Reviewed 2023
Joseph P. Monteleone
Summary: The reservation of rights letter is often misunderstood by insurers, insureds, and attorneys. This treatment attempts to clarify its use.
This article was written by Joseph P. Montelone who is Vice President and Claims Counsel at Hartford Financial Products in New York . It originally appeared in an edition of Claims Magazine and is reproduced with permission.
Topics covered:
Occurrence prior to effective date
Introduction
How many times have you thought your insurance carrier said, "You really didn't expect us to pay anything under this insurance policy—did you?"
Too often, that is precisely the type of response many insureds and brokers believe they are hearing from the insurer upon submission of a claim. Is the insurance contract nothing more than a few pieces of paper intended solely to give psychological comfort to insureds but no financial benefits whatsoever?
This view of insurance is not one held by all insurers. Reputable insurers continually demonstrate responsibility and responsiveness to their insureds and brokers. Because an insurance policy is a contract between the insurer and its insured, it must be understood by the latter that the submission of a claim or incident report triggers certain legal rights, duties, and obligations under that contract on the part of both the insured and the insurer.
Unfortunately, these obligations are not always crystal clear at the outset of a given claim situation. Therefore, it is of mutual benefit to both the insurer and the insured for the insurer to reserve rights on a number of issues and promptly communicate those reservations to his insured in writing and with sufficient detail.
This is particularly true in the areas of professional liability and errors & omissions insurance, including such coverages as directors and officers liability and architects and engineers professional liability, where almost every report of a claim or incident would, in my opinion, warrant the insurer's reservation of rights.
Let's examine two aspects of these policies in order to help illustrate why insurers must reserve rights.
Excluded Activity
First, almost all of these policies contain a provision that excludes from coverage dishonesty and/or other fraudulent or intentional misconduct. Given the propensity of plaintiffs to assert claims of such intentional wrongs in addition to negligence counts, the insurer has no choice but to reserve the right to deny coverage should such dishonest or intentional conduct be material to any recovery by the plaintiff. Of course, many policies require an adjudication before this exclusion can be supplied and thus its ultimate application is far from commonplace.
Occurrence Prior to Effective Date
Second, many claims involve allegations of wrongful activity that occurred well before the application for the inception of the policy. While this does not per se suggest misrepresentation on the part of an insured in the application process, it behooves the insurer to inquire as to when an insured first knew of the claim or facts or circumstances which gave rise to the claim. Remember, this is only an inquiry and not an accusation. If an insured discloses the facts fully and promptly and the subsequent investigation supports that response, then the prior knowledge issue is usually resolved.
What Should a Reservation of Rights Letter Do?
A reservation of rights or other coverage letter should not create an adversarial relationship between the insurer and the insured. In most claim situations, all the insurer has at the inception of the claim are various unsubstantiated allegations and, at best, a few confirmed facts. In reserving rights, the insurer is merely telling the policyholder of its concerns that the claim may, in whole, or in part, not be covered under the policy pending further investigation.
A reservation of rights letter, while obviously protective of the interests of the insurer, is also beneficial to the insured. It alerts the insured to the fact that some of the elements of the claim may not be covered, thereby allowing the insured to take necessary steps to protect its potentially uninsured interests. Further, if the insurer and the insured are to have any disputes over coverage or other issues, such matters can be addressed early on and resolved in an amicable manner.
As discussed above, it is the development of solid factual information which facilitates the resolution of many coverage issues. Oftentimes, the requisite facts and information are in the possession of the insured and not the insurer. Providing necessary information to the insurer can help resolve many disputed coverage issues and enable both parties to go forward in the common cause of protecting the insured's interests.
Conclusion
In closing, here are a few points to keep in mind when an insured receives a reservation of rights letter:
- A reservation of rights letter is not the beginning of an adversarial relationship between the insured and the insurer.
- Reservation of rights letters are appropriate in almost every claim and incident situation, particularly in sophisticated and complicated and complex insurance coverages as mentioned earlier.
- Many states require that an insurer notify its insured of any potential coverage issues early in the claim process so that the insured may take steps to protect itself. In such situations, an insurer may waive its rights if it fails to reserve them.
- A reservation of rights letter is an important document and should not be regarded—by either an insurer or an insured as a legalistic exercise in unnecessary and boilerplate verbiage.
- Request of either the insured or the insurer of facts, information, and/or statements of position should be answered promptly and completely to facilitate the resolution of outstanding coverage issues and the ultimate disposition of the claim matter.
Original October 2003, reviewed 2008