The purpose of a reservation-of-rights letter is to advise the insured that there is a question of coverage. Simply put, it states that coverage issues are under investigation and the carrier is reserving all their rights to disclaim coverage at a later date once the coverage issue has been fully investigated and analyzed. This is a unilateral act on the part of the insurer and is an affirmative act by the carrier to avoid a waiver of a potential coverage disclaimer.

If the claim handler is not accustomed to writing detailed coverage position letters, they may not find it to be an easy task. In many claims, the factual information needed to resolve the coverage is not available, or the results of the investigation show the issue requires a subjective determination to be resolved. For example, most third-party liability policies contain some form of intentional injury exclusion. To apply the exclusion, you need a direct affirmation from the insured that they intended the injury, not just the act that caused the injury. It is unlikely the information needed will be obtained in an interview with the insured. In these coverage cases, a reservation of rights will require periodic review and renewal.

In some jurisdictions, if the issue is not resolved in a specific time period, a declaratory judgment action will need to be filed to ask the court to make the determination. Failure to take such action can waive the right of the carrier to assert the coverage defenses at a later time. Place this scenario on top of a demand from the insured to defend a third-party suit arising from the loss and you have several difficult decisions to be addressed.

Well-written and documented communication between the insurer and the insured make addressing these types of difficult claim scenarios easier to manage. A coverage issue may never be resolved and it may be necessary to file a declaratory judgment action. Miscommunication or missed communication can cloud the true coverage issues to be resolved by the court.

A non-waiver letter (sometimes called a non-waiver agreement) is another method to advise the insured there is a coverage question. The non-waiver is a bilateral act as it requires signature by the insured. Frequently, the non-waiver letter contains a specific question or request for information from the insured that is necessary to address a final coverage determination.

If the insured refuses to sign the non-waiver, the policy cooperation clause can be raised as a potential coverage issue. If a non-waiver agreement is properly explained to the insured or his representative, there should be little or no disagreement. Technically the insured is in no worse position if they sign a non-waiver as opposed to having received a reservation-of-rights letter from his carrier. The key to avoiding disputes is understanding the coverage position taken, understanding the applicable policy language, and providing well-written, clear, and concise communication to the insured.

The disclaimer letter is a letter designed to tell the insured that there is no coverage for a specific loss or specific item of damages under the terms and conditions of the policy issued by the insurer. Disclaimer letters should be issued only after careful consideration or on the advice of counsel.

The reasons for a disclaimer need to be written so the insured can understand the nature and scope of the disclaimer. Many times, there are numerous coverage issues and only one issue is resolved to the point that a disclaimer can be issued to the insured. In the disclaimer letter, the reasons for a disclaimer must be separated from the unresolved issues, and a reservation of rights incorporated into the disclaimer for those unresolved issues. The key to avoiding a dispute is to understand the coverage position taken, refer to the applicable policy terms, and ensure you have provided well-written communication to the insured. It is highly recommended that form letters not be utilized. Each coverage position letter should be tailored and address the facts of the specific claim for which it is issued.

There is yet another type of coverage position letter that is often overlooked. This is the letter that withdraws the reservation of rights and tells the insured based on the known facts that there are no issues of coverage and the insurer is going to provide coverage as provided by the policy terms. It is smart to include a statement in this letter that says if new facts come to light suggesting coverage may not apply, the insurer will advise the insured of the new facts and may reserve rights or disclaim based on those new facts. To fail to include this statement may invite a challenge that the withdrawal of the reservation of rights was a qualified acceptance of coverage.

Content Importance

There are several areas that need to be addressed in every coverage position letter. A coverage position letter that is defective or flawed could expose the insurer to uncovered claims based on a waiver if all necessary issues are not addressed. Prior to writing the coverage position letter, the claim handler must first thoroughly analyze the applicable coverage in light of the known facts and identify all issues for inclusion in the position letter. In three-to-five years a coverage suit may be pending; having clear and succinct notes as a part of your claim file can be an excellent resource.

To begin, the coverage position letter should contain a brief but accurate description of the facts of the loss as they are understood by the claim handler. It is important to attribute the source of the information being relied upon. For example, stating that there is a reliance upon the statement of an independent witness or facts found in an official report helps to clarify the analysis. This gives the insured the opportunity to correct any misunderstandings as to how the loss occurred. It is an example of good communication, which helps avoid disputes and misunderstandings. Asking the insured to correct any factual misunderstandings helps to narrow the issues and could lead to a final coverage determination.

Secondly, the coverage position letter must identify the specific policy or policies from which the coverage questions arise. Identification of the policies should include the basic information such as policy number, policy dates, and limits. It should refer to any policy endorsements that may be an issue. If there are multiple lines of coverage such as general liability, personal injury, or auto liability afforded by the carrier, each line of coverage should be acknowledged. If those lines are not being analyzed based on the nature of the loss, then the position letter should indicate that the line does not apply. For example, if a general liability claim is being presented and there is auto coverage or property coverage, it can be simply stated that these policies are not being analyzed as they do not apply to the nature of the loss reported. This clarification can avoid disputes and misunderstandings and a potential waiver. If the carrier provided multiple years of coverage, the letter should acknowledge those years and confine the coverage position to only those years at issue.

For example, if a carrier provided auto insurance to a risk from 2000 to 2006, then only the policy in effect at the time of the accident needs to be analyzed. On the other hand, if a carrier provided general liability coverage from 1975 to 1995 and the insured was reporting a claim with an injurious exposure aspect, then the coverage position letter needs to spell out the details of all the policies at issue.

The third category the coverage position letter needs to address is the specific policy provisions upon which the coverage issues arise. It is not necessary to cite all of the exclusions if only one or two exclusions are at issue. However, it is important to cite the entire definition to describe the nature of the coverage issue.

For example, if there is an issue over whether a specific claim is a claim for property damage, citing the entire definition of property damage may be necessary to effectively communicate the nature of the issue. The letter must clarify why there is a coverage issue or no coverage. The letter needs to be concise and comprehendible by the insured.

In three-to-five years from the time the letter is written, a claim handler may be in court to explain what was intended by the letter. The disclaim letter can be the claim handler's best documentary evidence of good faith claim handling in a potential bad-faith case if the letter clearly spells out the facts upon which the coverage position was based. It also will show that you clearly communicated to the insured the policy provisions that are operable to eliminate or minimize the coverage obligation.

Wrapping It Up

The coverage position letter always should be addressed to the insured unless you are legally required to communicate with an insured's legal representative. If the insured's interest in the coverage issues is represented by counsel, send a copy of the coverage position letter them. There is no legal obligation for a primary carrier to send a copy of the letter to an excess carrier because there is no contractual relationship between them and the primary carrier. The excess carrier can obtain a copy of the coverage position letter from the insured or his legal representative.

The conclusion of the coverage position letter should inform the insured of their rights to take concerns, questions, or complaints to the applicable state insurance department. Many state insurance departments have instituted directives that require the insurer to provide the insured the name, address, and phone number of the appropriate department to which concerns or questions can be addressed.

The coverage position letter should require the insured or his legal representative to promptly notify the carrier of any incorrect factual information contained in the coverage position letter. Correcting a misstatement may or may not change the coverage position taken, but it does bring the parties closer to agreement. The letter also should include the carrier's contact information including a phone number, a mailing address, and an e-mail address.

The key to success in handling coverage issues is to do a complete investigation of the facts and to objectively analyze the policies in light of the case law while considering the advice of counsel. If there is an unresolved issue of coverage, the insurer's position must be clearly explained to the insured. Periodically, the reservation should be renewed and, as soon as the issue is resolved, a position letter either withdrawing or disclaiming the reservation should be issued. Key factors to keep in mind include clarity in which the coverage issue is expressed to the insured, and the timeliness of the notice.

Writing a good coverage position letter requires time, patience, and an understanding of the issues. The claim handler who can consistently draft good coverage position letters is a true asset to his employer.

Donald M. Huffer is a senior consultant specializing in asbestos, environmental, and mass tort claims with Liability Management Systems. He is currently an expert witness on issues of custom and practice of the insurance industry, and is a consultant on various claim matters.