February 9, 2017 by Canadian Underwriter
Understanding, anticipating and properly responding to reservation of rights letters is integral to risk professionals’ ability to protect their organizations and realize the full value of insurance policies, according to a new report from RIMS.
Released on Thursday, the RIMS Professional Report, titled A Risk Management Guide to Reservation of Rights, guides risk professionals in understanding the potential implications of reservation of rights letters. The report, developed by members of the RIMS Standards and Practices Council, explains the background of these notifications and discusses what to consider when deciding if, when and how to respond. It also includes examples of reservation of rights and response letters, while exploring issues regarding claim limitations, communications strategies, litigation, and potential conflicts of interest, RIMS, the risk management society, noted in a press release.
“It may be surprising when a claim is reported, and an insurer sends the policyholder a reservation of rights letter, potentially limiting coverage,” said Carol Fox, RIMS’ vice president of strategic initiatives, in the release. “Knowledgeable and prepared risk professionals can make all the difference in getting the full value from an organization’s insurance policies.”
RIMS noted in the report that when an insured reports a claim, the insurance company may initially respond with a reservation of rights letter, whether the policy is a standard or customized form. A reservation of rights letter is a formal notice, often sent by certified and registered mail, that places the policyholder on notice that the insurer has received the claim, but that “certain provisions with the policy may not obligate the insurer to provide coverage for all or part of a claim. In simple terms, this letter serves as a notice that the insurer has reserved its rights to either limit or deny coverage for the claim, based on the terms and conditions of the policy or information uncovered in an investigation of the claim itself.”
Although there is no requirement that a policyholder respond to an insurer’s letter, “it is highly recommended that the policyholder do so,” the report suggested. “Should the insured entity choose to respond, it should at a minimum reply with a generic statement stipulating that the entity does not agree with the insurance company’s position and is reserving its rights under the same set of circumstances, carefully referencing the original reservation of rights communication.”
Depending on the situation, the report continued, an insured entity may want to engage special counsel to review coverage and the letter. For example, insurers may ask a policyholder or additional insureds to waive their rights to payment for separate defence counsel as a condition of the insurance company providing defence, RIMS said. A policyholder/insured should obtain a coverage counsel review of the relevant insurance policy, and an opinion as to potential consequences before signing any waivers or accepting a reservation of rights letter as is, the report suggested.
“Reservation of rights letters pose a significant challenge to an entity’s ability to realize the full value of its insurance policies in covering its claims,” the report concluded. While reservation of rights letters were developed in response to issues of ‘bad faith’ in the conduct and coverage decisions made by insurers, interpretations in case law have refined the application and force of these documents.”
Given that reservation of rights notice of limitations have been upheld in court, risk managers and legal counsel should not dismiss the importance of a timely response, RIMS suggested. Receipt of a reservation of rights notice should prompt a review by risk managers – ideally, in conjunction with legal counsel – leading to an informed decision and deliberate action: whether to accept the insurer’s interpretation of the coverage and defence obligations, or respond with a reservation of its own rights. “If not, unexpected and unintended consequences may result,” RIMS warned.
Topics that require decisions on the part of the insured entity can include the timing of the notice, involvement of coverage counsel, duty to cooperate in the investigation and resolution of the claim, effect of tolling agreements and conflicts of interest. “By understanding, anticipating and properly responding to reservation of rights letters, risk managers are better prepared to protect their organizations, and realize the full value of its insurance policies,” the report concluded.