AIRMIC's new voluntary scheme to reduce the use of Reservation of Rights will benefit all parties, but only if they approach it in the intended spirit, say Jonathan Bruce and Andrew Stevenson of Elborne Mitchell.
The Statement of Principles in relation to Reservation of Rights, published this month by the Association of Insurance and Risk Managers (AIRMIC), could be a shot in the arm for amicable claims handling between insurers and insureds. As the Statement recognizes, they are both "stakeholders" in the same venture, and there should be a spirit of partnership rather than one of hostility, at least until things have gone fundamentally sour.
It is a common enough scenario: an insured notifies a sizeable claim to its insurers. The insurer, spooked by the size of the claim, sees a potential coverage issue and immediately issues a Reservation of Rights (ROR) to try and protect its position. Feeling cut adrift, the insured's relationship with its insurers becomes fractious, often leading to the appointment of lawyers, and the flow of information between the parties is then carried out through gritted teeth.
Ultimately, after a long battle, coverage is confirmed. But in the meantime, insurers' ability to take effective control of the claim has been lost, overall expenditure on all sides has ballooned and trust between insurers and insured has taken a battering, often irreparably so by the next renewal.
AIRMIC's members – no doubt often on the wrong side of many RORs over the years – asked themselves if there was a better way. Their conclusion? There is.
After lengthy discussion with insurers and brokers they have come up with the Statement of Principles. In essence, it is a voluntary code of conduct that provides for a 90-day "cooling off" period after first notification of an actual or potential claim. During that period:
- Insurers agree not to pre-emptively initiate court or arbitration proceedings or issue an ROR;
- Insurers will communicate with the insured – on a without prejudice basis – to discuss how the insurance contract may respond to the loss, what information is required to support the loss; and the timetable for resolution of any coverage issues;
- If Insurers determine that a ROR is required, they will explain the position to the insured beforehand and continue to communicate with the insured regarding it afterwards.
It is hoped that this structured approach, which encourages the parties to exchange the information they each need in order to make informed decisions, will prevent some of the knee-jerk coverage decisions that often afflict insurers' claims-handling. Likewise, with insurers and insureds working together in the all-important early days of a claim, evidence gathering and investigation can be improved and early opportunities to mitigate the loss can be seized. Rather than waste time and money fighting each other, insurers and insureds can focus on the priority: dealing with the claim.
Although it would need to be specifically incorporated into a contract of insurance to be binding, the Statement of Principles is at least broadly in line with the current state of the law. In the important decision earlier this year of Kosmar Villa Holidays v Syndicate 1243, the Court of Appeal said unequivocally that insurers can and should carry out a detailed investigation of the facts before issuing a ROR.
In reality, Kosmar is the exactly the sort of case that would have benefited from the AIRMIC scheme. Back in 2002 an individual seriously injured himself on a Kosmar holiday in Greece. Due to an internal communications mix-up, Kosmar did not notify its insurers until nearly a year later. The insurers initially stepped in to assist in the defence of the claim, but on learning more about what had happened, issued a ROR, followed by a letter declining coverage. Positions became entrenched and led to protracted litigation both between Kosmar and the claimant (which Kosmar ultimately won) and with its insurers (which it lost). It took five years to resolve both sets of litigation and cost a fortune in legal fees and management time.
Had Kosmar and its insurers had 90 days to consider both the claim and coverage issues without pressure to reserve rights or risk accusations of waiver, it is probable that a different result could have been achieved.
"What's in it for me," we hear insurers cry. The classic ways by which insurers waive coverage are through making payments on account and by appointing or directing lawyers to protect the insured's interests, sometimes with varying degrees of effort to "reserve rights". This inevitably leads to lengthy disputes later about whether or not a waiver (by "election" or by "estoppel" – it gets even more complicated...) has taken place, thus again diverting valuable resources away from dealing with the claim and directly into the coverage lawyers' pockets. That is clearly in neither party's interests.
But before everyone gets carried away, AIRMIC's Statement is not a universal panacea. For one thing (unless expressly incorporated into specific policies), it is not legally binding on insurers.
Secondly, it only applies to (potential or actual) claims "reasonably anticipated to exceed" ₤2.5 million. Currently, there is no guidance on whether it is supposed to be the insurers' or the insured's "reasonable anticipation", and we all know how difficult it is to define "reasonable".
Thirdly, an insurer's decision to adopt the Statement does not bind its followers and co-insurers.
Fourthly, and perhaps most importantly, the insurer has an absolute discretion to determine that the Statement does not apply to any particular loss (although it is required to explain this to the insured before issuing an ROR). Further, the insurer may apparently exercise its discretion to make such a determination at any time, and there is no express requirement that it must be reasonable (although that is probably implied).
But the principle is sound if the hearts are willing. A considerable degree of trust will be required, particularly in the early months in which the scheme is in force. It is obviously open to insureds to insist on the Statement being incorporated into wordings, on a mandatory basis and to apply to claims of some figure less than £2.5m.
These steps would circumnavigate most of the problems referred to above, although they would depend on the bargaining power of the parties. Nonetheless, there is every reason to believe that, where the parties are encouraged to communicate and share information, real mutual benefits can be achieved, not only for the parties but for the industry generally.
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