Poorly Defined Service

If sending a reservation of rights letter is considered “bad claim service,” then submitting a gray area loss makes one a “bad” policyholder. Sure, there are instances of specious reservation of rights letters. There are also examples of farfetched coverage tenders by insureds who are “fishing” for coverage that they knew they neither had nor paid for. This is the “Let's throw it up against the wall and see what sticks” approach.

There are also instances of sloppy brokering that leave risk managers exposed to perils to which they thought were insured.

The notion that reserving coverage rights quickly signals “bad claim service” strikes this self-proclaimed claims geezer as ridiculous. It underscores, though, the reality that insurers can do a better job in making sure that such letters do not rub policyholders the wrong way. For example, claim representatives could offer insureds an advance heads-up phone call to discuss and explain the “what” and the “why” of their actions. They could do the same with the broker and could emphasize the time requirements that make them reserve rights in the face of incomplete information. They could make the tone of the letters more conversational and less legalistic, as there are ways to soften but not detract from the import of reservation of rights letters.

If foregoing potentially valid coverage defenses is the price of good claim service, then that price is too high. Claim representatives should seek other ways to “sell” the reservation of rights so that insureds will not reflexively assume it represents an effort to evade coverage.

All Riled Up

Insurers do not send reservation of rights letters to build good customer relations, or because it constitutes “good PR.” In fact, such letters often ruffle feathers and annoy policyholders. Claim adjusters may face graver perils, however, if they investigate a claim and fail to send reservation of rights letter to policyholders when coverage issues exist.

Various factors drive the reality that reservation of rights letters create tension between insurers and policyholders. One reason is that these letters often come as a shock to policyholders. Rarely does an adjuster soften the blow by giving the insured a heads up regarding its imminent arrival. Perhaps if insurers took this preemptive action more frequently, there would be less friction and contentiousness about coverage issues. The unpleasant surprise creates animosity with the insured, who might fume, “I paid those premiums all of those years and receive this type of treatment when I file a claim.”

Second, adjusters' letters are often written in stilted “legalese,” drafted or ghost-written by attorneys. Thus, they tend to be formal, guarded, and circumspect — not exactly charming models of discourse. They contrast starkly with the warm and fuzzy communication of marketing types and advertisements that coo, “We will take care of you.”

Many policyholders do not read their insurance policies and have only a vague idea of what is covered. They may have an even vaguer idea about what is excluded. Some may believe they have “full coverage.” Consequently, the average policyholder may hold high expectations as to the protection afforded by an insurance policy. A reservation of rights letter shatters unrealistic expectations.

When a reservation of rights letter arrives, it reinforces the perception of insurance companies trying to find loopholes to evade a duty to take care of its clients. These duties are widely touted by agents, marketing specialists and sales representatives, who may ignore the messy details of what happens in “gray area” coverage situations.

As confrontational as reservation of rights letters are, they steer insurers between the twin perils of total acceptance and denial of coverage, each bearing risks. Reservation of rights letters let insurers keep their options open. If no strong coverage defenses emerge, then the insurer is no worse off. Reservation of rights letters give insurers time to investigate claims or unearth facts through the discovery process, which may entail interrogatories, document production, and depositions. Erring on the side of caution, an insurer can later disclaim coverage if the investigation reveals that the fact pattern renders a loss uncovered, excluded, and so on.

No one will mistake a reservation of rights letter for a love note. Glossy insurance marketing materials consider them “unmentionables.” Writing and receiving them is very low on the “fun scale” for both adjusters and for policyholders. Nevertheless, because adjusters are often pressed for quick decisions based on limited information, this form of correspondence is a legitimate tool by which to buy time to gather more information. Once more information arrives, then the adjuster can make a logical final decision as to coverage.

Kevin Quinley has helped thousands of claim professionals boost their productivity. Visit his blog at http://claimscoach.blogspot.com. Get your free monthly productivity newsletter, Claims Caffeine, by e-mailing [email protected] or [email protected].