DLA Piper's Practical Guide for Claims Managers in 2022 - Part 3: Reservation of Rights
In our third monthly edition of our Practical Guides for Claims Managers, we outline when and how insurers might use a reservation of rights, and otherwise communicate in a manner which is clear to insureds and does not inadvertently prejudice insurers' position.
Naturally, the necessary steps will differ between matters, but this guide is intended to provide an understanding of the key issues to consider during the different phases of the claims handling process.
Automatic vs Elected Rights
Insurers gain rights in two different ways.
Some rights arise automatically, without insurers having to do anything, where the insured:
- Breaches a warranty in the policy – for English law policies written before 12 August 2016, the date upon which the Insurance Act 2015 (2015 Act) came into force, insurers will be discharged from liability from the date of an insured's breach of warranty. However, for policies written after 12 August 2016, insurers' liability is only suspended until the breach is remedied; or
- Fails to satisfy a condition precedent in the policy – for pre-2015 Act policies, where a condition precedent is not satisfied, depending on the policy terms, insurers may not have to pay the claim, regardless of whether this had a causal connection to the loss. However, for post-2015 Act policies (unless contracted out), where the failure to satisfy a condition precedent is shown to have increased the risk, insurers may not have to pay the claim.
We would note that we have summarised above only the high-level consequences for breaches of warranty and conditions precedent – a detailed review of the implications of a breach of warranty or condition precedent is outside the scope of this Practical Guide and will be the subject of a future edition.
Where rights arise automatically, it is particularly important for insurers to ensure that ongoing claims handling (as well as other business) conduct is consistent with exercising those rights, or giving them up, or putting them "on hold" while insurers consider matters in more detail – for more detail on these steps, see further below.
Other rights only arise when insurers specifically elect to invoke them, after the insured:
- Breaches the duty of good faith (pre-2015 Act policies) or fair presentation (post-2015 Act policies) – insurers may choose to avoid the policy, or treat it as being written on different terms (including as to premium), in certain circumstances; or
- Breaches a mere condition – insurers may choose to claim damages if they can show that they have been prejudiced by the breach.
Waiver and Estoppel
For insurers and insureds alike, it is important that insurers are clear in their communications to insureds about the status of their consideration of a claim and the current coverage position.
Insurers will also need to be careful not to inadvertently prejudice their rights, by something they do or don't do.
From a practical point of view, there are two legal doctrines which are most commonly considered when trying to assess whether insurers' rights may have been prejudiced:
- Waiver by election (known as "affirmation")
For example, where there has been a breach of the duty of fair presentation (eg. a pre-contractual misrepresentation or non-disclosure of material circumstances) by the insured, if insurers do something which is manifestly inconsistent with the legal remedy (eg. avoidance of the policy, where this is permitted) they wish to claim, such as paying another claim, insurers will likely be considered to have waived this right and to have affirmed the policy despite the misrepresentation or non-disclosure.
For an insured to show that insurers have waived a right, the following elements are required:
|Knowledge of the facts which give rise to the right
|Insurers knowing about a misrepresentation or non-disclosure
|Knowledge of the right being waived
|Insurers knowing that they have a remedy for breach eg. a right to avoid the policy
|A clear and unequivocal election, through a representation (by words or conduct), that insurers will not exercise the right
|Insurers paying another claim, accepting premium if it was outstanding, or signing an endorsement – each of which is manifestly consistent with the insurer choosing to carry on with the policy rather than avoiding it
|Communication of this representation to the insured
|Insurers confirming any of the above to the insured
The decision of the Court of Appeal in ABN Amro v RSA  EWCA Civ 1789 (which can be found here) provides a recent example of conduct by insurers which amounted to affirmation. The insurers filed a defence to a coverage dispute that did not allege non-disclosure or misrepresentation and did not reserve insurers' rights on these arguments. Instead, the defence positively relied on terms of the policy applying. Insurers had also retained the premium (and did not offer to return it until long after serving their defence).
The Court of Appeal found that the insurers had knowledge of all material facts when serving their defence. By this conduct, insurers were taken to have demonstrated objectively and unequivocally that they were making an informed choice to affirm the policy by relying upon its terms. Insurers could not subsequently seek to avoid the policy. You can find our article on the ABN Amro v RSA case here.
- Estoppel by representation
Estoppel by representation involves insurers making a unilateral representation with the intention of inducing the insured to rely on it. This legal doctrine is intended to prevent an unfair result where the insured relies on a representation that insurers have made, to the insured's detriment.
Estoppel prevents insurers from acting inconsistently with any representation they may make, so prevents them from exercising the rights they may otherwise have had.
For estoppel to be established, the following elements are required:
|A pre-existing legal relationship between the parties
|Insurers knowing about a misrepresentation or non-disclosure
|Apparent knowledge of the right being given up
|Correspondence which suggests insurers were aware of their ability to interpret a specific clause in the policy in multiple ways
|A clear and unequivocal representation (by words or conduct) not to exercise the right in future
|Placement correspondence which indicates clearly that the insurer did not intend to assert a particular interpretation of a specific clause or term (such as the meaning of 'subsidiary')
|Communication of this representation to the insured
|Through the above correspondence
|Reliance by the insured on the representation to their detriment*
|The insured not taking out additional insurance to cover the aspect which would have been uninsured on the alternative policy interpretation (such as separate cover for a recently acquired company that insurers subsequently contend is not a covered 'subsidiary')
*Detriment involves the insured changing their position based on the insurer's representation and, usually, failing to take steps to protect themselves (as they do not think this is necessary based on the insurer's representation). Where the insured would have changed its position in the same way regardless of the representation, there is no detriment.
The decision in Kosmar Villa Holidays Plc v Trustees of Syndicate 1243  EWCA Civ 147 (the Court of Appeal decision can be found here) provides an example of where an insured tried, but failed, to establish estoppel. The insured argued that the insurers' communications following the claim being submitted constituted a representation that the insurers did not intend to rely on a condition precedent for notification of claims "immediately". The Court of Appeal held that insurers were entitled to a reasonable time to get to grips with the claim, and to gather the relevant facts, before their actions could amount to a representation that they would not rely on the condition precedent as to timing of the notification. The Court of Appeal also held that the insurers' correspondence had not been an unequivocal representation - insurers had stated that they would postpone their decision on liability and made no express statement that they would not rely on the condition precedent as to notification, nor did they expressly accept liability. Further, the Court of Appeal's view was that the insured's efforts in compiling responses to the insurers' questions was not enough to constitute detrimental reliance.
We note below some additional practical points in relation to waiver and estoppel:
- conduct amounting to a representation may include inaction, in certain situations (see further below);
- whether there has been an unequivocal representation is determined by an objective test from the point of view of a reasonable person in the position of the insured, rather than the insured's subjective understanding of what the insurer has done (or not done);
- in order for something to be unequivocal, the conduct needs to be clear and leave no doubt as to what the position is - where insurers take a number of steps, some of which suggest there could be cover (eg insurers are reviewing materials and asking about advice on the merits of a third party claim) and some of which do not (insurers are also asking about why notification was made so late, in breach of a condition precedent), insurers' conduct is unlikely to establish waiver or estoppel, because insurers have not evidenced in clear terms which choice they have made about whether the claim is covered or not;
- estoppel cannot be used to create a basis for a claim against insurers, it can only be used by an insured as a response to an attempt by insurers to exercise a right; and
- to more easily distinguish between the two doctrines, we suggest considering the order of events - for waiver, a right arises which insurers then elect to give up; whereas for estoppel, insurers make an unequivocal representation and are then prevented from asserting a right which is inconsistent with this representation.
Conduct which may prejudice insurers' rights
In practice, there are lots of things that insurers might wish to do as a matter of daily business, but which may inadvertently prejudice their rights. There may also be express provisions in a policy which entitle insurers to take certain steps, the unguarded exercise of which could be inconsistent with the right to decline cover.
Conduct which may prejudice insurers' rights:
- Issuing a policy wording;
- Responding to and accepting new notifications;
- Demanding or accepting payment of premium;
- Varying policy terms (eg via an endorsement);
- Paying claims;
- Exercising contractual rights under the policy; and
- Certain inactions.*
*Examples of 'certain inactions' amounting to conduct which may prejudice insurers' rights include:
- inactions inconsistent with insurers' rights, eg not returning premium where there is a right to avoid; and
- failing to perform a 'duty to speak' in circumstances where a reasonable person in the position of the insured would expect insurers, acting honestly and responsibly, to take steps to make their position clear to the insured (see below).
The Court of Appeal confirmed the existence of a "duty to speak" in Ted Baker v Axa Insurance UK Plc  EWCA Civ 4097 (which can be found here). Insurers knew the insured was under the impression that insurers' request for certain documents (delivery of which was a condition precedent to cover) had been 'parked' pending resolution of a request for insurers to agree to pay accountants' fees to produce the documents. In circumstances where insurers actually regarded the documents as outstanding and due (and the request was not "parked"), then acting honestly and responsibly, insurers should have spoken up and corrected the insured's misapprehension. In Ted Baker, insurers' failure to speak gave rise to an estoppel, preventing insurers from relying on the non-compliance with the condition precedent.
Since many of the above-mentioned activities are routine and may well be carried out by different teams within insurers' business who may not be aware of the status of a particular coverage investigation, the practice of setting down a 'reservation of rights' has evolved as part of the claims handling process.
Reservation of Rights
A "reservation of rights" (ROR) is a statement made by insurers which operates in law to allow insurers to carry on fulfilling their obligations under the policy whilst concurrently considering the coverage position in respect of a particular claim or circumstance, without the risk of insurers losing their rights against the insured in respect of that claim or circumstance. Such rights are treated as reserved.
An ROR statement may take many forms.
Particularly where use of electronic claims systems constrains the wordcount, insurers might communicate an ROR very briefly. For example, in response to the upload of new information, an insurer might respond with "Update noted, subject to ROR".
Where space permits, insurers might use a longer ROR form such as: "Insurers’ rights under the policy and at law are fully reserved and shall continue to be reserved unless and until lifted by insurers in writing".
While a clearly stated ROR provides insurers with protection of their rights, over time the legal effect of an ROR may be weakened (and invalidated altogether) if insurers engage in conduct which is objectively and unequivocally inconsistent with the rights that insurers are seeking to reserve.
For example, as discussed above, in ABN Amro, coverage defences were raised by insurers when they filed their defence but they did not include avoidance and a prior reservation of rights as to avoidance was not repeated – amongst others, this factor meant insurers lost the right to argue avoidance.
Key questions we are often asked include
1. Can insurers take time to investigate a new claim or circumstance without prejudicing their rights?
Yes. When a claim or circumstance is first notified, and even as matters progress (particularly more complex ones), insurers frequently need more information to assess the coverage position.
Since insurers can only prejudice their rights once they have knowledge of all material information and of their rights, fact finding enquiries should not usually compromise those rights.
Clear and plain communications along the lines below will assist both parties to be clear about the status of the coverage assessment:
"Insurers are currently investigating this matter and have not yet reached a view on coverage. In order to assist insurers with their assessment, please would the insured provide the following…"
2. Can insurers decline coverage for a claim on a specific ground where that part of the coverage investigation is complete, but still carry on considering additional points?
Yes, but insurers need to be clear in communications with the insured about the current status of the ongoing coverage assessment in order to reserve other rights. A plain and simple explanation along these lines may be appropriate:
"We have explained above why we are declining coverage for this claim. There are a number of additional coverage issues that insurers are still considering and those investigations remain ongoing. Our comments above are made without prejudice to all the remaining terms and conditions of the policy, along with other defences under the policy and at law which may be discovered after further investigation."
The Court of Appeal has held that the words in bold above are a clear indication that insurers are reserving their rights to rely on other terms and conditions of the policy in support of the existing denial of coverage, as well as reserving their rights to rely on other defences (ie additional grounds on which to decline coverage) that might be discovered after further investigation.
3. Can insurers renew an 'expiring' policy while coverage investigations are still ongoing under that policy?
Yes. As the current policy approaches expiry, insurers should be able to agree to renew cover or commence a new policy without prejudicing their rights under the expiring policy.
Each new (or renewed) policy is a separate contractual arrangement. The entering into of a new policy cannot alter the parties' legal rights under the prior policy (unless there are additional agreed terms to this effect).
Whilst not at all necessary, it is not uncommon for insurers to include some explanatory wording in the new policy along these lines, so that their position is clear beyond doubt:
"In negotiating and agreeing terms of cover for the new policy (for the 2022 year of account), insurers are not in any way prejudicing or compromising their rights under the expiring policy (for the 2021 year of account) and otherwise at law with respect to that policy’s validity, coverage and application."
4. How often should insurers repeat a reservation of rights?
There is no strict requirement that an ROR be repeated in every communication from the insurer to the insured; whether and how often it needs to be repeated depends on the facts of the matter.
An ROR should last until either:
- insurers act objectively and unequivocally inconsistently with the ROR - see above for examples of conduct which may prejudice insurers' rights and where waiver or estoppel may apply to prevent the insurer exercising their rights; and/or
- insurers gain full knowledge of the relevant facts and rights - insurers are permitted a reasonable amount of time to get to grips with a claim and a reasonable amount of time to consider what course of action to take once they have acquired the relevant knowledge. However, if insurers want to maintain the ROR for a lengthier period once their knowledge has reached that point, it would be practical and prudent to repeat the ROR in clear terms, as well as consider explaining why more time is required for insurers to make a choice about what they wish to do.
Reservation of Rights: Practical takeaways
Here are our top tips for reserving insurers' rights during the claims handling process:
- Communications with the insured should be clear about the current stage of insurers' investigations - whether they are complete or ongoing. If investigations are ongoing, insurers should explain this and advise that a coverage view is not yet formed. It is helpful if these communications also set out what needs to happen next to progress matters further.
- Insurers have a reasonable amount of time to get to grips with a claim and a reasonable amount of time to decide what course of action they wish to take, once they acquire knowledge of all material information and their rights.
- When investigations are multi-faceted, or are likely to take a lengthy period, it will usually be obvious that insurers need more information to fully address their coverage questions. Strictly, in such equivocal circumstances, there is no need for an ROR. However, it may be practical and prudent to put one forward if that communication assists the insured to understand (more) clearly the current coverage position.
- RORs are plainly needed in order to protect insurers from prejudicing their rights once investigations are complete and once insurers have become aware of rights which are ready to be exercised.
- RORs should be written in plain and clear language.
- RORs are at risk of being weakened, and may become invalidated altogether, if insurers act objectively and unequivocally inconsistently with an informed choice not to exercise the rights they have previously reserved.
- Alongside issues of waiver or estoppel, insurers of post-2015 Act policies should also bear in mind the implied term requiring insurers to investigate claims and pay sums due under the cover within a reasonable period of time.
DLA PIPER UK LLP
Jane Childs is a Partner and leads DLA Piper's International Financial Lines Insurance Disputes group. Leanne Rogers is a Legal Director and Charlotte Marks is an Associate in the Insurance and Reinsurance Disputes team in the UK. The UK Insurance and Reinsurance Disputes team forms part of DLA Piper's leading, multi-disciplinary, global insurance sector, consisting of over 400 lawyers representing major insurance and reinsurance companies internationally on all aspects of their business, including claims, disputes and investigations, transactional, regulatory and all forms of commercial advisory work.
To find out more about DLA Piper's insurance capabilities in the UK and globally, please click here.
This publication is intended as a general overview and discussion of the subjects dealt with under English law at the time of original publication and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.