Monday's Practice Tip: Writing The Right RoR
Today, we inaugurate a new feature on our blog. The Monday Tip will consider a practical problem faced by claims professionals and outside coverage counsel, presenting a dialogue created by our five editors.
The question that we posed is how to write the "right" reservation of rights letter? Is it better to err on the side of caution and throw in everything but the kitchen sink (is there a kitchen sink exclusion?)? Alternatively, is there a risk of waiver or estoppel if a conceivably applicable policy term, condition or exclusion is omitted from the RoR?
Sara Thorpe: The purpose of a reservation of rights letter is to communicate and reserve rights. As the California Supreme Court observed in Buss:
"Through reservation, the insurer gives the insured notice of how it will, or at least may, proceed and thereby provides it an opportunity to take any steps that it may deem reasonable or necessary in response--including whether to accept defense at the insurer's hands and under the insurer's control or, instead, to defend itself as it chooses. . . . Through reservation, the insurer avoids waiver . . ."
Chris Martin: There has to be a balance between inclusiveness and comprehensibility. In Texas, I advise insurers to balance the scope of a reservation of rights with understandability concerns. An overly inclusive reservation of rights runs the risk of incomprehensibility.
Diane Polscer: Insurers are often concerned with making the reservation of rights letter so broad that they become easy to attack in a deposition of the claims handler should a coverage action be filed. With those caveats, we do typically prepare a broader rather than narrower reservation of rights letter.
Michael Aylward: The key to a reservation of rights is to clearly communicate to the policyholder those coverage issues that are apparent to the insurer. If it’s written too broadly, it can have unintended consequences like generating a conflict of interest that might deprive the insurer of the right to defend.
Chris: Some reservation of rights letters are so long, convoluted and full of legalese that they would make a law professor's head spin. How can unsophisticated insureds ever be expected to comprehend letters that cite a dozen policy provisions with little (if any) discussion of why the provisions are being raised or what the insured is supposed to understand about the suit pleadings and the policy?
Diane: Part of the problem with determining a general rule for what to include in a reservation of rights letter is that states have particular limits or requirements. In general, insurers should include every defense that may apply. This is especially true in states that recognize coverage by estoppel. In Washington, however, WAC 284-30-930 makes it an unfair practice to deny a claim “on the basis that the insured expected or intended the damage” unless the position is supported by the facts and the law.
Kevin Merriman: The question poses unique issues in New York for reservations of rights letters that also serve to partially or fully disclaim coverage for a claim. New York Insurance Law §3420(d), applicable to bodily injury and death claims arising from accidents in New York, requires insurers to disclaim coverage “as soon as is reasonably possible.” The failure to do so results in waiver of policy defenses.
Chris: If the purpose of such letters are to warn the insured that the defense or indemnity benefits might not be available later so they can plan for contingencies and can watch what they disclose to assigned defense counsel, then comprehensibility is paramount. Many courts and many carriers seem to have forgotten this. Instead, fears of "waiver" have lead to some outrageously long and confusing RORs which, in the end, achieve none of the aims intended by the courts when initially requiring such letters to be sent.
Michael: Most states, including my home state of Massachusetts, will allow an insurer to supplement its coverage position if new facts emerge or the policyholder isn’t prejudiced by the assertion of new defenses. Even so, we always recommend that insurers include a standard paragraph at the conclusion of a RoR reserving the right to supplement their position as new facts and developments may warrant.
Sara: California allows a general reservation of rights as long as it apprises the insured of the reason (or at least some of the reasons known at the time based on the information then available) for the coverage decision.
Chris: Texas law requires the insurer in a liability claim to raise those policy defenses which are apparent from the facts pled or the facts known or run the risk of waiving those claims if the carrier later decides to withdraw the defense or deny indemnity benefits. As new facts are pled or new facts are discovered, amended RORs are permissible and customary. So, the fear of not being able to later amend a ROR is generally unfounded.
Kevin: The obligation to issue a disclaimer is triggered not by unassailable facts, but by sufficient facts upon which to base the disclaimer. Conversely, insurers need not invoke unknown policy defenses.
Sara: The reservation of rights should also remind the insured to read the policy and that there may be other provisions that apply to the claim, and (if permitted in the jurisdiction) that the reservation will be updated as the matter develops, the insurer's investigation continues, and issues arise.
Kevin: New York courts have ruled that a reservation of rights letters is no substitute for the written disclaimer required by Section 3420(d). Also, it doesn’t toll the period within which a disclaimer must be issued. Thus, insurers that opt to limit their response to those provisions of their policies that are “clearly” triggered by a claim might be inviting unwelcome scrutiny about what they knew or should have known under the circumstances, and whether such knowledge was indeed sufficient to invoke a policy defense.
Sara: The California Fair Claims Practices provide that the insurer is to "provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law" for the coverage determination. Cal. Ins. Code Section 790.03(h)(13). And, every insurer is required to disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. California Fair Claims Settlement Practices Regulations, Cal. Code Regs., Title 10, Chapter 5, Subchapter 7.5, Article 1, Section 2695.4.
THE BOTTOM LINE: Clear and timely communication is vital.
Great discussion. I'm not sure where I first heard this, but one great way to introduce the concept of an RoR to new insurance professionals is to describe it as a "civil Miranda warning." The two do not equate exactly, but the analogy demonstrates that the parties could have conflicting interests, so proceed with caution and take steps to protect yourself.
A related issue deals with how to send the ROR letter. Insurers typically send them by certified mail, but I have found they often returned unclaimed. This creates evidence that the policyholder did not receive or read the letter. If you send the ROR letter by regular mail and keep proof of mailing, then you don't need to show the policyholder received and read the letter; only that the insurer followed its normal business practice of mailing. Lately, I have been recommending that insurers send ROR letters by both U.S. mail and certified mail.
One of the issues regarding a reservation of rights rarely addressed is it is also a springboard for the discussion of the coverage issues with the insured and their counsel. The point of the RofR is it creates a context for the discussions regarding the application of coverage and allows for the framing of the defenses of the case by the insured’s counsel, whether paid for by the carrier or not, within the purviews of coverage.
The requirement, and the function, of the RofR is for the insured's benefit, and not necessarily for the carrier. While for the carrier the coverage defenses are preserved, for the insured it means that they can effectively address the errors of perception of the application of coverage and correct the factual context of the disagreement.
However, in order to do so, there must be an intelligent discussion of coverage with the carrier’s representative, but that is another issue.
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