What Does a Reservation of Rights Letter Do to an Insurance Claim?

Insurance companies have several obligations to policyholders. While the specific obligations vary according to the type of policy and terms in that policy, in many cases, insurance companies owe a duty to defend you in court if you’ve been sued due to injuries, breach of contract, malpractice, or other issues. In addition to defending you, the companies have a duty to indemnify you, or pay judgments issued against you due to a covered issue.

When a company sends a reservation of rights (ROR) letter, they are notifying you that they may be prepared to defend you for the time being, but they might refuse to indemnify you. If the case involves only a loss to the policyholder, the insurance company is indicating it is investigating the claim but may determine the loss is not covered.

A reservation of rights is not a denial of a claim, but a warning that one may be coming soon. When a policyholder receives a reservation of rights letter, they need to take steps to preserve their rights and protect their claim.

Understanding an ROR

A reservation of rights letter is usually many pages long and filled with seemingly contradictory statements. The insurance company assures you that they have received the claim. But they inform you that just because they may be taking initial steps to help you, that doesn’t mean they’re going to follow through. They reserve the right to say, “Sorry, we’re not responsible for this” later.

The letter may be issued for a variety of reasons. Sometimes, the facts are unclear and will require extensive investigation to determine whether damage is excluded from coverage. In situations involving liability, the insurance company may see signs indicating that liability could be based on factors not covered, such as intentional illegal actions like fraud. Or liability could be based on a mix of covered and excluded factors.

Insurers issue ROR letters to protect themselves. If they defend a policyholder without notifying them of a reservation of rights, then, in most jurisdictions, the doctrines of waiver and estoppel prevent the insurer from later denying the claim.

How an ROR Changes a Claim

The reservation of rights changes the relationship and obligations of the insurance company and the policyholder. While the insurance company may agree to expend funds to defend the claim, they have stated that they may not pay for losses arising from liability. So the money at stake when defending the lawsuit could belong to either the insurer or the policyholder. That means decisions about defense need to be mutually acceptable to both parties. When an insurance company defends a claim without issuing an ROR, it has sole control of the defense. They give up some of that control by issuing an ROR.

The financial burden potentially shifted onto the policyholder by an ROR could be enormous. It is important to ensure that the insurance company has appropriate grounds for denying coverage and to refute their attempts to wrongfully exclude a claim.

Statutory Requirements Go into Force

Because a policyholder could be put at risk when an ROR is issued, Florida and other states have established legal requirements that insurance companies must follow when issuing a reservation of rights. For instance, Section 627.426 of the Florida Statutes requires insurers to issue an ROR within 30 days after the insurer should have realized it had a potential reason to deny coverage. That forces the insurance company to notify policyholders quickly.  In addition, the notice should explain why the company believes it is not obligated to defend the policyholder.

Once a policyholder has sent an ROR, the insurer has 60 days to either:

• Notify that policyholder that the insurer will not defend the policyholder,
• Obtain a non-waiver agreement from the policyholder, or
• Retain independent legal counsel that is acceptable to both the policyholder and the insurance company

If the trial date is approaching, the insurance company must take one of these actions at least 30 days before the trial, even if it is less than 60 days after issuing the ROR.

The Need to Act After Receiving a Reservation of Rights

Any insurance claim requires serious consideration, but when a policyholder receives a reservation of rights letter, it is important to act quickly. It is a good idea to review the ROR assertions carefully to determine what the insurance company is asserting. Do the assertions fit within the listed exclusions in the policy, or is the company overreaching in its assertions? 

This type of analysis can be difficult to undertake without a thorough grounding in insurance language and laws, so it is very helpful to work with a knowledgeable insurance attorney who can determine whether the insurance company is acting within its rights.

If both the policyholder and the insurance company will be responsible for defense, then it is wise to choose an attorney who is truly independent rather than defense counsel routinely employed by the insurer.

Get the Guidance You Need If You Have Received a Reservation of Rights Letter

It can be challenging to understand the obligations of insurance companies and the rights of policyholders even in a simple claim. When factual or legal issues become complex, it requires thoughtful analysis to determine whether an insurance company is acting within its rights or whether the policyholder deserves more. A reservation of rights letter is issued to protect the insurance company, so it is wise for policyholders to take special measures to protect themselves in the face of this legal maneuver.

At Ver Ploeg & Marino, we have decades of experience untangling insurance knots and resolving complex disputes. We understand how insurance companies operate, but we are always on the policyholder’s side. If you have received a reservation of rights letter and want to know how to proceed, we invite you to schedule a consultation with our team to learn about the advice and assistance we can provide in your particular situation.

Share