To the Letter

Among the many duties of a risk manager is likely the procurement and maintenance of a company’s insurance program, and along with that, the management of any claims made under that insurance program. Should a loss event occur, the risk manager is probably responsible for most or all insurance matters.

Working through a claim can be a complex and demanding process, making communication a critical element in the disposition of any claim. Accurate and efficient communication among all relevant stakeholders, and especially between the insurer and insured, will help expedite processes and avoid misunderstandings.

RESERVATION OF RIGHTS

If and when an insured files a claim with an insurer, that insurer may then respond to the insured with a reservation of rights letter. To help risk professionals successfully navigate such a situation, RIMS has published the professional report, A Risk Manager’s Guide to Reservation of Rights.

Steve Pottle, Treasurer, RIMS 2017 Board of Directors; and Director, Risk Management Services, York University

Such a letter is a notification from the insurer that it may limit or deny coverage of the insured’s claim based on specific policy provisions and details and circumstances of the claim. The insurer is, thus, reserving its rights to limit or deny said coverage, based on the terms and conditions of the policy or information uncovered in an investigation of the claim.

SPECIFIC INFORMATION

A reservation of rights letter will include all relevant and important specifics of the case, from the name and policy number of the claimant to details about the claim itself, as well as specifics about policy language, coverage terms and exclusions.

The letter will lay out in detail the logic and/or reasoning forming the basis of the insurer’s decision to reserve the right to limit or deny coverage. This explanation must be clear and unambiguous to ensure the policyholder is adequately informed of the potential policy defences.

A reservation of rights letter may also request additional information about the claim from the insured or note that insureds are obligated to co-operate with any investigation into the claim. The letter may further address issues, including defence of the claim and any self-insured retention (SIR) the insured may have.

In addition to specificity and clarity, timing is also an important element when dealing with reservation of rights letters. In most cases, a carrier must provide an insured with a reservation of rights “promptly.”

There are cases, however, when a delay in notification is allowable. In such cases, a court can decide that an extended delay in issuing an insurer’s reservation of rights communication does not necessarily result in a waiver of the insurance company’s denial of coverage.

POLICYHOLDER RESPONSE, CONSIDERATIONS

Should an insured receive a reservation of rights letter, it should be carefully, even meticulously, reviewed, preferably against the policy under which the claim was filed. In some situations, it may be preferable or even recommended for an insured to have counsel review the reservation of rights letter in order to be able to properly evaluate it and identify any potential consequences.

There is no legal obligation for an insured to respond to a reservation of rights letter. Still, it is highly recommended that the insured/policyholder do so, even if only in some simple form or language to acknowledge receipt of the letter and to stipulate that it does not agree with the insurance company’s position. The insured/policyholder is, therefore, reserving its rights under the same set of circumstances, carefully referencing the original reservation of rights communication.

In some cases, depending on jurisdiction, a response to a reservation of rights letter is necessary to preserve certain rights on behalf of the insured. For example, should an insurer reserve the right to recoup defence costs paid in defence of a policyholder when it is subsequently found that the insurer had no duty to defend, a policyholder must specifically disagree with that assertion in the reservation of rights letter to avoid such a result.

Also incumbent upon a policyholder/insured is the obligation to co-operate with the insurer’s investigation and defence of the insured’s claim; indeed, most policies require, in their terms and conditions, that insureds co-operate fully with their carriers in such matters, even in the face of disputes about coverage.

Communication among insureds, their carriers and all relevant parties, such as defence, coverage and other counsels, is central to this co-operation.

This co-operation may extend to the use of tolling agreements in reservation of rights disputes.

A tolling agreement between parties is an agreement to waive the right to claim that litigation should be dismissed based on the expiration of a statute of limitations, generally with the purpose of allowing parties more time to assess the status and viability of claims of damages without having to file legal action. Parties to a tolling agreement must ensure they retain all relevant and appropriate rights under the agreement and may wish to consult counsel to make certain rights are protected.

CONFLICTS OF INTEREST

Under many, or even most, insurance arrangements, liability insurers often have the discretion to select counsel to defend policyholders. When an insurer issues a reservation of rights letter to an insured, however, it may introduce a conflict of interest that has the effect of allowing the insured to select its own counsel. This could occur if the insured’s interests in a lawsuit are not completely aligned with those of its carrier.

Only certain circumstances lead to a genuine conflict of interest, including punitive damages, intentional and negligent conduct, covered versus non-covered defendants, whether or not the policyholder’s employee was acting as an agent of the policyholder, when a default judgment has been entered against the policyholder, and whether or not the alleged conduct by the policyholder was part of its normal business operations.

EFFECTIVELY MANAGING RISK

A risk manager must give appropriate consideration and attention to a reservation of rights letter as it may have serious and irrevocable legal consequences.

In addition to a thorough review, preferably with counsel, a risk manager must decide whether or not to reply, which is recommended, and if so, how. Further, the risk manager must decide whether to accept the insurer’s view of coverage and related claims or respond with a reservation of rights letter asserting the position of the insured.

Whatever the course of action, the risk manager will head the response not only as the point of contact for counterparties, but also as the communications and decision co-ordinator among any and all relevant stakeholders to the claim or related dispute with the insurer. The right response can ease a claims process while the wrong answer can make a claim harder to resolve.

Careful and deliberate preparation for events and contingencies will enable risk managers to safely steer businesses and organizations through potentially troubling incidents, including the receipt of a reservation of rights letter.

By understanding, anticipating and properly responding to reservation of rights letters, risk managers can better protect their organizations and realize the full value of its insurance policies.

Steve Pottle, Treasurer, RIMS 2017 Board of Directors; and Director, Risk Management Services, York University