Reservation of Rights Letters: Protecting the Policyholder

(CLM006)

Speakers:

• Susan Hiteshew, Senior Manager, Global Insurance & Risk Management at Under Armour, Inc.

• Michael Sharkey, Partner, Insurance Recovery Practice at Perkins Coie, LLP

Learning Objectives

At the end of this session, you will:

• Identify insurers’ reasons for sending reservation of rights letters.

• Isolate the parts of a reservation of rights letter that call for your response in order to protect your rights.

• Anticipate privilege and confidentiality issues that arise from responses to a reservation of rights letter.

Reservation of Rights Letters• What is a Reservation of Rights (“ROR”) Letter?

• Why do insurance companies send them?

• Acceptance

• Denial

• Reservation of Rights Letter• Non-Waiver Agreement

Types of Insurance Company Responses

Purpose of ROR Letters• Inform policyholder of potential conflicts of interest

• The duty to defend is broader than duty to indemnify, and so the insurance company may be required to defend a case against the policyholder in which the ultimate judgement or settlement is not covered in whole or part.

• Classic situation is an action involving both covered and non-covered allegations:

Non-Covered

Allegations

Covered Allegations

Duty to Defend

Non-Covered

Allegations

Covered Allegations

Duty to Indemnify

Purpose of ROR Letters

• An insurance company defending an action involving both covered and non-covered allegations may have a conflict of interest:

Plaintiff Verdict on

Non-Covered

Allegations

Defense Verdict

Plaintiff Verdict on Covered

Allegations

Policyholder

Plaintiff Verdict on

Non-Covered

Allegations

Defense Verdict

Plaintiff Verdict on Covered

Allegations

Insurance CompanyResults:

- Good

- Bad

Purpose of ROR Letters

• ROR letters prevent the insurance company from losing coverage defenses.

• Courts require an insurance company defending an action where there are potential conflicts to disclose these conflicts to the policyholder.

• Failure to do so could result in loss of defenses to coverage.

• Even outside the duty-to-defend context, an ROR helps the insurance company avoid arguments that it waived coverage defenses by investigating or taking other actions without informing the policyholder of its coverage defenses.

Purpose of ROR Letters

• Insurance companies send ROR letters to avoid breach of contract, and its consequences:

• Breach of contract action

• Excuse of policyholder conditions such as cooperation, consent to settle

• Most states do not consider a reservation of rights a breach of the insurance contract

• But merely sending ROR letter does not excuse an actual breach:

• The insurance company still must perform its obligations (defend, investigate, make a timely coverage determination), or it is in breach; and

• ROR letters sometimes include partial denials (for example, that a particular co-defendant does not qualify as an “insured”), and if those denials are incorrect, that can be a breach.

ROR Letters May Include:

• Basic Parts of the ROR Letter:• Identification of policyholder, policy, etc.

• Summary of allegations or loss

• Defenses being reserved

• General reservation of other defenses

• Requests for information

ROR Letters May Include:

• ROR Letters may also include:• Additional conditions on the defense (for example, proposed fee caps or other

litigation guidelines)

• Proposed apportionment (when policy allows apportionment of defense costs)

• Partial denials (for example, that a particular co-defendant does not qualify as an “insured”)

Responses to ROR Letters

• Because of the risk of losing coverage defenses, insurance companies have an incentive to list every possible defense to coverage that could arise under every conceivable way the underlying action could develop.

• It is usually not necessary or advisable to try to rebut each listed defense point-by-point at the outset of a claim, if the insurance company is meeting its obligations (defense, investigation).

• A general statement that the policyholder does not agree with all the listed defenses and reserves all of its own rights generally is sufficient at that time.

• Focus instead on responding to those issues the insurance company is not merely reserving, but as to which it is seeking agreement or acquiescence.

Responses to ROR Letters

• A key area where insurance companies seek agreement or acquiescence in ROR letters is the conduct of the defense:

• Selection of counsel, caps on rates, other litigation guidelines, proposed apportionment under those policies that apportion mixed claims

• Some of these may amount to agreement to create conditions not found in the actual policy language

• “Right” to reimbursement of defense costs

• Acquiescence on other issues may be explicit or implicit• What state’s law applies to the coverage issues?

• Policyholders should know their rights, and respond to protect them, when an insurance company seeks agreement on conditions beyond those in the policy or provided by law.

Responses to ROR Letters

• A policyholder may also wish to respond on other issues:• Requests for reconsideration of partial denials

• Issues raised in ROR letters that reveal the insurance companies’ misunderstanding or lack of knowledge about straightforward facts, which can be remedied by providing additional information

• The time to respond to the full laundry list of reserved defenses usually comes later.

• Under liability policies, this is often during settlement efforts when the policyholder sets out its position on the application of the reserved defenses to a contemplated settlement.

• By this time, underlying case likely has developed and its allegations are more concrete.

• Under other policies, assess whether the reserved defenses are adversely affecting the insurance company’s investigation

• Who should respond?

Requests for Information

• Cooperation

• Requests for privileged information

Beware!

• Deadlines for filing suit in an insurance coverage dispute• Statutes of limitations

• Suit limitations clauses

• Accord and satisfaction• “Full and final payment on invoice XYZ.”

• When accepting that payment forfeits your rights

Questions?

For Further Information

• For more insurance law updates, follow Perkins Coie’s Insurance Recovery group on Twitter: @policyholderpc

• Connect with Susan Hiteshew or Michael Sharkey on LinkedIn

• Perkins Coie is at Booth #823 in the Exhibit Hall

• Don’t forget to submit feedback on today’s sessions