The overall premise of a Reservation of Rights letter is straight forward — a letter advising of coverage issues that may result in a denial of coverage. There are however many ways that a letter can fall short of its intended purpose.
In some jurisdictions, a minor technicality can render an
entire Reservation of Rights defective and waive all coverage
defenses. Even absent such draconian consequences, minor
inconsistencies in the preparation of a Reservation of Rights
letter can compromise the coverage position.
Outlined below are 10 tips for preparing Reservation of
Rights letters.
1 Know What Kind of Coverage
Position Letter You are Writing
There are actually four categories of Coverage Position
Letters (CPL) that deal with the preservation of coverage
defenses. The most common is the Reservation of Rights,
which identifies potential coverage defenses pending further investigation or other activity. This letter identifies coverage defenses, but does not disclaim coverage altogether.
As such, the recipient of a Reservation of Rights letter is not
excused from all of the conditions of the policy. On a first
party basis, the letter identifies coverage defenses pending
further investigation into the claim. On a third party basis,
the letter identifies coverage defense while agreeing to either
retain or reimburse defense counsel, or investigate the claim,
pending clarification of coverage issues.
A Disclaimer letter advises the insured that there is no coverage for the claim. Generally, it means that the insurer will
conduct no further investigation, nor provide a defense. The
insured may argue that a disclaimer letter excuses it from
complying with any policy conditions, such as forwarding
amended pleadings or other new information on a claim.
The insurer may be able to maintain the insured’s cooperation through a paragraph requesting further cooperation
but the risk that the conditions are no longer enforceable
should be considered.
A Denial letter is generally a pre-suit letter issued by an
insurer to an insured or a claimant advising that at that stage
in the claim, the insurer does not consider the insured to be
liable and that a pre-suit payment will not be contemplated.
Denial letters and Disclaimer letters are terms that are often
used interchangeably. Avoid the misconception that a denial
of liability excuses the insurer from retaining counsel in the
event that a complaint is brought against the insured should
the complaint trigger a duty to defend. It is therefore a good
practice to avoid using the terms interchangeably as confusion can result.
A Non-Waiver letter is a Reservation of Rights that is execut-
ed by the insured. It confirms that the insured is aware of the
coverage defenses and consents to the insurer’s continued
investigation or retention of counsel on its behalf. The letter
will often set forth the terms of the relationship between the
insurer and the insured pending resolution of the coverage
issues. Some jurisdictions require a Non-Waiver letter for an
insurer to preserve its coverage defenses.
2 Know the Rules of the Jurisdiction
While the general format of a CPL is fairly standard from
insurer to insurer, there are many jurisdictions that have
statutory requirements. Many jurisdictions also have common law requirements for format, content, parties to be
noticed and timeliness. Many of these requirements, if not
followed, can result in a full waiver of the coverage defenses.
As such, it is important to know what laws will govern the
content of your CPL. Remember also, that it is not always
the state where the letter will be issued, or even the state in
which the policy was issued that will determine what state’s
law will govern.
3 Who Should Send the Letter
The CPL may be issued by the specific insurance company
on which the policy at issue is written. It may also be issued
by a parent company, a holding company or another corporate entity. It may be issued by a third party administrator,
managing general agent, independent adjuster or counsel.
What is most important, particularly for those entities sending letters on behalf of another, that it is clear who is sending the letter, and to be consistent in referencing that entity
throughout the letter.
Another issue is who will sign the letter. Often, the signature
represents the actual author of the letter, but it may also be
a manager or specifically designated individual within the
entity that sends the letter. It is helpful for the signer to have
some familiarity with the matter and to have read the letter
in full before executing and sending it.
4 Who Should Receive the Letter
Generally, a CPL is issued to the first named insured on
the policy. In some jurisdictions, the claimant must receive
a copy depending on the type of claim. Many CPLs will
provide for a copy to the agent or broker on the policy.
Other parties may receive a copy based upon their status
or demand as a putative additional insured, an additionally
named insured or a party otherwise satisfying the policy’s
definition of an insured.
Often a CPL letter will be addressed to counsel. A good
rule of thumb is that if a tender is received from counsel,
then the responding CPL may be addressed to that attorney,
whereas if an attorney is merely identified in the file, then
the CPL should be addressed to the named insured with a
copy or a separate addressee line to the attorney. If the letter is addressed specifically to counsel, it is a good idea to
note in the beginning of the letter that it is addressed to that
attorney as he or she is understood to be counsel for the
