Tips for Effective Reservation of Rights Letters to Policyholders
If an insurer decides it will defend a policyholder while reserving its right to challenge coverage in the future, it is important to draft an effective reservation of rights letter communicating that decision to the insured. Courts have held that insurers have waived defenses to coverage in the absence of a properly drafted reservation of rights letter.
1. Gone are the Days of the General ROR—Opt for Specifics
Statutory requirements and case law in some jurisdictions require more than blanket, generic reservation of rights (ROR) letters to policyholders. A generic ROR that is not tied to the facts of the underlying claim or the specific policy provisions/exclusions in the policy can be a mistake. The “catch-all” approach fails to inform policyholders about the coverage position. Provisions that are not potentially implicated should not be in the ROR letter. An effective ROR letter explains how policy provisions/exclusions match or fail to match with an underlying complaint or facts provided.
2. Know What Rules Govern the Jurisdiction
Similar to policy provisions that require prompt notice by the policyholder to the insurer, some states require insurers to issue ROR letters by a certain deadline (i.e. within 30 days or “as soon as reasonable”). If state law allows an insurer to recoup defense costs in the event that the claim does not trigger coverage, some states will require the insurer to explicitly reserve that right. Some states may require reference to or quote of pertinent policy language or require policyholders to consent to the ROR when a defense is being provided. Key is knowing what the relevant jurisdiction requires.
3. ROR Letters Should Open Communication
A good ROR will ask questions and seek information to potentially resolve coverage issues . Openness on both sides encourages the exchange of information and allows a policyholder to explain areas of disagreement and set forth any new information that might affect the coverage position.
4. Reserve the Right to Reserve More Rights
As investigation goes forward, it may be necessary to revisit or supplement the initial ROR letter. The letter should also state that the insurer reserves the right to withdraw its defense should it be determined that coverage was not triggered—a provision that might not be included in the policy.
5. Know Who Should Receive the ROR Letter
Although it may be obvious that the policyholder should receive the ROR letter, there may be other interested parties that should also be advised of the coverage position. For example, some jurisdictions require insurers to address third party claimants as well. An insurer may also want to advise additional insureds and brokers of the coverage position.
Have a question about a coverage position or drafting an ROR, contact Simpson Law Group for your insurance coverage needs.