Drafting and Sending a Reservation of Rights Letter

By Denise Johnson | September 10, 2012

Adjusters on the fence about whether to send a reservation of rights letter, also known as an ROR, should go ahead and do so, according to an expert on the subject.

“Even if you’re late in realizing that you have grounds for an ROR, go ahead and send the ROR generally speaking. If you don’t, you’ll be worse off,” said Renee Callantine, a partner at the San Francisco office of Meckler, Bulger, Tilson, Marick & Pearson.

Callantine spoke with Donald M. Carley, during a presentation on the subject at this year’s Property Loss Research Bureau national conference, held in Florida.

The panelists explained that an ROR is a written form of communication to the policyholder setting forth the company’s assumption of the defense, subject to coverage reservations such as the following:

  • Coverage defense
  • Policy defense
  • Right to reimbursement for defense fees
  • Right to reimbursement of amounts paid to settle

Carley, associate general counsel with State Farm, provided tips on how to draft an ROR. He said the letter should be specific, understandable and timely.

Because it is not uncommon for RORs to be pages long, Carley recommended using subject headings as a way to organize the letter.

“Headings are underused in these letters,” Carley said.

Legal and industry terms and abbreviations should be avoided, he said.

While many claims departments use form letters, he recommended specifically tailoring it to the circumstances of the case.

Equally important is that once an adjuster is aware of a coverage issue that limits coverage, the adjuster should supplement the original ROR as soon as the additional facts are known, Carley said.

The ROR letter should:

  • Identify the policy and purpose of the letter. It may create ambiguity if not addressed.
  • Summarize pleadings and facts. “The touchstone and the focus of your ROR is the pleading,” Carley said. Determine whether outside investigation should be included.
  • Quote the policy language verbatim. “Actual policy language upon which you are relying,” said Carley.
  • Identify coverage and policy defenses reserved. If two issues predominate, break them out and note the main one first.
  • Include the continued cooperation clause. A contractual obligation under the policy.
  • Note insured’s right to counsel.
  • Note insurer’s right to file a declaratory relief action.
  • Note insurer’s right to assert other policy defenses. Have to do it if you say it. Send supplemental RORs when appropriate.
  • Note insurer’s right to reimbursement. In California, this is required otherwise the insurer’s right to reimbursement is waived.
  • Note conflict triggering right to independent counsel.

In addition, in some jurisdictions, like California, a denial of coverage triggers a department of insurance review. That information should be included in the letter as well, Carley said.

It’s important to keep out extraneous information that can sometimes be included if a form letter is used, he said. Adjusters should never advise an insured not to seek independent review by another lawyer and, as a general rule, the ROR letter should not have any waiver of rights, Carley said. Sometimes, an ROR letter may contain a coverage waiver as a strategic move to avoid triggering independent counsel.

The author of an ROR should be the claims adjuster handling the file because an ROR is not a legal document, but rather a business letter, Carley said.

Defense counsel should not be involved in the coverage aspect at all, he said.

Carley recommended sending the letter certified, return receipt requested, as well as sending it by regular mail in order to verify the insured received it.

He said the letter should be sent to all known addresses for the insured, the insured’s agent, the insured’s personal counsel and coverage and defense counsel.

Issues Involving Waiver and Estoppel

Callantine explained that waiver is a one-party analysis while estoppel is a two-party analysis based on whether it was express or implied.

The question is whether the policyholder relied on the insured’s action or inaction to his or her detriment.

According to Callantine, factors for determining waiver and estoppel include:

  • The length of time before tender.
  • The length of time between the tender and ROR. Considered the biggest factor.
  • The length of time the insurer defends without an ROR versus the length of time the insurer defends with an ROR. May be okay if it is complex litigation that will go on for a long time; not okay if it’s the eve of trial.
  • The stage of litigation when insurer issues an ROR. Insured may have lost the ability to settle the matter.
  • The insurer’s diligence in discovering facts giving rise to coverage and policy defenses.
  • Whether the insured represented by counsel.
  • Whether the insured exercised control over the defense.

One alone is not dispositive, said Callantine.

“A court is usually going to look at all of these things,” she said.

According to Callantine, there are four options an insurer can choose when an insured refuses to accept a defense under a reservation of rights, which is only an option in a few jurisdictions. The insurer can:

  1. Offer an unqualified defense, essentially withdrawing the ROR.
  2. Continue to defend the insured.
  3. Withdraw from the defense. This will avoid any waiver issue, preserve coverage defenses and acts like a denial of the defense.
  4. Offer an independent defense while maintaining the ROR.

For more detail on reservation of rights letters, including relevant case law, read a detailed 2008 session outline.

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