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 rights.
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.
Legal 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 EWCA Civ 147,  Lloyd’s Rep IR 489. 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 representationEstoppel by convention, which does not involve any representation, is not relevant in the present context., 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:At para 80 (Rix LJ).
‘What 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 EWHC 2225 (Comm),  2 Lloyd’s Rep 289. – that a reservation of rights is ‘an obstacle to finding an unequivocal communication of a decision’At para 179. – 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 AXATed Baker plc v Axa Insurance UK plc  EWCA Civ 4097,  Lloyd’s Rep IR 682. 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:At para 82.
‘… 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 remain.
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.
When should 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.Kosmar Villa Holidays plc v Trustees of Syndicate 1243  EWCA Civ 147,  Lloyd’s Rep IR 489. Rix LJ saidAt para 80. 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:At para 82.
‘‘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:At para 82.:
‘Legal doctrine 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:At para 83.
‘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 cover.’
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
I’d like to look now at some of the practical issues which can arise in relation to reservations of rights.
I’ve 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 done?
On one view, nothing could be easier. After all, as Lloyd LJ said in the Court of Appeal in Barber v Imperio Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).in 1993:
‘Every businessman knows how to reserve his rights’.
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,Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd  1 Lloyd’s Rep 523. Woolf J held that a loss adjuster’s use of the phrase ‘without prejudice’ was in fact a reservation of rights. At 525.
And in a case in 2015,Brit UW Ltd v F & B Trenchless Solutions Ltd  EWHC 2237 (Comm), [ Lloyd’s Rep IR 69 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.At paras 175-177.
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 presentation?
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.
Challenging 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 ICOBSICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers. 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;The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R. 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.See Damages for late payment of insurance claims. 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
|↑1|| EWCA Civ 147,  Lloyd’s Rep IR 489.|
|↑2||Estoppel by convention, which does not involve any representation, is not relevant in the present context.|
|↑3||At para 80 (Rix LJ).|
|↑4|| EWHC 2225 (Comm),  2 Lloyd’s Rep 289.|
|↑5||At para 179.|
|↑6||Ted Baker plc v Axa Insurance UK plc  EWCA Civ 4097,  Lloyd’s Rep IR 682.|
|↑7||At para 82.|
|↑8||Kosmar Villa Holidays plc v Trustees of Syndicate 1243  EWCA Civ 147,  Lloyd’s Rep IR 489.|
|↑9||At para 80.|
|↑10||At para 82.|
|↑11||At para 82.|
|↑12||At para 83.|
|↑13||Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).|
|↑14||Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd  1 Lloyd’s Rep 523.|
|↑16||Brit UW Ltd v F & B Trenchless Solutions Ltd  EWHC 2237 (Comm), [ Lloyd’s Rep IR 69|
|↑17||At paras 175-177.|
|↑18||ICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers.|
|↑19||The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R.|
|↑20||See Damages for late payment of insurance claims.|