Reservation of Rights workshop

1. Reservation of Rights workshop Victoria Smith & Linda Rothmann June 2014

2. Introduction • Overview of Chubb Insurance Company of Europe • Background of speakers

3. Agenda • Overview & Objectives • Topics & Issues to be covered • How will this be achieved? • Rules • Time for questions

4. Workshop Scenario • The Insured is a UK plc. It owns and runs amusement/theme parks throughout the world. • The Insured has a public liability policy (“the Policy”) underwritten in London. The lead insurer is a Lloyd’s syndicate, LI. Three other Lloyd’s syndicates participate on the risk as well as a company market insurer, C1, who underwrites 30% of the risk. • The Policy is subject to English law and contains the following notification clause: • “It is a condition precedent to insurers’ liability under this insurance that: • The Insured shall as soon as practicable after the occurrence of any Injury or Damage give notice in writing with full particulars thereof to insurers …”.

5. Workshop Scenario Continued • The effectiveness of the terms and conditions of a policy are only tested on receipt of a claim and this can take time. • Reservation of Rights makes an equivocal statement unequivocal. • Not to be used for tactical advantage • Prevents a waiver of rights • Allows parties to continue to operate under the terms and conditions of the policy • When to reserve • How to reserve

6. Workshop Scenario continued • Rights can be waived by affirmation or estoppel • Waiver by affirmation • You can only waive a right not a breach • Insurers have the choice as to whether to exercise their rights to use the defence • It requires knowledge on the part of the insurer • It is not dependent on reliance • Once election is made and communicated it is final and irrevocable • Decision to abandon must be unequivocal • Policy avoidance and breach of conditions

7. Workshop Scenario continued • Rights can be waived by affirmation or estoppel • Waiver by estoppel • It is a remedy in equity • It applies as a defence to a right being asserted • Insurers do not need to know about the facts that give rise to the defence • Detriment is required • Condition Precedent and Warranties

8. Workshop Scenario Continued • In March 2012 an accident occurred at the Insured’s amusement park in England. A 21 year old man fell off the “Ride of Death” because of a failure of the “locking in” system and suffered severe spinal injuries. • Could a different loss location and/or choice of law change the contracting parties obligations? • On 14 February 2013, the Insured received a letter of claim from the lawyers acting for the injured man.

9. Workshop Scenario Continued • On 27 February 2013, the Insured’s Risk Manager became aware of the claim and notified insurers by telephone on that day, sending formal written notification on 28 February 2013. • This notification is received after inception of new policy period – what impact does this have, if any? • What would the position have been in no formal written notification had followed the call? • Would you regard this notification as being “as soon as practicable”?

10. Workshop Scenario Continued • On 14 March 2013, the lead underwriter sent a letter to the Insured seeking additional information and on the same day, sent a letter to the injured man’s lawyers introducing themselves as the Insured’s liability insurers and asking them to note their interest. • On 15 April 2013, the lead underwriter wrote to the insured reserving their rights. • Is this too late? • General reservation of rights – no detail – is this sufficient? • Would a reservation under and in relation to the policy be necessary? • Advising the insured to act as a prudent uninsured – is this the correct terminology?

11. Workshop Scenario Continued • On 14 May 2013, insurers sent a letter to the insured denying liability for breach of condition precedent. • In doing this would you waive your rights to any future avoidance of this policy in relation to this matter? • Despite the denial for breach of the condition precedent, the parties continued discussing the matter with the insured. • Do the Insurers need to reissue/restate their reservation of rights and how should it be positioned? • During this period, additional information was provided by the Insured which suggested that when completing the proposal form, the Insured had failed to disclose that its operation had been fined by the relevant authorities for breaches of the relevant health and safety laws. • Can insurers consider avoidance of the contract at this point? • If it was a short-form proposal form would insurers waive the right to consider non-disclosure.

12. Workshop Scenario Continued • If it is a duty to defend policy and insurers continue to defend the claim after identifying • That there has been a breach of a policy condition; • That the Insuring Clause has not been triggered; • That cover is excluded due to the application of a policy exclusion.

13. Workshop Scenario Continued • Ultimately, in June 2013, Insurers confirmed their denial of coverage based on the condition precedent for the “Ride of Death” claim but continued to pay out other claims which occurred during the relevant policy period. • Would this be regarded as an unequivocal representation if insurers are still considering non-disclosure? • The lead’s claim file was reviewed as part of an internal audit in late June 2014 and the auditor raised the possibility of avoiding the policy based on the non disclosure identified as a result of information provided between May and June 2013. A decision was subsequently taken to avoid the policy for non-disclosure and a letter sent on 30 June 2014 avoiding the policy ab initio. • Would the courts support insurer’s avoidance of the policy?

14. Workshop Scenario Continued • The avoidance letter was sent on behalf of all insurers subscribing to the risk • Is this sufficient to protect all subscribing underwriters? • What if the letter does not specify on whose behalf it is being sent? • Alternatively, letter sent on behalf of lead only • Is this sufficient to protect all subscribing underwriters?

15. Round up • What is a reservation of rights? • When & how Insurers should use the Reservation of Rights language • What are the implications to policyholders when their Insurers are holding a reservation of rights • What can policyholders do to avoid the need for Insurers to use the reservation of rights language • In the event that insurers do use the reservation of rights language how can this situation best be resolved • Globalisation – impact and use of reservation of rights in other jurisdictions

16. Any Questions?