As insurance coverage attorneys and insurance carriers’ in-house counsel are keenly aware, the Reservation of Rights letter is a standard, and at times mundane, letter that triggers the often long journey of determining whether an insurer will provide or decline coverage to an insured.
While usually seen as a standard, boilerplate letter, attorneys must be cognizant of the obligations imposed on them across the states to ensure that a Reservation of Rights letter complies with each state’s specific requirements on the timing of delivery of the letter and the content of the letter to preserve its defenses and avoid prejudicing the insured. This article examines opinions from courts across various states and their impact on the obligations imposed on insurers when drafting a Reservation of Rights letter. Additionally, this article will address the potential consequences that may arise from a poorly drafted Reservation of Rights letter.
What is a Reservation of Rights Letter?
A Reservation of Rights letter is a letter provided to an insured from an insurance company that informs the insured that the insured’s relevant insurance policy may not provide coverage for a claim. While a Reservation of Rights letter does not explicitly deny coverage of a claim, it does put the insured on notice that that insurance company is investigating the claim and reserves the right to deny coverage upon further investigation.
The Reservation of Rights letter should include the following information: the identity of the insurer that issued the policy; the policy number; a list of documents that the insurance company has received and which it will make its decision on coverage; a statement describing that the insurance company’s purpose of the letter is to reserve its rights; a summary, including references to the facts, allegations, and damages sought, of the relevant pleadings; exact quotations of the relevant policy language that the insurance company is relying on; a discussion and analysis of how the quoted policy language applies to the allegations in the pleadings and how it may preclude coverage; and other factors that the insurance company may rely on to reserve its rights, including withdrawing representation or proceeding with a declaratory judgment action.
Potential Consequences and Pitfalls From Drafting a Deficient Reservation of Rights Letter
It is imperative for attorneys and their insurance company clients to draft a thorough Reservation of Rights letter that complies with the deadlines imposed by caselaw and state statutes. Failure to adequately explain limitations of coverage that may apply to a claim in a Reservation of Rights letter can result in adverse consequences for insurance companies, including, but not limited to, failing to preserve legitimate defenses and being precluded from effectively denying or disclaiming coverage for the insured’s claim.
As an initial matter, insurance companies must first ensure that any Reservation of Rights letter for an insured’s potential claim is provided to the insured in a timely manner. While some states impose a specific timeline for providing a Reservation of Rights letter, others require the insurance company to send the letter “within a reasonable time.” See Fla. Stat. Ann. Section 627.426(2)(a) (prohibiting a liability insurer from denying coverage based on a particular coverage defense unless “within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured;” see also Tex. Ins. Code Section 541.060(4)(B) (“It is an unfair method of competition or an unfair or deceptive act or practice in the business of insurance to engage in the following unfair settlement practices with respect to a claim by an insured or beneficiary… by failing within a reasonable time to submit a reservation of rights to a policyholder”). Failure to timely issue a Reservation of Rights letter can be costly for an insurance company as courts have held that insured’s can recover unpaid defense costs incurred before an insurance company reserves its rights. In John Moriarty & Associates v. Zurich America Insurance, a general contractor initiated litigation against its subcontractor’s CGL insurer, Zurich, alleging that Zurich breached its contractual obligations under the Zurich Policy by refusing to accept the general contractor’s tender for defense and indemnity without reservation. John Moriarty & Associates v. Zurich America Insurance, 102Mass. App. Ct. 474, 478, 207 N.E.3d 542, 547 (2023). The general contractor was forced to obtain defense counsel and incur defense fees for seven months before initiating litigation seeking reimbursement for those defense fees before Zurich finally reserved its rights. The litigation proceeded with the general contractor seeking reimbursement of defense fees and attorney’s fees in bringing the action against Zurich to enforce that right before Zurich reserved its rights.
The Appeals Court of Massachusetts ruled in favor of the general contractor on both issues. While the appeals court remanded the issue of the duty to defend to the trial court, it held that the general contractor could recover fees incurred in bringing the coverage action if the trial court found that Zurich violated its duty. The appeals court arrived at this holding by citing policyholder-friendly dicta that “the insurer should not enjoy the usual freedom to litigate without concern about the possibility of having to pay the insured’s attorney fees.” This ruling should inspire insurance companies to proceed with caution, at least in Massachusetts, before forcing insureds to litigate to enforce their rights under the relevant policy.
In addition to timely providing a Reservation of Rights letter in response to an insured’s demand for coverage on a potential claim, insurance companies must also avoid providing the insured with a generic boilerplate Reservation of Rights letter that does not adequately cite to specific policy exclusions and analyze why the facts of the insured’s claim might preclude coverage under those provisions. While time constraints or the lack of information on an insured’s claim might tempt the drafter of a Reservation of Rights letter to produce a letter containing boilerplate language, insurance companies must be aware that courts may find the letter defective later in litigation. For example, In Mave Hotel Investors v. Certain Underwriters at Lloyd’s London, No. 21-cv-08743 (JSR), 2023 U.S. Dist. LEXIS 62718 at *12(S.D.N.Y. Apr. 10, 2023), the U.S. District Court for the Southern District of New York ruled that the insurer’s generic reservation of rights language in its Reservation of Rights letter denying coverage did not suffice to avoid waiver of its late notice defense, despite the insured conceding that it did not bring prompt notice of the claim.
Moreover, it is not enough to merely avoid boilerplate language in your Reservation of Rights letter. A Reservation of Rights letter must also specify the particular grounds upon which they dispute, or may dispute, coverage for the specific claims. See Harleysville Group Insurance v. Heritage Communities, 420 S.C. 321, 340, 803 S.E.2d 288, 299 (2017) (the South Carolina Supreme Court holding that, despite an insurer’s references to specific policy provisions in its Reservation of Rights letter, the insurer’s Reservation of Rights letter at issue was ineffective for failing to include a discussion or explanation of the insurer’s position as to those cited policy provisions); see also Selective Way Insurance v. MAK Services, 2020 PA Super 103, 232 A.3d 762, 771 (finding that, where the insurer had actual knowledge of the policy exclusion from the outset yet waited 18 months to raise the exclusion to the insured, the insurer’s reservation of rights letter failed to “clearly communicate” the extent of the rights being reserved, which resulted in presumptive prejudice to the insured).
The Bottom Line
When counseling clients on Reservation of Rights letters, attorneys must review and be knowledgeable of state-specific requirements as to what should be included in the Reservation of Rights letter and ensure that your clients’ letter adequately addresses all obligations imposed on them in drafting an effective Reservation of Rights letter that does not prejudice the insured or fails to protect your clients’ defenses.
Reprinted with permission from the July 25, 2024 edition of The Legal Intelligencer © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.