As Airmic looks to work with insurers over a protocol to help settle claims earlier, Richard Evans looks at the difficulties in striking a balance between commercial expediency, legal rights and professional obligations
When a claim IS first intimated, a key objective for the person investigating, be it the insurer, adjuster or lawyer, is to establish a rapport with the insured so that all available information is obtained as quickly as possible.
In most cases, it will be part of the investigation to ensure that there has been a full disclosure of the material facts, compliance with the policy terms and that the claim falls within the cover afforded.
However, care is needed where comments are made by the insured that could prejudice decisions regarding their cover without their understanding the scope of the investigation fully. This raises issues as to whether or not the customer has been treated fairly and can pose difficult questions about conflicts of interest, professional ethics and the use of the evidence given in this way. Accordingly, the practice has evolved of alerting the insured from the outset that there is a precautionary reservation of rights under the policy while the investigations are being conducted.
There was some justification for this cautious approach when the case of Kosmar Villa Holidays v Syndicate 1243 was first heard in court in 2007. An accident occurred in August 2002 and the tour operator was aware of its seriousness, yet it failed to notify insurers until over a year later. Insurers corresponded with the tour operator, setting out a strategy with regard to claim handling, also writing to the claimant's solicitors asking them to note their interest. One month after the notification was received, insurers asked the operator to explain the delay in notification and reserved its rights under the policy.
At first, the Commercial Court decided that the insurers had waived their rights and had elected to accept liability for the claim under the policy. While this decision encouraged insurers to issue reservation letters at the earliest opportunity, such a course of action runs contrary to the need to build rapport and trust with the policyholder.
A survey carried out in June 2008 found that 29% of the Association of Insurance and Risk Managers' members had experience of a reservation of rights being used inappropriately in the past two years. This assertion supports Airmic's decision to negotiate a voluntary agreement for a 90-day moratorium between a claim being notified and any reservation of rights being issued. It is suggested that this cessation will enable meaningful discussions to take place to try to resolve the claim amicably and, crucially, will reduce both the time and expense involved in settling large claims.
Judicial comfort for this approach can be taken from the Court of Appeal decision in Kosmar, which reversed the Commercial Court decision. Lord Justice Rix said: "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 absence of prompt notification."
Insurers are working with Airmic on the detail of the agreement. This will not be an easy protocol to draft, given the need to strike a balance between commercial expediency, legal rights and professional obligations. Hopefully, such a protocol can be developed to foster trust between the insurer and the insured, resulting in the earlier settlement of claims.
As the credit crunch tightens, insurers are likely to be under greater pressure to settle claims more quickly in order to maintain the liquidity of an insured's business. Increasingly, in order to treat a customer fairly, it will be essential to deal with customers more quickly.
This autumn, the next round of the Law Commission will issue papers in its ongoing review of insurance contract law that will focus on damages for late payment; a proposal may well be put forward that could see insurers held fully accountable if they do not pay out promptly.
The House of Lords reviewed late payment under general contract law recently in Sempra Metals v IRC (2007). There it was held that, in the event of late payment under a contract, the creditor can recover damages for late payment of the debt in the right circumstances. There is a view that this principle could be extended to non-indemnity insurance, where such claims can be viewed as claims for a debt. It is not thought that it extends to indemnity insurance where there has been property damage, for example, as these claims are not viewed as claims for debt but as claims for damages. Such a distinction arises from the line of cases culminating in Ventouris v Mountain (1993) and the Court of Appeal decision of Sprung v Royal Insurance (1996), where the insurer's liability was restricted to the limits of indemnity under the policy plus interest.
It must be likely that the Law Commission will propose reform of the Ventouris and Sprung decisions and follow the position taken in Scotland and other jurisdictions, where there is a duty to pay out within a reasonable time - a breach of which will render the insurer liable appropriately. This would tie in with the 'reasonable expectations of the policyholder' approach, on which the Law Commission's proposals for non-disclosure and misrepresentation are based, and would bring insurance law more into line with general contract law.
The tide of change is, therefore, gaining momentum and the autumn promises to be an interesting time as the market awaits the proposals emanating from Airmic and the Law Commission. The focus is clearly on dealing with customers more quickly and that can only be good for all concerned, not least the image of the insurance industry.
- Richard Evans is a partner and head of the policy coverage unit at law firm, Beachcroft.
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