“What’s in a name? That which we call a rose by any other name would smell as sweet.” William Shakespeare, “Romeo and Juliet,” Act II, Scene 2. [Well, actually, Wikipedia.] But the same cannot be said of reservation of rights letters. In fact, just the opposite. A letter that is called a reservation of rights may be nothing of the sort.
What makes a letter a “reservation of rights” letter? Is it enough to call it a reservation of rights letter? Is it enough to say, sometimes multiple times, that the insurer is reserving its rights to deny coverage? In some cases, the answer may be no.
Despite how commonplace reservation of rights letters are for insurers in the claims context, some courts have taken issue with the content of such letters – concluding that, while a letter with the words “reservation of rights” may have been issued, the notice provided to the insured in such letter, of the reasons why coverage may not be owed for some claims or damages, was not sufficiently specific to be adequate.
One court described the situation as follows: “In this case, the Court finds that Safeco’s reservation of rights letter did not ‘fairly inform’ Liss of the reasons it was reserving its rights and that the letter was inadequate as a matter of law to preclude application of the estoppels doctrine. The only factual reference contained within the policy is: ‘As you are aware, this lawsuit arises out of a gunshot incident on July 10, 1997.’ More importantly, the letter sets forth pages of policy provisions but does not explain why Safeco believed the insurance policy would possibly not cover Liss for the shooting incident. In other words, Safeco did not ‘apply’ the sole fact stated to the policy’s legal terms.” Safeco Ins. Co. of Am. v. Liss, No. DV 29-99-12, 2005 Mont. Dist. LEXIS 1073, at *41 (Mont. Dist. Ct. Mar. 11, 2005), [enhanced version available to lexis.com subscribers]; see also Osburn, Inc. v. Auto Owners Ins. Co., No. 242313, 2003 Mich. App. LEXIS 2887, at *3 (Mich. Ct. App. Nov. 18, 2003), [enhanced version available to lexis.com subscribers], (“[W]e conclude that, because Auto Owners’ reservation of rights letter was not sufficiently specific to inform plaintiffs of the policy defenses the insurer might assert, the letter did not constitute ‘reasonable notice.’”) (comparing an example of sufficiently specific reservation of rights language to that which was not); Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012), [enhanced version available to lexis.com subscribers], (“In order to inform an insured of the insurer’s position regarding its defenses, a reservation of rights must be unambiguous. If it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured. A reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position.”).
I have seen many (many) reservation of rights letters that do not meet the “fairly inform” standard. These letters set out a very brief factual summary – sometimes just a couple of paragraphs to summarize a long and complex complaint – then spew out seven pages of policy provisions, many of them not relevant, and conclude with – we reserve our rights. Such letter may not survive a challenge that it does not meet the “fairly inform” standard.
An effective reservation of rights letters needs to do several things. Most importantly, while it must cite the facts in detail and potentially relevant policy provisions, it must then tie them together and set forth which facts are relevant to support a potential lack of coverage based on the cited policy provision. To fairly inform the insured of the insurer’s position it is not enough just to list the facts, even in detail, and then separately list a bunch of policy provisions.
In Western Heritage Ins. Co. v. Asphalt Wizards, No. 13-34 (W.D. Mo. June 3, 2014), [enhanced version available to lexis.com subscribers], the court addressed coverage for a fairly typical TCPA/junk fax case. The insurer undertook its insured’s defense in 2008 and sent the insured a letter containing a two line description of the complaint, the name of defense counsel and the policy’s limit of liability and deductible. Then, four years later, the insurer’s counsel sent the insured a twelve-page reservation of rights letter, which the court noted contained a lengthy, detailed explanation of the insurer’s coverage position.
However, the Asphalt Wizards court held that the insurer waived its coverage defenses because it undertook the insured’s defense without any reservation of rights: “To begin, the Court finds the 2008 letter to Asphalt Services is not a reservation of rights letter. Although it identifies one of the relevant policies at issue and restates the allegations in the state court petition, it does not provide any other information from which Asphalt Wizards could infer that Western Heritage was defending subject to a reservation of rights. On the other hand, the 2012 letter is a reservation of rights letter because it bears almost all of the indicia of a typical reservation of rights letter. This letter was ineffective, however, because it was untimely. Western Heritage had notice of the lawsuit in May of 2008, but did not notify Asphalt Wizards of its reservation of rights until the fall of 2012. Since Western Heritage knew, or should have known, from reading the state court petition in May of 2008 that it possessed applicable coverage defenses and yet waited four years before sending a reservation of rights letter, it waived its ability to deny coverage under the Policies.”
In comparison, the Asphalt Wizards court stated that “[a] typical reservation of rights letter does most, if not all, of the following: (1) identifies the policy at issue; (2) quotes, or at least refers to, the relevant policy provisions and identify any terms, conditions, or exclusions which may bar coverage; (3) refers to specific, relevant allegations in the complaint; (4) identifies which claims may not be covered; (5) explains in detail the basis for the insurer’s coverage position; (6) sets forth the proposed arrangement for providing a defense and, depending on the law of the jurisdiction, advises the insured of its right to independent defense counsel; (7) advises the insured of any actual or potential conflicts of interest between the insurer and the insured; (8) reserves the right to withdraw from the defense; (9) contains a general reservation of rights, including the right to assert other defenses the insurer may subsequently learn to exist during further investigation; and (10) uses the words ‘reservation of rights.’” (citations omitted).
The insurer was fortunate that, under the facts at issue, the loss of its coverage defenses was not consequential. The court concluded that, despite the waiver of its coverage defenses, the insurer did not wave its $1,000 “per-claim” deductible and no class member will have more than $1,000 in damages.
While Western Heritage dodged a bullet, the lesson from the case is clear: “A reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position.” Hoover v. Maxum Indem. Co. (Ga. 2012).
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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