What happens if you, as an insurer, have not yet concluded whether or not to indemnify an insured, and a third party commences Court proceedings against your insured (with the indemnity decision still pending)?
When these types of claims arise, an insurer (and its panel firm) can continue to act for an insured on a “reservation of rights” basis.
Acting on a “reservation of rights basis” whilst the claim is being investigated allows the insurer time to carry out the necessary investigations on indemnity and, if appropriate, deny indemnity if there is a valid reason. At the same time, it allows the insurer to take the necessary steps to ensure the insured’s position is not irreversibly prejudiced as a result of the outstanding indemnity decision.
Examples where an insurer may want to consider acting on a “reservation of rights” basis include:
- where the insurer has not had sufficient opportunity to consider the insured’s claim, but need to act to defend proceedings or potential proceedings against the insured quickly;
- where the insurer suspects that the parties involved in the matter have colluded, or that the claim may be fraudulent claim; and
- when the insurer suspects there may have been non-disclosure or misrepresentation by its insured.
When you refer a claim to your panel firm and a decision on indemnity has not yet been made, you need to think carefully about instructing the lawyers to act on a “reservation of rights” basis and including that direction as part of the initial instruction to the lawyers.
Your lawyers should then send a letter to the insured explaining the terms of the “reservation of rights” and what this means for them if the insurer grants indemnity, or do not grant indemnity down the track. The insured will need to accept those terms for your lawyers to act on the reservation of rights basis. In addition, special terms need to be agreed so that when a lawyer is instructed to act on a reservation of rights basis, the lawyer will not be conflicted out of the matter and will not have to return the file to you if anything of concern is established, and the lawyer can continue acting for the insurer if the decision is to deny the claim. This , of course, is subject to the lawyer’s professional responsibility.
If the insured is not prepared to accept the terms of lawyers acting on a reservation of rights basis, they have an obligation to act as a prudent uninsured, which will mean funding the defence properly themselves and not prejudicing their own position or that of their insurer.
It is important to remember that the position of an insurer to act on a reservation of rights basis can be challenged, and you should remain vigilant and ensure you don’t communicate with the insured in a way that can be viewed as granting indemnity if indemnity is still under investigation. “Reservation of rights” can be a bit of a tricky concept and you should contact us to discuss your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specific advice should be sought about your specific circumstances.
