Topics covered:

Introduction

Excluded activity

Occurrence prior to effective date

What should a reservation of rights letter do?

Conclusion

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Introduction

How many times have you thought your insurance carrier said, "You really didn't expect us to pay anything under this insurance policy—did you?"

Too often, that is precisely the type of response many insureds and brokers believe they are hearing from the insurer upon submission of a claim. Is the insurance contract nothing more than a few pieces of paper intended solely to give psychological comfort to insureds but no financial benefits whatsoever?

This view of insurance is not one held by all insurers. Reputable insurers continually demonstrate responsibility and responsiveness to their insureds and brokers. Because an insurance policy is a contract between the insurer and its insured, it must be understood by the latter that the submission of a claim or incident report triggers certain legal rights, duties, and obligations under that contract on the part of both the insured and the insurer.

Unfortunately, these obligations are not always crystal clear at the outset of a given claim situation. Therefore, it is of mutual benefit to both the insurer and the insured for the insurer to reserve rights on a number of issues and promptly communicate those reservations to his insured in writing and with sufficient detail.

This is particularly true in the areas of professional liability and errors & omissions insurance, including such coverages as directors and officers liability and architects and engineers professional liability, where almost every report of a claim or incident would, in my opinion, warrant the insurer's reservation of rights.

Let's examine two aspects of these policies in order to help illustrate why insurers must reserve rights.

Excluded Activity

First, almost all of these policies contain a provision that excludes from coverage dishonesty and/or other fraudulent or intentional misconduct. Given the propensity of plaintiffs to assert claims of such intentional wrongs in addition to negligence counts, the insurer has no choice but to reserve the right to deny coverage should such dishonest or intentional conduct be material to any recovery by the plaintiff. Of course, many policies require an adjudication before this exclusion can be supplied and thus its ultimate application is far from commonplace.