Reservation Of Rights Letter

Texas insurance lawyers need to understand the significance of a “reservation of rights” letter received from an insurance company. The Claims Journal published an article in 2008 that is educational. It is titled “Reservation of Rights Letters.”
What is a Reservation of Rights Letter?
Effective reservation of rights letters can be the difference between preserving policy defenses or paying on damages.
As written communication to policyholders, reservation of rights letters set forth a company’s assumption of defense, subject to coverage reservations. Reservation of rights letters mainly inform the insured of coverage and policy defenses, thereby preserving the insurer’s right to assert such defenses. In many jurisdictions, the reservation of rights may allow the insurer to withdraw from the defense when there is no potential for coverage under the policy. The ROR letters allow insurers to decline indemnifying the insured for any portion of a judgment not covered under the policy.
A coverage defense is one by which the liability insurer asserts that a given claim is or may not be covered by its policy.
A policy defense is one by which the liability insurer admits coverage of the claim but asserts that the policy is not enforceable due to the breach of a policy condition by the insured. An example would be a breach of a policy condition such as late notice or voluntary payments.
A reservation of rights letter may provide the insurer with the right to seek reimbursement for defense costs it pays if it later establishes that those costs were incurred in defending non-covered claims.
A reservation of rights letter is generally a unilateral letter from the insurer to the insured. By contrast, the term “non-waiver agreement” is sometimes used to refer to a bilateral agreement (signed by both parties) between the insurer and the insured that the insurer’s defense of the action against the insured will not result in a waiver of any rights by the insurer to later assert some defense to coverage.
To fulfill its intended purpose, the reservation of rights letter must contain certain information. Some of the specific information that should be included is listed below. In drafting a reservation of rights letter, specificity, understandability and timeliness should be foremost. A well-drafted reservation of rights letter should address the following.
Whenever it becomes evident to the insurer that a coverage defense or policy defense may exist, a reservation of rights must be sent. Timeliness is important, although there is generally no specific deadline for sending a reservation of rights letter.
The reservation of rights letter should identify the policy under which the defense – and the reservation – is provided. The policy should be identified by policy number and type. This will aid in avoiding confusion where the insured has multiple policies. The letter should also include the date of loss and claim number, again to avoid confusion. Near the beginning of the letter, the insurer should state that the purpose of the correspondence is to reserve the insurer’s rights. This statement should be made in plain language, using the familiar phrase “reservation of rights” so there can be no argument that the insured did not understand the purpose of the letter.
The reservation of rights letter should contain a summation of the complaint and other pleadings that are pertinent to the coverage or policy defense as well as facts relied upon from sources outside the pleadings.
The reservation of rights should quote verbatim the specific policy provisions relied upon. The letter should not quote policy provisions that are clearly not implicated, but if there is some basis to believe that a policy provision may apply, the letter should quote the provision and state that it may also apply to preclude or limit coverage.
The reservation of rights must adequately inform the insured of the rights the insurer intends to reserve so that the insured can intelligently choose between retaining his/her own counsel or accepting the tender of defense counsel from the insurer.
The letter should also specifically note whether the insurer is reserving its right to seek reimbursement of defense costs expended in defending claims that are not covered. This will make clear that the insurer is not denying coverage by virtue of the letter and will help defeat any argument by the insured to the contrary.
The letter should include an offer to the insured to review any additional information that they may be aware of, and should include a phrase that will “catch all” other defenses that could become pertinent. This will allow further supplementation of the reservation of rights letter.
The reservation of rights should request the continued cooperation of the policyholder, especially if any further facts come to light or if new or amended pleadings are served on the policyholder. This will allow the insurer to continue to reevaluate coverage.
The reservation of rights letter should set forth the policyholder’s right to retain personal counsel at the policyholder’s own expense.
Although an insurer generally doesn’t waive coverage defenses of which it is unaware, it is always a good idea to reserve the right to assert other defenses as they become known. The insured may be aware of a coverage or policy defense that is not asserted and this will alert the insured that such a defense is not waived simply because the insurer is not yet aware of it.
Do not include extraneous information that is not relevant to the reservation of rights. Set forth only those facts and policy provisions that are germane to the reservation of rights to avoid “burying” the coverage defenses in the letter.
The reservation of rights letter should be sent by certified mail, return receipt requested, to the insured’s address set forth on the policy.
The reservation of rights letter should be on insurance company letterhead and should be signed by a representative of the company.
An insurer generally does not have a duty to reserve its rights on coverage and policy defenses of which it is not aware, but a reservation of rights letter should be sent as soon as the insurance carrier becomes aware of a coverage or policy defense. There is generally no specific time by which an insurer must provide a reservation of rights letter to the insured. But an insurer runs the risk of waiving, or being estopped from asserting, its coverage and policy defenses if its reservation of rights letter is untimely.
A reservation of rights letter may create a potential conflict of interest between the insurer and insured, depending upon the nature of the reservation. For example, when the complaint against the insured alleges that property damage or bodily injury was both negligently and intentionally caused, an insurer may reserve its rights to deny coverage for any intentionally-caused damage or injury. This creates a potential conflict of interest because the insurer-retained defense counsel may be able to control the insured’s defense in such a way as to affect the outcome of the coverage issue.
Not every reservation of rights creates a potential conflict of interest. The key question is whether counsel retained by the insured has the ability to manipulate the outcome of the issues upon which coverage depends. For instance, in states that do not permit insurance coverage for punitive damages, the mere existence of a punitive damage claim does not create a conflict of interest. This is because the interests of both the insurer and the insured are aligned: both want to minimize any award against the insured.
The bottom line here is this: If an insured receives a reservation of rights letter from their insurance company, the insured needs to seek the advice of their own attorney.