Market accord close on reservation of rights

By the end of September Airmic had had talks about reservation of rights with seven of its eight insurance partners, who between them provide most of the Property cover purchased by members. On the table for discussion was a model clause for insertion into insurance contracts that would significantly reduce the use of the practice.

“We’ve had really positive talks with the market, who accept 100% the principle of what we’re doing. They’ve been very helpful with suggestions about how the wordings can be improved, and we are confident it will have wide acceptance in the market,” said chief executive John Hurrell.

It is understood that the changes to the initial draft clause requested by insurers are relatively detailed, and that they do not challenge what the original wording set out to achieve. Law firm Herbert Smith, who have been supporting Airmic in the exercise, are now working on a second version.

The model clause is similar in aim to the reservation of rights Statement of Principles published by Airmic in 2008. The Principles apply to large claims on policies issued in England and Wales, and provide for a ninety-day cooling off period from receipt of the claim before the insurer announces a reservation. This would give time for the parties to explore the evidence informally with less need to involve lawyers, saving both time and money.

Although all Airmic’s insurance partners signed up to the Principles, the document is voluntary and has had little influence on what happens in practice. Writing in Post Magazine in June, Hurrell said anecdotal evidence backed by a member survey had confirmed the impression that the ‘softly softly’ approach was not working.

“It would seem that, despite the good intentions of underwriters and others at the client-facing end, there is a remorseless legal and governance logic leading insurers to reserve rights even where is no need to do so,” he wrote.

Unlike the Principles, the model clause on reservation would be legally binding once inserted into an insurance contract. This is the same approach adopted by the association last year when it produced the non-disclosure clause, which feedback from members suggests has led to significant improvement. The various parties will be free to change the wording of the clause as part of their discussions; the main thing is to come up with something acceptable to both insurer and buyer that achieves the desired objectives. Once the new model clause has been discussed fully with insurers, Airmic will seek the input of brokers before unveiling it to the market; the expectation is to reach this stage before the end of 2012.

“We’re aiming for a clause that has such wide acceptance that it is viewed as the market norm,” said Hurrell. “Of course, no one will be obliged to use it, but being willing to do so would put insurers in a stronger competitive position.”

Surveys of Airmic members have found reservation of rights to be an issue of serious concern, with around 30% having had experience of it in the previous two years when making claims. Half of this group were dissatisfied with the eventual outcome.

“We’ve had really positive talks with the market, who accept 100% the principle of what we’re doing."
John Hurrell
Airmic CEO