Increased monitoring by brokers and the issue by AIRMIC of a specific policy clause for its members has put the use of reservation of rights by insurers under the spotlight.
Reservation is an area where there is absolutely no need for insurers to be expansive under English law. All the insurer really needs to say is that they “reserve all of their rights” and to maintain that reservation as required. The courts have discouraged insurers from automatically issuing “knee-jerk” reservations. There is also no general requirement to give reasons and, in most cases demanding a reservation, the reasons ought to be abundantly clear.
In terms of further dos and don’ts:
- It is important if you go on in your reservation to make a specific reference to coverage that you also cover avoidance rights
- You should not add that the insured should “act as a prudent uninsured”. This suggests a waiver of policy obligations
- It is also not best practice to either extensively delay responding to the insured, to remain silent or to be inactive
- When engaging in global commutation discussions, reinsurers must be extremely careful to maintain a reservation with respect to any contentious claims issues
Reservation of rights is a useful protection for the insurer, but not a complete substitute for clear and effective communication with brokers and the insured.
This blog post is based on an article that David wrote for Insurance Day.