RoR allows insurers to notify an insured that coverage for a claim may not apply and thus the indemnified is not covered. Such notification allows an insurer to investigate, or even defend, a claim to determine if coverage applies, in whole or in part, without waiving its right to later deny coverage based on information revealed by the investigation.

Airmic has believed for some time that insurers overuse the legal device. It spent time negotiating a voluntary cooling off period that was intended to minimise the unnecessary use of RoR.

However members contacted the association to complain that the device continues to be used in ways that they regard as unjustified.

In reaction to these concerns, a survey conducted by Airmic of 100 of its members revealed that, despite the voluntary RoR agreement with Airmic’s insurer-partners reached in 2008, the practice continues to be used in a way that appears to be excessive.

Not only had more than a third been confronted by an RoR notification, a significant minority had been so at least five times. 35% of the cases were for claims above £10 million. According to respondents, only a minority of these issues were resolved satisfactorily.

Whilst accepting that RoR can be justified under certain circumstances, Airmic said it is concerned that the practice is increasingly used by some insurers as a default response to any large claim. This usually means increased and earlier use of lawyers, said the association, leading to higher costs and a slower process.

“It does appear that there continue to be instances where Reservation of Rights takes place on big claims regardless of the individual merits of the case,” said Mr Hurrell. “This is just not acceptable at a time when, because of the continuing difficulty in getting credit from banks on reasonable terms, UK companies depend on the prompt fulfilment of the insurance promise.”

Airmic is therefore keen to devise a model clause in collaboration with the market to help address this issue.

“These are early days and we need to consult the market about what would work, but the current protection against the indiscriminate use of Reservation of Rights needs to be beefed up,” continued Mr Hurrell.

The same survey did, however, provide more encouraging news on the question of non-disclosure.

Of those members surveyed, 11% had claims challenged for this reason during 2010 and 2011, of which more than 60% were eventually resolved satisfactorily. Airmic said that this marks a big improvement compared to earlier surveys.

“Whilst it leaves room for improvement, especially as some of the challenges related to very large claims, it suggests that Airmic’s efforts are making a difference,” said the association in its newsletter.

For the last two years the association has been urging insurance buyers to reduce the scope for uncertainty on disclosure and has given them advice on how to do so.

At the same time it has made the argument to insurers that it is unreasonable to turn down claims on grounds of non-disclosure where the buyer has made every reasonable effort to provide reliable information.

The survey shows that more than 40% of risk managers have recently opened discussions with their brokers and/or insurers about inserting non-disclosure clauses into their contracts, and that 15% have reached a satisfactory agreement with their insurers.

“Our members are clearly still worried about a legal system that leaves them relying on the goodwill of insurers, but we appear to be making progress,” said Mr Hurrell.

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