Airmic unveils clause to control use of Reservation of Rights
The main purpose of the new Reservation of Rights (RoR) clause is to agree a 90-day period following any claim or notification of circumstance before the insurer can issue a notice to reserve its rights.
It is similar in principle to the voluntary reservation of rights Statement of Principles published by Airmic in 2008. The big difference is that, once inserted into an insurance contract, it will be legally binding. The clause will protect both parties' rights during this 90- day period, enabling a free exchange of information. This period can then be extended if required by mutual consent.
“I would like to thank everyone who has provided comments during the development of the clause. We are optimistic that our clause will have wide buy-in,” said chief executive John Hurrell.
“In due course we’re aiming to achieve a level of acceptance for the clause such that it is viewed as a market norm,” said Hurrell. “Of course, no one will be obliged to use it, but we think being willing to do so would put insurers in a stronger competitive position..”
The clause has been drawn up following extensive market consultation and with assistance from Herbert Smith Freehills, the law firm that drafted Airmic’s model clause defining the buyer’s disclosure requirements. Published last year, feedback from members indicates that this has proved effective.
As with the disclosure clause, the various parties will be free to choose whether or not to use it and also free to change the wording of the RoR clause as part of their negotiations.
“The clause provides a framework for effective communication between the insurer and the insured, which we hope will help improve the claims experience and reduce the number of reservations issued,” said Paul Lewis, partner at Herbert Smith Freehillls.
Market reaction
Hurrell believes that the clause has the potential to provide a breakthrough for this long-running problem. “As with any new voluntary practice, market forces will determine whether it gains traction. The head of steam building up behind this clause gives me confidence that it will do so, and its use will become widespread,” he said.
“Much will depend on relations between insurer and client. Underwriters will only have confidence to use the clause where the buyer is perceived to be professional and credible – a description that I would like to think fits all Airmic members.”
His comments were supported by several of Airmic’s partners. "At Zurich we believe that open and constructive dialogue is critical to achieving a successful outcome in complex claims negotiations. Zurich supports Airmic’s initiative in relation to Reservation of Rights (RoR). We believe it will encourage insurers and customers to engage in a constructive dialogue in relation to claims with a view to reaching consensus with each other, without recourse to legal process. We are confident that Airmic’s initiative is a great step towards this objective,” said Vinicio Cellerini, CEO of Zurich Global Corporate UK.
George Davies, CEO of Marsh's Risk Management Practice said: “We are pleased to support this pragmatic initiative as a well thought out option for insurance buyers. Where implemented, it will undoubtedly provide greater clarity to all parties to the contract with a view to speeding up the claims process and saving time and resource for all concerned.”
Surveys of Airmic members have found reservation of rights to be an issue of serious concern, with around a third having had experience of it in the previous two years when making claims. 57% of this group were dissatisfied with the eventual outcome.
"As with any new voluntary practice, market forces will determine whether it gains traction. The head of steam building up behind this clause gives me confidence that it will do so."
John Hurrell
Airmic CEO
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RESERVATION OF RIGHTS Reservation of Rights enables insurers to reserve the right to refuse liability for a claim or part of a claim pending further enquiries. Although a legitimate tool under some circumstances, Airmic members report that it too often can become the default position on large claims even when unnecessary. The result has been to reduce the scope for open discussion between the parties and to introduce lawyers into the process too early, adding to the time and cost of settlement. Furthermore, it means that companies cannot include the claim as an asset in the annual accounts. |
Reservation of Rights Guide
Commentary and guidance on avoiding the service of a Reservations of Rights letter, the implications of receiving a Reservation of Rights letter and the actions that should be taken