It’s a peculiar fact that liability insurance is an industrybuilt on standardization of policy forms. And at no time are thoseforms more important than in the context of a claim. Yet thecritical document whose purpose is to explain to policyholders howthose forms may apply to their claim — the reservation of rightsletter — is anything but standardized. Simply put, reservation ofrights letters resemble fingerprints.

This lack of set guidelines for drafting reservation of rightsletters means that, no matter how much experience a person hasdoing so, it’s still easy to get something wrong. And courts havebeen penalizing insurers for issuing what they see as inadequatereservation of rights letters. This penalty can be severe: the lossof otherwise applicable coverage defenses.

What makes a letter a “reservation of rights” letter? Is itenough to simply label it a reservation of rights letter? Is itenough to say, sometimes many times over, that the insurer isreserving its rights to deny coverage? In some cases, the answer isno.

There are countless reasons why a reservation of rights lettercan be found to be deficient. It may have been prepared based on anerroneous choice of law determination. It may not have been sent tothe correct insureds. It may not have been sent timely. It may notcomply with certain statutory obligations. It may not properlyaddress the handling of the insured’s defense. It may omit certaincoverage defenses.

Want to learn more about reservations of rightsletters? Attend National Underwriter's webinar on“The Definitive Reservation of Rights Checklist: 50Things That Every ROR Needs,” on Nov. 18. For more informationor to register, click here.

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Inadequate explanation

But the most common — yet easiest to prevent — reason why areservation of rights letter may be declared inadequate is that theexplanation provided to the insured of why coverage may not be owedfor some claims or damages was not sufficiently specific to beadequate. In other words, the reservation of rights letter did not“fairly inform” the insured why, despite a defense being provided,coverage for any damages, in whole or in part, may not be owed.

We have all seen reservation of rights letters that set forth abrief factual summary of the claim, followed by several pages ofpolicy language — some completely irrelevant — and then aconcluding statement that, voilà, the insurer reserves itsrights. Some courts have concluded that such letters, lacking anexplanation why coverage may not be owed, do not cut the mustard,no matter how many times they may use the words “reservation ofrights.” [See Safeco Ins. Co. of Am. v. Liss, No. DV29-99-12, 2005 Mont. Dist. LEXIS 1073, at *41 (Mont. Dist. Ct. Mar.11, 2005).]

In this case, the court found that Safeco’s reservation ofrights letter did not “fairly inform” Liss (the insured) of thereasons it was reserving its rights and that the letter wasinadequate as a matter of law to preclude application of theestoppel doctrine. According to the court, the only factualreference contained within the policy was: “As you are aware, thislawsuit arises out of a gunshot incident on July 10, 1997.” Moreimportantly, the court found, the letter set forth pages of policyprovisions but did not explain why Safeco believed the insurancepolicy would possibly not cover Liss for the shooting incident. Inother words, Safeco did not “apply” the sole fact stated to thepolicy’s legal terms.”

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In another case, Builders & Exteriors, Inc. v.Mid-Continent Casualty Co. [449 S.W.3d 16 (Mo. Ct. App.2014)], a Missouri trial court found that an insurer, afterundertaking its insured’s defense, owed no coverage. But thatdecision went by the wayside at the state appeals court because thereservation of rights letters — despite containing a lot of pages,setting out the facts at issue, voluminous policy language and astatement that the insurer was reserving its rights — were found tobe not effective. The court put it like this: “The lettersgenerally discussed the nature of the underlying lawsuit and setforth various provisions of Advantage’s general liability policy.Neither letter clearly and unambiguously explained how thoseprovisions were relevant to Advantage’s position or how theypotentially created coverage issues.”

Remember the letter’s purpose

The best way to approach drafting a reservation of rights letteris this: Remember its purpose. The insured-recipient may have neverseen a reservation of rights letter — or ever heard of it. Justbecause you deal with them day in and day out does not mean thatthe insured has any familiarity with them. What’s more — theinsured is being provided with a defense. That may create animpression that its insurer is taking care of the matter — lockstock and barrel.

Thus, the reservation of rights letter needs to make itabundantly clear to the insured that, just because the insurer isdefending, it should not get a false sense of security when itcomes to coverage for any damages. To achieve this, a thorough andclear explanation of why coverage may not be owed should beprovided. In other words, fairly inform the insured.

[Related: The 8 most misunderstood coverage issues in CGLinsurance]

Randy Maniloff is an insurance coverage attorney at Whiteand Williams LLP, in Philadelphia. A version of this article wasoriginally published at Maniloff’s website, www.CoverageOpinions.info.