Knowledge Of Local Law Critical To Preserving Coverage Defenses: Experts

"However," she continued, "an incorrect denial is not sufficient. The insured must also establish the insurer acted without reasonable justification. The test [under the Act] is not whether the insurers position was correct, but whether its conduct was reasonable under the circumstances."

Continuing in the same vein, Mr. Edmonds provided guidelines for issuing effective reservation of rights letters for CGL claims.

Of critical importance is the need to be as specific as possible without providing so much detail that the letter becomes confusing, he said. Among the most important aspects is a recap of the claim details.

The adjuster may have limited knowledge about the claim in the early stages of the adjusting process, but its important to state what the adjuster understands as the facts in any reservation of rights letter, he said.

This summary of information must be connected to the reasons the adjuster has for reserving rights under the policy. The letter should be as substantive as possible, he continued.

"Ask the insured for specific information if its needed," he said. "Its important to identify what is known already and what is outstanding."

Its also important, he said, to request that the insured correct or clarify any statement in the letter that he believes is inaccurate.

He cautioned against deferring issuing a reservation of rights letter simply because all the facts are not yet determined or some may be questionable. Timeliness is extremely important, he said.

In response to a question from an audience participant, Mr. Edmonds indicated that the definition of "timeliness" was not hard and fast.

"I certainly wouldnt wait a year to issue a reservation of rights letter," he cautioned. Depending on the circumstances, the letter should be issued as soon as possible, and certainly within 30-60 days, he said.

Any conditional reservation of rights letter should be followed up with supplemental letters as additional information is uncovered, Mr. Edmonds advised.

The need to itemize coverage issues that are the reason for reserving rights is extremely important. Among the most frequent CGL coverage issues he cited as possibly leading to a reservation of rights are those that apply to the insureds own work, own product or ongoing operations, along with contractual liability limitations.

The adjuster also should emphasize that the reservation is not limited to exclusions or limitations that are listed in the letter.

There also is a need to differentiate between the insurers potentially broader duty to defend a claim and the potentially narrower duty to pay the claim.

This is important, Mr. Edmonds noted, at least partially because the insurer may be able to recover defense costs if there ultimately is no coverage under the policy. But adjusters must inform the insured of this fact in the reservation of rights letter so the insured realizes the possibility up front.

Other defenses that the adjuster should state in the letter include potential issues with late reporting of the claim, failure of the insured to cooperate with the investigation and other insurance.

The ACE-SCLA Annual Claims Exposition + Conference was presented by Claims Magazine. Claims Magazine is published by The National Underwriter Company, which is also the parent company of this newsmagazine. The Conference was produced in conjunction with the Society of Claims Law Associates, a national organization of claims people whose purpose is to promote professionalism through education.

Diana Reitz, CPCU, AAI, is associate editor of the FC&S Bulletins and editor of the RF&S Bulletins, published by the National Underwriter Company in Erlanger, Ky.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.