COMPOSING YOUR BEST RESERVATION OF RIGHTS LETTER

On your way to work, you hear news that a terrible storm has stalled in the area and nearby Anytown has been overwhelmed by flooding. You are barely in your seat at the office before your beloved claims manager approaches with a wild look in her eye. She tells you that your employer, Manus Dei Insurance, insures Anytown and all of the new storm claims will be yours. As the end of the day approaches, the claims start arriving in bunches. While you are struggling to meet your protocols, your claims manager is leaving for the day. Before she disappears, you hear her say over her shoulder that the company’s policy has an exclusion for flooding and that you “better get a ROR letter out to the insureds right away.”

A what?

Don’t worry, we’re here to help. A Reservation of Rights (ROR) letter is simply a notice from an insurer to its insured advising that the insurer is providing them with a defense, but is reserving its rights to withdraw the defense if it determines that the insurance policy does not provide coverage. It is intended to accomplish two purposes. The legal purpose is to defend the insured while preventing a waiver of coverage defenses. Perhaps a more important purpose of the ROR is to prevent misunderstandings between insurer and insured. This is essential because providing a defense can create a false sense of security in the insured and potentially even lead to bad faith claims. 

Because sending out a ROR letter has a significant downside, you may want to consider a non-waiver agreement. The reservation of rights letter alerts insureds and their attorneys to the concerns the insurer has about coverage for the claim. That knowledge is then used to craft the information insureds disclose to avoid loss of coverage. Unlike reservation of rights letters, non-waiver agreements do not typically specify the policy language of concern to the insurer. Also, non-waiver agreements are bilateral. In agreeing to a non-waiver agreement, the policyholder consents to the terms of the insurance company's agreement to defend. However, we have found that unless the policy language requires such an agreement (few do) most sophisticated or represented insureds will refuse to sign them, which brings us back to the ROR letter.

What makes a letter a “reservation of rights” letter, anyway? Is it enough to give it a bolded “Reservation of Rights” heading or to simply say - even multiple times - that the insurer is reserving its rights to deny coverage? In Louisiana, the answer is likely no. Some courts have taken issue with the content of such letters - concluding that, while a letter using the words “reservation of rights,” the notice provided to the insured was not sufficiently specific. Louisiana courts have been inconsistent in the guidance they offer in this area. One court specified that a reservation of rights letter should say “the insurer retains its rights to defend itself based on the insured’s lack of coverage under [the] policy,” while another court held that Louisiana follows a functional approach to reserving rights, so technical language is not required for a reservation of rights letter to be effective.

To help you put your ROR letter together, here are some tips you may want to keep in mind, starting from the top of the letter and working our way down:

1.     Dating your letter (Timeliness). Your ROR letter must be prompt. That may sound like a line from Miss Manners, but it is actually vital to the preservation of the insurer’s rights. If the insurer assumes the defense of an insured before reserving its rights, a waiver of the insurer’s defenses may occur. Such a waiver could eventually cost your company millions of dollars. This may not be the sort of attention from upper management you were hoping for. 

For a waiver to occur, there must be (1) misleading conduct on the part of the insurer, and (2) prejudice to the insured. The Louisiana Supreme Court has said that the insurer must have an actual intention to waive its defenses or the insurer’s conduct must be so inconsistent with an intention to preserve the coverage defense that a reasonable belief arises that the defense was waived. But you do not want to be in a position of hoping your circumstances will be treated similarly. Get your ROR letter delivered before a defense is assumed.

2.     Identify all of the proper recipients.  When sending a reservation of rights letter, it is important to send it to all of your insureds, even if they live in the same household. It is not safe to assume that one ROR letter sent to all the residents at a particular address is sufficient to notify an adult offspring living in the same home.  Additional insureds should also be considered. Each different insured should receive a separate reservation of rights letter. If your insureds are represented by attorneys, send separate ROR letters to each defense attorney.  Also look to see if there is a broker or a defense attorney that should appropriately receive your ROR letter. 

3.     Stand ready to prove your ROR letter was delivered. The easiest dodge for an insured to make is to claim they did not receive a reservation of rights letter and challenge your claims to have sent it. Avoiding that claim is easy. Certified mail, overnight mail, or even facsimile transmission provide a means to confirm delivery. Also, document all of your attempts and outcomes in case delivery becomes an issue later.

4.     Get the caption right. As with the remainder of the ROR letter, accuracy in the caption is important. The information in the caption should be double checked. It must agree with the information in the body of the letter. Contradictions between the caption and the body invite needless trouble.

5.     Introduce yourself. At the beginning of your letter, plainly state on whose behalf you are writing, with special care to get the insurer’s name right. It sounds obvious, but this can become an issue. To save yourself a headache later, confirm that you have identified the correct insurer in your ROR letter. For Third Party Administrators, identify your company as the claims handling organization for the insurer.

6.     Introduce the insurance policy. Precisely identify the policy in question by number, effective dates, and named insured. “We have ordered for review a certified copy of policy number [policy number] held by [named insured] during the policy period from [beginning date] to [ending date]. The policy will be reviewed to compare its terms, conditions, and endorsements with the allegations in the complaint to determine if the policy provides coverage for this claim.”

7.     Do not make your insureds guess. Directly state the purpose of your ROR letter. It is essential for the insured understand that the insurer’s decision to provide a defense does not create an obligation to provide coverage. Also, make clear that the insurer reserves its rights to withdraw the defense if it later determines that no such defense is owed and that it reserves its rights to file a declaratory judgment action to determine the parties’ rights and obligations.  Clearly state that a defense is being provided subject to a full and complete reservation of the insurer’s rights “under the terms, conditions, limitations, endorsements, and exclusions contained in” the insurance policy and at law. For example, “This letter is to advise that, subject to the reservation of rights below, [Insurer] has determined that it will provide a defense to [list all defendants] under the terms, conditions, limitations, endorsements, and exclusions contained in” the insurer’s policies and at law. The assumption of the aforesaid defense does not indicate, establish, or confirm coverage under the policy described below. This letter shall not be deemed or construed as a waiver of any of the rights or defenses available to [Insurer] under this or any other contract of insurance. [Insurer] further reserves its rights to withdraw the aforesaid defense if it later determines that no such defense is owed. [Insurer] may seek a declaratory judgment to determine its rights and obligations under the policy.” 

8.     Identify defense counsel. In Louisiana, when a carrier reserves its rights to deny coverage and withdraw a defense, the insured has the right to retain counsel of its choice at the expense of the insurer. Louisiana courts have reasoned that a conflict of interest arises as a result of the insurer’s reservation regarding coverage. 

Be sure to check your policy for a Cumis endorsement. This provision requires the insured’s selected independent counsel to have specified minimum qualifications and meet certain requirements for professional liability insurance and related matters. Typically, the endorsement also requires the independent counsel to be subject to the same attorney rates as any other counsel selected directly by the insurer.  

Directly set out the rates to be paid for an independent counsel in the jurisdiction where the suit was filed. Also, be sure to spell out that the independent counsel is required to follow your company’s billing guidelines to the extent that they do not interfere with counsel’s right to represent his clients. Generally, status report obligations, acceptable expenses, billing format, and other aspects of the guidelines that are not directly related to the attorney-client relationship and do not obstruct an independent counsel’s ability to represent the insured. Provide a copy of the billing guidelines with the ROR letter. 

9.     Summarize the facts and allegations and invite the insured to add to them or correct any errors. Your reservation of rights letter must include a narrowly tailored statement of facts and allegations as they are understood at the time of your letter. When preparing your statement of facts and allegations, focus only on the allegations of consequence in your case. The only facts or allegations that matter are those tied to the coverage issues you include later in your ROR letter. This is also the place to consider whether there is a policy limits issue. Ask the insured to clarify any statement of fact it finds to be incorrect or unclear and to offer additional information that bears upon coverage or the determination made by the company. Be sure to include a statement that although the ROR letter includes a summary of the facts, the totality of the allegations was considered by the insurer in reaching its determination of any of its obligations. 

10. Choose your words carefully. Each word in your reservation of rights letter may be examined for the opportunities it presents by an insured or her attorney looking for an advantage. Word choice is important. For example, you are not setting out the insurer’s “position” on coverage or whether a defense will be provided. By the time your ROR letter is mailed, your company position may not yet be fixed. It may be better to say you are providing the insurer’s “determination.” Be careful about saying the insurer is investigating the claim. If you are going to say there is an investigation, the insurer had best be prepared to show that an investigation was conducted. 

11. Say what you must, and nothing more. Keep your ROR letter brief with no extra words or sentences. Pay close attention to modifiers like adjectives and adverbs. Unessential verbiage often causes the most trouble. Unless it is a word, phrase, sentence or paragraph is necessary to make your point about the rights you wish to preserve the insurer’s rights, leave it out.

12. Beginning to reserve the company’s rights. When you begin to reserve the company’s rights, reiterate the purpose of the ROR letter by repeating that the company has determined to undertake the defense of the defendants but the company still may not have any obligation to provide coverage to the insured for some or all of any settlement or judgment. Remind the insureds that the defense is being provided subject to a full and complete reservation of the company’s rights and that the company may later determine there is no coverage and/or withdraw its defense of the insured. 

13. Your goal is to eliminate opportunities for misunderstanding. This is not a merely aspirational goal. It is essential that you unambiguously explain how the policy provisions in your ROR letter are relevant to the insurer’s position or how the facts and allegations potentially create coverage issues. You must carefully inform the insureds of the reasons the company is reserving its rights. Explain why the company believes the insurance policy would possibly not cover the allegations of the claim. 

14. Cite the correct policy language.  An insurer should identify the relevant provisions and exclusions in its ROR letter to its insured. To properly do this, you must verify that you are using the correct policy language from the policy in effect at the time of the loss. Diligently focus on only the policy language that matters. Avoid the temptation to include policy language because it may someday be relevant. The policy language you include in your ROR letter must be closely tied to the allegations of the claim. 

15. Address covered vs. uncovered claims and damages. Your ROR letter should help the insured to understand that if the case proceeds to trial, it may be necessary to use an allocated verdict form to identify what portion of a judgment, if any, is assigned to damages not covered by the policy. Reserving the company’s rights to use a special verdict sheet, special interrogatories, to intervene, or to take other action to identify uncovered damages should be a part of your ROR letter. 

16. The reservation of rights “catch-all” paragraph. To conclude, you should indicate that your ROR letter is not intended as a waiver, modification or alteration of any of the terms, conditions, limitations, endorsements, or exclusions of any of the company’s policies or rights at law and the company reserves all of its rights thereunder. You will also want to say that the company reserves all rights to amend and supplement its reservation of rights letter.

Of course, your carefully thought out reservation of rights letter is not the end of your obligations. You must be prepared to send out follow-up letters as the facts of the case develop. Keeping timeliness in mind and avoiding a waiver is of paramount importance.  Staying vigilant about preserving the company’s rights as additional policy provisions are implicated will serve you well.

There is no single right way to compose a reservation of rights letter. The specifics of the claim and the insurance policy will certainly affect your final product. Keeping these tips in mind my help you keep your ROR complete.

Lance E. Harwell is a Member of Staines & Eppling, APLC practicing, publishing articles, and presenting seminars in the fields of auto liability, longshore, Louisiana worker’s compensation, general liability, insurance coverage, bad faith insurance claims handling, fire and property defense, and Louisiana business enterprises.  He is a Melvin Jones Fellow and a recipient of the APAS Frank Hara Memorial Award for community service. When he is not practicing law, Lance often volunteers with the University Park Lions Club or the Asian-Pacific American Society. Otherwise, he can be found cheering for his Louisiana Ragin’ Cajuns.  He is married to a woman he does not deserve and is the father of one really great son.

The opinions and comments expressed in this article are those of Lance E. Harwell, who is not responsible for the inaccuracy of content or any loss or damages incurred by any party as a result of reliance on information contained in this article. Content may not be published or reproduced without the written consent of the author. Prior articles may not be updated for accuracy as pertinent information changes over time. The content of this and other articles composed by Lance E. Harwell provide general information not specific to any particular case or set of facts and should not be construed as legal advice, nor do they establish an attorney-client relationship.

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