Knowing when and how an insurer’s rights should be
reserved is a key skill for anyone involved in handling insurance claims – claims
handlers, loss adjusters and of course lawyers.
So here are a few thoughts about reservations of
Reservation of rights by insurers is a subject which evokes strong reactions. The circumstances surrounding an insurance claim can be extremely difficult for policyholder or other insured party, and an immediate reservation of rights can alienate the insured and damage the relationship of trust which should exist between the insured and its insurer. But on the other hand, insurers and their agents, including lawyers, will always have in mind the possibility that, if an insurer subsequently rejects a claim without having reserved its rights, the insured may argue that because of the way the claim has been handled, the insurer is not entitled to do this. I’m going to talk about this tension. In order to do that, I need first to briefly sketch the legal principles underpinning reservations of rights.
principles underpinning a reservation of rights
The principles in play are familiar ones: affirmation
or waiver, and estoppel. At the same time, this area is bedevilled by
linguistic confusion – the label ‘waiver’ is sometimes used to apply to both
concepts, partly because it is convenient shorthand – it’s much easier to say –
and I do this myself – that an insurer has waived its rights than to say that
is or has become estopped from exercising its rights. Some of the older cases
are less precise in their use of language, too, so it can be dangerous to rely
on the labels they use.
It’s useful to remember, here, that the law of insurance contracts is a branch of contract law, and that although it has specific features such as the duty of utmost good faith – and now the duty of fair presentation – the answer to many questions can be found in the general law of contract. And this means that we can look to the general law of contract for the legal principles underpinning this area, and for the labels or terminology.
So, one the one hand, there is ‘waiver by election’,
which in insurance cases is often referred to as waiver, or as affirmation.
And on the other hand, there is ‘waiver by estoppel’,
more commonly referred to in insurance cases as estoppel.
Waiver and estoppel were considered in detail by the Court of Appeal in an insurance case in Kosmar Villa Holidays plc v Trustees of Syndicate 1243 in 2008. This is the key case on reservation of rights by insurers, and the following outline draws heavily on the judgment of Rix LJ.
Both doctrines – waiver or affirmation on the one
hand, and estoppel on the other – require that the party with the relevant
contractual right who is alleged to have lost it – typically the insurer – made an unequivocal representation, by words or conduct, that they did not, in
future, intend to enforce that legal right against the other party to the contract
– here, the policyholder or other insured making a claim under the policy.
It’s always a good idea to be sure that you know the ordinary
meaning of a term before you start to think about its legal meaning, and according
to my Oxford English Reference Dictionary, unequivocal means ‘not ambiguous, plain, unmistakeable’.
The need for an unequivocal representation means that
silence and inaction are not enough to give rise to a waiver or estoppel – they
are by their nature equivocal (at least in the absence of a ‘duty to speak’ –
which I’m going to come to in a moment).
So the two concepts are similar – but there is a key difference: in the case of estoppel, the insured also has to demonstrate that it relied on the unequivocal representation in such a way that it would be inequitable for the insurer to go back on the representation. This is sometimes referred to as ‘detriment’ or ‘detrimental reliance’. This is not a requirement for affirmation or waiver – only for estoppel.
That’s a brief sketch of the basic legal
principles underpinning reservations of rights. I think good way into this
subject is to remember what Rix LJ said in the Kosmar Villa Holidays case:
a reservation of rights does is expressly to preserve a situation where
otherwise it might be held that something unequivocal had occurred’.
I also like the phrase which Leggatt J
used in Involnert Management
Inc v Aprilgrange Ltd – that a reservation of rights is ‘an obstacle to finding an unequivocal communication of a decision’ – in that case, a decision by insurers to affirm a policy when they
might have avoided it for non-disclosure.
If I’d been writing this piece before the decision of the Court of Appeal in Ted Baker v AXA in 2017, I would have stopped here and moved on to discuss the practical aspects of reservations of rights. I’ll do that in a moment – but first I need to say something about Ted Baker v AXA.
In that case, the Court of Appeal recognised that
there may be an estoppel based on a ‘duty
to speak’. Christopher Clarke LJ said that:
‘… whether an estoppel arises is not wholly dependent on whether the person sought to be estopped has made some representation express or implied. It may arise if, in the light of the circumstances known to the parties, a reasonable person in the position of the person seeking to set up the estoppel (here, TB) would expect the other party (here the insurers) acting honestly and responsibly to take steps to make his position plain.’
As I’ve said, the traditional analysis is that an
unequivocal representation is required for an estoppel. And it follows from
this that silence and inaction are insufficient.
It’s clear that this must be qualified in the light of
the Ted Baker decision. But questions
There was a reservation of rights in Ted Baker.
This was referred to by Christopher Clarke LJ only in passing when he set out the
facts of the case. He didn’t refer to it at all when analysing the duty to
speak. As a former Commercial Court judge with significant experience in
insurance law, it seems extremely unlikely that Christopher Clarke LJ would
have overlooked the significance of a reservation of rights. The inference is that
he didn’t think that the reservation of rights was relevant – and actually this
is logical if – as he said in the quotation above – a representation is not
required in order for there to be an estoppel based on a duty to speak.
But the fact remains that the Court of Appeal did not
deal expressly with the impact of the reservation of rights on the duty to
speak, and that the Ted Baker
decision leaves open the question of whether – at least in some circumstances –
a reservation of rights might be relevant; whether it might somehow neutralise a
duty to speak, perhaps by preventing it from arising in the first place.
an insurer’s rights be reserved?
I’d like now to come back to the tension I mentioned earlier: when – at what stage in the life of a claim, or in what circumstances – should an insurer’s rights be reserved?
There are two – sharply opposing – views on this:
In the first camp are those who think that an insurer
should not reserve its rights until it has notice of a potential defence to the
claim – for example the right to avoid or proportionately reduce a claim for breach
of the duty of fair presentation, or as in the Kosmar Villa Holidays case, a late notification and potential
breach of a condition precedent by the policyholder.
If nothing has happened – yet – which means that the insurer might be entitled to exercise certain rights, the purist approach is that there is no need for a reservation of rights. This has support from policyholder organisations. The regulatory requirement that insurers treat their customers fairly may also be relevant in some circumstances.
In the second, opposing, camp are people who think
that an insurer should reserve its rights as soon as a claim is made and the
insurer starts to investigate it.
Both camps can draw support from Kosmar Villa Holidays. Rix LJ said that even where an insurer knows that an occurrence has potentially been notified late, but it is getting to grips with a new claim arising out of the occurrence, has asked questions and is waiting for answers, the situation is ‘equivocal’ – and that in such a situation there is no need for a reservation of rights, even if such a reservation ‘may be practical and wise’. He then went on to say:
‘‘It would not
be good practice for insurers to rush to repudiate a claim for late
notification, or even to destabilise their relationship with their insured by
immediately reserving their position – at a time when they were in any event
asking pertinent questions about a claim arising out of an occurrence about
which they had long been ignorant in the absence of prompt notification.’
Rix LJ also said that::
should not push insurers into over-hasty reliance on their procedural rights.’
This looks like firm support for the purist, don’t-be-too-quick-to-reserve, camp. But Rix LJ then qualified what he had said in a way which in my view brings the matter down on the side of the prudent-to-reserve-at-the-outset-of-any-investigation camp, saying:
‘That said, I
would certainly not like to give the impression that insurers can equivocate
for long while giving the plain impression that they are treating a claim as
covered by their policy, especially at a time when a decision might be
required, without running at least the risk that they will be treated as having
waived some requirement of their contract or their right to avoid it. Moreover,
there may well be express options given to insurers under their policy the
unguarded exercise of which is simply inconsistent with the right to decline
There are two obvious problems for insurers in waiting
to see if something emerges from an investigation. One is that the insurer or
its agents have to ensure that they reserve insurers’ rights as soon as
something does emerge – or risk being held to have lost those rights.
And the other problem is that no-one wants to end up
in court – let alone the Court of Appeal, as happened in Kosmar Villa Holidays – arguing about waiver or estoppel.
The upshot of this is that, more often than not, in a
claim of any complexity, insurers’ rights will be reserved, and this will be
done at the outset of the investigation of the claim.
Practical issues in reserving rights
like to look now at some of the practical issues which can arise in relation to
reservations of rights.
already covered the question of when insurers’ rights should be reserved, so
the next question is, if insurers rights are to be reserved, how should that be
one view, nothing could be easier. After all, as Lloyd LJ said in the Court of
Appeal in Barber v Imperio in 1993:
‘Every businessman knows how to reserve his
But is it really that simple?
The first point is that a reservation of rights can be effective without using the phrase ‘reservation of rights’ if the effect of the words used is clear.
For example, in a case in 1979, Woolf J held that a loss adjuster’s use of the phrase ‘without prejudice’ was in fact a reservation of rights.
And in a case in 2015, Carr J found as a fact that the words ‘reservation of rights’ were not used, but that the insured’s representatives were told clearly at the relevant meeting that insurers might not be providing cover because of a material non-disclosure.
This is similar to the approach to construing insurance
policy terms such as conditions precedent – there is no magic in the phrase,
and what matters is the substance.
But why take the risk of not using the
well-understood, conventional words?
So if the starting point is that it is prudent to use
the phrase ‘reservation of rights’, or a variation of it, what else is required?
Here, less may be more – the simplest wording may be
the most effective – for example:
‘Insurers’ rights are fully reserved.’
Why is this so? Well, let’s look at some examples. A
simple reservation of rights is often embellished or expanded.
And so a letter from insurers or their lawyers might
say something like this:
‘Insurers’ rights are fully reserved under the policy,
including the right to refuse to pay a claim altogether.’
The additional words don’t add anything. But they
raise an implicit question: what about the right to avoid the policy? The
reservation refers to the policy – could this be an unequivocal representation
that the insurers do not intend to rely on their right to avoid the policy?
So what then if the letter-writer adds more words to
deal with this, and the reservation becomes:
‘Insurers’ rights are fully reserved, including the
right to refuse to pay a claim altogether or to avoid the policy.’
This new wording has arguably cured one problem, but
has it created another? What about the right not to avoid the policy but to
reduce the payment proportionately due to a breach of the duty of fair
And on it goes.
In each case, the question of whether the reservation
of rights is effective depends on the facts, and although it would be difficult
to spell out an unequivocal representation from these wordings, no-one wants to
have their wording tested in court.
The point here is that, in general terms, attempts to
embellish a simple reservation of rights do not make it stronger, and carry an
element of risk.
Let’s look at another practical issue. Does a reservation of rights need to be repeated in order to remain effective? As the relevant principles are waiver and estoppel, there are no relevant time limits. And there is no requirement that, to be effective, the reservation of rights must be repeated in every communication from the insurer.
But whether a reservation of rights remains effective
if not repeated very much depends on the facts.
If the situation in relation to the claim has changed,
or the insurer and insured are in frequent contact, and the insurer has not
repeated the reservation of rights, its effectiveness as an ‘obstacle’ to a
finding of an unequivocal representation may be reduced, particularly over time.
a reservation of rights
Let’s change gear now and think about whether a
reservation of rights can be challenged.
The first point is that there is no direct means of challenging a reservation of rights. So we are looking at indirect ways in which an insured might bring pressure to bear on insurers in order to persuade them to conclude their investigations and lift a reservation of rights more quickly.
One way this might be done is commercial pressure. This might be applied to the insurer’s claims department by a large broker – or perhaps, internally within the insurer, by the underwriter if the client is a longstanding and valuable source of premium. This is more likely to be a factor in a soft market. And it is unlikely to be effective if there are serious concerns about the validity of a large claim.
In some situations pressure might be brought to bear
by a complaint to the insurer’s complaints department, and if that is
unsuccessful, to the Financial Ombudsman Service – the FOS – that the insurer
is not treating its customer insured fairly and is breaching ICOBS
in failing to complete its investigations and make a decision about cover
within a reasonable period.
But many commercial policyholders are outside the FOS’s jurisdiction; and the time it takes the FOS to deal with a complaint may also make this ineffective.
I’ve written previously about the possibility of a claim for damages for late payment of insurance claims due to breach of the new implied term. The risk of a claim for damages for consequential loss is likely to put insurers, and their agents, under pressure to conclude investigations and lift reservations of rights more quickly. And this means that the risk of a claim for damages for late payment of a claim is probably now the most powerful of these indirect means of challenging a reservation of rights.
Alison Padfield QC