A RISK MANAGER’S GUIDE TO
RESERVATION
OF RIGHTS
A RIMS STANDARDS & PRACTICES COUNCIL REPORT
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
1
A RISK MANAGER’S GUIDE TO
RESERVATION
OF RIGHTS
A RIMS STANDARDS & PRACTICES COUNCIL REPORT
Authors
Nada Jandrich, MBA
Director of Insurance,
Cook Group Incorporated
As the preeminent organization dedicated to educating,
engaging and advocating for the global risk community, RIMS,
the risk management society™, is a not-for-profit organization
representing more than 3,500 corporate, industrial, service,
nonprofit, charitable and government entities throughout the
world. RIMS has a membership of approximately 11,000 risk
practitioners who are located in more than 60 countries. For
more information about the Society’s world-leading risk
management content, networking, professional development
and certification opportunities, visit www.RIMS.org.
Marilyn Rivers, CPCU, ARM, AIC
Director of Risk and Safety Management,
City of Saratoga Springs, New York
Contributor
Stephen Dzury
Senior Vice President, Claims,
Berkley Public Entity Managers
Editors
Disclaimer
Morgan O’Rourke
RIMS
The information contained in this document is based on
sources believed to be reliable. RIMS, the authors and the
contributor make no representations or warranties, expressed
or implied, regarding its accuracy. This publication provides a
general overview of the subjects covered and is not intended
to be taken as advice regarding any individual situation.
Individuals should consult their advisors regarding specific
risk management or claims issues.
Carol Fox
RIMS
Art Director
Joe Zwielich
RIMS
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
1
A Risk Manager’s Guide to RESERVATION OF RIGHTS
B
usinesses continually strive to manage the totality of their risks through robust risk
management programs that capitalize on financial strength initiatives and utilize weaknesses
as potential opportunities for improvement and growth. One mechanism for the financial
management of risk is the purchase of insurance. Corporations purchasing insurance should carefully
review and understand the policies they purchase including entities covered, limits provided, special
coverage afforded and exclusions that may apply. A failure to verify potential exposures for which
coverage was intended to be purchased, versus the coverage afforded by the insurance program, may
result in unexpected—and unpleasant—surprises.
Entities purchase and/or arrange insurance programs expecting to be covered at a time of loss.
It is a good business practice to expend and invest money to cover anticipated and unexpected loss
(whether first-party or third-party loss) to reduce the financial pressure on balance sheets. Businesses
anticipate that coverage will be available for insured losses. Contractually, an insurance company is
obligated to pay for covered damages, and depending on the nature of the loss and policy language,
provide a defense to the policyholder for those claims covered by the policy purchased. It may
therefore be surprising when a claim is reported, and an insurer sends the policyholder a reservation
of rights letter, potentially limiting coverage to the policyholder.
It can be particularly vexing that the typical reservation of rights reflects an insurance company’s
standpoint on coverage, while little is referenced from the insured’s point of view. This paper intends
to help prepare risk managers to understand, anticipate and respond to these types of letters.
WHAT IS RESERVATION OF RIGHTS?
Commercial insurance policies typically are considered contracts of adhesion, wherein the policy is drafted by a party in a position of power,
giving the weaker party no choice but to accept.
Insurance policies are legally binding contracts
on a standard form that are approved for use
by each individual state’s insurance department
and contain universal terms, conditions and
approved language. The insured cannot change
the standard terms and conditions as approved
and can either accept them or look elsewhere for
coverage. At times, insurance companies may
issue customized “manuscript” policies for large
commercial policyholders or for specific industries or for specific types of coverage. Even in
these situations, the insurance company usually
has more expertise and technical knowledge in
the application of the policy provisions than
does the buyer.
When an insured reports a claim, the insurance
company may initially respond with what is
called a reservation of rights letter, whether the
policy is a standard or customized form. A reservation of rights letter is a formal notice, often
sent by certified and registered mail, that places
the policyholder on notice that the insurance
company has received the claim, but that certain
provisions within the policy may not obligate
the insurer to provide coverage for all or part
of a claim. In simple terms, this letter serves as
a notice that the insurer has reserved its rights
to either limit or deny coverage for the claim,
based on the terms and conditions of the policy
or information uncovered in an investigation of
the claim itself.
A typical reservation of rights letter identifies
the plaintiff or claimant, date of loss, applicable
policy number, and policy period and starts
with an acknowledgment from the insurer that
the claim was received. The letter will then
include a synopsis of the claim being submitted for coverage, which will encompass a
summation of all known underlying facts, and
information from all relevant pleadings. It will
then address the applicable coverage provisions
from the policy at issue. This will often include
specifics as to the types of coverage that may be
implicated, the limits that apply to each of the
implicated coverages, and policy language that
is applicable to each of the implicated coverages,
including policy terms, conditions, definitions
and exclusionary language.
Most jurisdictions recognize that the reservation
of rights letter must clearly and unambiguously
advise the policyholder of the insurer’s position
and the basis of the reservation so that the policyholder is adequately informed of the potential
policy defenses. See e.g., Associated Indem. Corp.
v. Wachsmith, 2 Wash. 2d 679, 99 P.2d 420,
425-26 (1940); Estee Lauder Inc. v. OneBeacon
Ins. Grp., LLC, 62 A.D.3d 33, 87 3 N.Y.S.2d
59 2 (1st Dep’t 2009); Intel Corp. v. Hartford
Accident & Indem. Co., 952 F.2d 1551 (9th Cir.
1991); Foremost Ins. Co. v. Wilks, 206 Cal. App.
3d 251, 258, 253 Cal. Rptr. 596, 600 (1988);
review denied (Cal. Feb. 15, 1989); JEM v.
Fidelity & Casualty Co. of New York, 928 S.W.2d
668, 674 (Tex. App. 1996).
2
HISTORY OF
RESERVATION
OF RIGHTS
Reservation of rights letters evolved as a
result of bad faith between insurers and insureds. An insurer has a duty to act in good
faith when investigating, defending and
settling a claim on behalf of its insured.
The earliest reported case involving what
is now considered bad faith dates back to
1899, but the tort of bad faith was not fully
developed until 1931, when the Wisconsin
Supreme Court recognized an insurer’s duty
to act in good faith in its decision to settle or
defend a claim.
A 1957 California case, however, became
the first to set forth the factors in determining whether an insurer’s refusal to settle
constitutes bad faith. In Brown v. Guarantee
Insurance Co., it was determined that the
insurer’s conduct was bad faith, and not
negligence, due to the following:
1. The strength of the injured claimant’s case
on the issues of liability and damages
2. Attempts by the insurer to induce the
insured to contribute to a settlement
3. Failure of the insurer to properly
investigate the circumstances so as to
ascertain the evidence against the insured
4. The insurer’s rejection of advice of its own
attorney or agent
5. Failure of the insurer to inform the
insured of a compromise offer
6. The amount of financial risk to which
each party is exposed in the event of a
refusal to settle
7. The fault of the insured in inducing the
insurer’s rejection of the compromise offer
by misleading it as to the facts
8. Any other factors tending to establish or
negate bad faith on the part of the insurer
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
SAMPLE RESERVATION OF RIGHTS LETTER
RE: Entity
Claim No.:
Claimant: Mr. Injured Party
Policy No.: 123456
Policy Effective Dates: XO/XO/XOOX to XO/XO/XOOY
Dear Entity:
XYZ insurance company received the claim/litigation entitled “Mr. Injured Party v. Entity” on
__________. The Entity submitted this claim/litigation on _____ seeking coverage under its
XYZ Policy 123456 with effective dates of XO/XO/XOOX to XO/XO/XOOY. The claim/
litigation (claim number) asserted by Mr. Injured Party against your company brought in the
(name of state) court.
As you are aware, the XYZ insurance company issued a general liability policy, for policy term of
(dates) under policy number #123456 written with liability limits of $2 million per occurrence/
claim with a $X million aggregate. The policy is written with a $10,000 deductible per
occurrence limit.
While we value the Entity as a customer, we have completed our review of the policy in light of
the claim/litigation. Our coverage evaluation is based upon the allegations raised in the claim/
litigation. Please note that in referring to the allegations made by Mr. Injured Party, XYZ Insurer
does not imply they are true. XYZ Insurer must, however, refer to the allegations in determining
whether or not coverage exists under the policy discussed herein.
The claim/litigation alleges…
The claimant/plaintiff demands…
The Entity is insured under policy number 123456 in effect from XO/XO/XOOX to
XO/XO/XOOY. This policy provides coverage for…
The key terms and conditions of this coverage are set forth on Form 98 76 54 which reads in part:
pertinent sections of each policy and each coverage available in question are then written out in
verbatim including 1) the insuring agreement; 2) policy definitions; 3) policy provisions; and
4) exclusions. (Coverage is afforded or denied for each of the policies examined after each policy
is listed.)
While XYZ has examined each of the policies available to your entity for coverage, the analysis
of coverage is not meant to be exhaustive. Each of your policies may have insurance that include
additional provisions that may have a bearing on the question of coverage. By limiting policy
references to those cited herein, XYZ does not waive any other policy provisions. The insurance
policy is incorporated herein by reference in its entirety as if set forth in full. It has determined
coverage will be afforded under _______________. We will monitor this claim/litigation during
its investigation and defense and expect your full cooperation with same. Please advise the TPA
(third party administrator)/staff/legal counsel to copy us on all reports and to forward a copy of
any investigative material for this matter. Additionally, please forward any further pleadings or
amendments served in this matter to us immediately for our consideration as such amendments
can affect our obligations to you under the policy(ies).
The foregoing is premised upon allegations set forth in the complaint and terms and conditions of
the policy. XYZ does not waive any other policy provisions and reserves all rights under the policy
and applicable law, as well as the right to amend, modify or supplement its coverage determination
as appropriate.
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
3
The reservation of rights letter will also include
a reminder that the insured is required to
cooperate in the investigation and the defense
of its claim as submitted. The insurer may also
ask for additional information about the claim.
Defense counsel (often a member of the insurer’s panel counsel list) may then be assigned to
provide defense. This means that any and all
information pertaining to the claim, whether
good or bad, must be shared with legal counsel
and the insurer and the insured must cooperate
in a timely and forthcoming manner to defend
the matter.
When a claim is subject to a self-insured
retention (SIR), the insured generally can
choose defense counsel. When the self-insured
retention is exhausted and the insurer has
previously issued a reservation of rights letter,
the insurer may allow the defense counsel
selected by the insured to maintain representation for continuity purposes. Even so, policies
can stipulate that the insurer can select defense
counsel once an SIR is exhausted.
The reservation of rights letter usually ends with
a statement that the coverage analysis contained
therein is not meant to be exhaustive, and that
the insurer will provide a defense to the claims
made against the insured, but that they “reserve
all of its rights to limit or deny coverage” for the
claim on the basis of its ongoing investigation
of the matter.
A reservation of rights letter needs to be
thoroughly read and understood as to its intent
and meaning. The insurer will provide a legal
argument in the letter using specific language
from within the insurance policy that may provide a defense, but also asserts a potential legal
basis for reserving its right to deny coverage
should an investigation uncover material facts
that would allow for coverage to be excluded at
some time during the life of the claim. Again,
insurers must be very specific with this type of
correspondence, as any ambiguous reservation
of rights may be construed strictly against the
insurer and in favor of the insured.
A Risk Manager’s Guide to RESERVATION OF RIGHTS
WHAT SHOULD THE POLICYHOLDER DO WHEN IT
RECEIVES A RESERVATION OF RIGHTS LETTER?
The majority rule is that an insurer must
promptly provide its policyholder with a
reservation of rights with the requisite degree of
specificity or the insurer may be deemed to have
waived coverage defenses. See e.g., Pendleton
v. Pan Am. Fire & Cas. Co., 317 F.2d 96, 99
(10th Cir. 1963), order amended, 326 F.2d 760
(10th Cir. 1964); Schmidt v. National Auto &
Cas. Co., 207 F.2d 301,304, 38 A.L.R.2d 1142
(8th Cir. 1953); Koehring Co. v. American Mut.
Liability Ins. Co., 564 F. Supp. 303, 312-13
(E.D. Wis. 1983). However, delays in asserting
reservation of rights by an insurance company
do not always provide an insured with an
argument that the insurance company waived
its rights in denying coverage. In Collins v.
Grange Mutual Casualty Co. [No. CA97-02002, 1997], the Ohio Appellate court held that
an extended delay (16 months) in issuing an
insurer’s reservation of rights communication
did not result in a waiver of the insurance
company’s denial of coverage, as the court
found that the delay did not prejudice the
insured.
Reservation of rights letters should not be taken
lightly. They should be read carefully, and
compared to the insurance policy. Often, a
line-by-line comparison with the policy is
helpful, particularly to safeguard against any
misinterpretation of pertinent policy language
and conditions.
If discrepancies in coverage and conditions
exist, the reservation of rights letter may require
a review and opinion from an attorney who
specializes in insurance coverage litigation.
Generally speaking, reservation of rights letters
vary greatly, but there are some commonalities.
The letter must cite the underlying facts of the
case in some detail, and identify potential relevant policy provisions. Then it must set forth
the reasoning to support the lack of coverage
based on the policy provisions provided.
Sometimes, the insurer will not cite all of the
specific policy provisions relevant to the claim,
and may provide a general statement to “keep
its foot in the door” in order to deny coverage
at a later date. This statement may read as follows: “We reserve the right to assert additional
reasons to disclaim coverage based upon the
policy’s terms and conditions or additional
facts whether now known or discovered in the
future.”
Policyholders should review the reservation of
rights letter in the context of the claim or litigation. The letter should identify the policy under
which the defense is being tendered, indicating
the policy number, type of policy, a summary of
the underlying facts, and a list of specific policy
provisions whereby the insurance company lists
its obligations to defend due to the provisions
cited, but reserves its rights to limit or deny
coverage once they have had the chance to fully
investigate the claim. The specific policy provisions relied upon should be quoted verbatim.
Generally, there is no requirement that a policyholder respond to an insurer’s reservation of
rights letter, disagreeing with the reservation or
the bases thereof. However, it is highly recommended that the policyholder do so. Indeed, in
the context of an insurer’s reservation to recoup
defense costs it paid to defend a policyholder
where it was later determined the insurer had
no duty to defend, some jurisdictions recognize that to avoid this result, the policy holder
must respond to the reservation of rights letter
specifically disagreeing with that particular
SAMPLE RESPONSE TO A
RESERVATION OF RIGHTS LETTER
RE: Entity
Claim No.:
Claimant:Mr. Injured Party
Policy No.: 123456
Policy Effective Dates: XO/XO/XOOX to XO/XO/XOOY
Dear XYZ Insurance Company:
This letter is in response to your letter dated ____________, Certified/Registered Receipt #
________________ acknowledging receipt of the above reference (policy period, policy
number, claim number, etc). In this letter, XYZ insurance company reserves all of its rights
under the policies and at law, and neither this nor any future investigation nor correspondence
shall serve as a waiver of any such rights.
ABC insured continues to reserve all of its rights under the noted policy of insurance, at law
or otherwise and nothing contained herein or omitted shall constitute a waiver of such rights.
ABC shall continue to cooperate to the fullest extent possible to defend the claim in question.
4
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
reservation. For example, in United National
Insurance Co. v. SST Fitness Corp. [No. 00-4239,
2002], the United States Court of Appeals,
Sixth Circuit, held that “SST knew of United
National’s reservation of rights because it received
a letter stating, ‘United National reserves the
right to recoup from SST any defense costs
and fees to be paid subject to this reservation
letter on the basis that no duty to defend now
exists or has existed with regard to the tendered
suit.’ SST did not object to the reservation and
accepted United National’s payment of defense
costs.” In its finding, the majority reversed
the judgment of the district court in denying
United National’s motion to recover defense
costs and pre-judgment interest. A dissenting
opinion notes that the majority decision implies
(incorrectly) that that reservation of rights
letter constituted a separate agreement, “United
National contends, and the majority opinion
agrees, that the circumstances surrounding the
unilateral reservation-of-rights letter demonstrate that the parties intended to enter into a
binding agreement.”
Should the insured entity choose to respond,
it should at a minimum reply with a generic
statement stipulating that the entity does not
agree with the insurance company’s position
and is reserving its rights under the same set of
circumstances carefully referencing the original
reservation of rights communication.
Depending on the situation, an insured entity
may want to engage special counsel to review
coverage and the reservation of rights letter. For
example, insurers may ask a policyholder or
additional insureds to waive their rights to payment for separate defense counsel as a condition
of the insurance company providing defense. A
policyholder/insured should obtain a coverage
counsel review of the relevant insurance policy,
and an opinion as to potential consequences
before signing any waivers or accepting a
reservation of rights letter as is.
DUTY TO COOPERATE AND
CROSS-COMMUNICATION
The insured necessarily has a duty to cooperate
with the insurance company’s investigation
and defense of claims. Most policies include a
provision under the terms and conditions that
requires full cooperation. A failure to cooperate
by the insured entity, its agents or its employees
may result in a loss of coverage for the claim.
Once a claim is being handled by the insurer,
it is being handled under the provisions of the
insurance policy for which coverage is afforded.
In general, the insured is obligated to provide
information to the insurer that is relevant to
the risk. In addition, there may be a provision
that stipulates that an insured may not settle a
claim without the insurance company’s consent.
Failure to obtain insurer consent in a settlement
negotiation may preclude coverage, even when
there is a coverage dispute under a reservation of
rights. The same is true for assuming financial
obligations for claimed damages without the
insurer’s consent, particularly when the insured
entity has no clear legal liability to do so.
An insured should review the policy provisions
pertinent to the claim in order to understand
its obligations in the claims management and
settlement process, and the continuing obligations when a reservation of rights notification
is issued. In the event that there is a coverage
dispute, the policyholder should inform defense
counsel of the coverage dispute and provide the
contact information for its coverage counsel,
as the coverage lawyer and the defense lawyer
have different responsibilities. Insureds need
to continue cooperating with defense counsel,
regardless of any coverage disputes, to preserve
the continuity of claim management as well as
meet the policy obligation.
THE USE OF TOLLING
AGREEMENTS IN
RESERVATION OF
RIGHTS DISPUTES
Tolling agreements at times are useful in handling
claims or in claim litigation. This mechanism
requires special consideration when there is
a coverage dispute. A tolling agreement is an
agreement to waive a right to claim that litigation should be dismissed due to the expiration
of a statute of limitations. Typically its purpose
is to allow a party additional time to assess and
determine the legitimacy and viability of their
claims and/or the amount of their damages
without the necessity of filing a legal action.
During this period, the parties agree not to
waive any defense by way of any statute of
limitations that would otherwise arise during
such period. The agreement should be worded
so as not to revive claims for which the limitations period has already passed and to be sure
that the agreement only tolls the statute of
limitations. These agreements generally do not
contain an admission of wrongdoing, but may
reflect stipulated events.
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.
5
Parties entering into a tolling agreement should
verify in advance whether such an action might
void insurance provisions, or otherwise affect
the rights reserved by the insurance company
in its notification. In situations involving a
disputed reservation of rights, tolling agreements
should only be undertaken after a review and
coverage determination by coverage counsel to
preserve the rights of the insured(s).
RESERVATION OF RIGHTS
AND CONFLICT OF INTEREST
As discussed above, when a policyholder is sued,
the liability insurer often has the right to select
counsel to defend the policyholder. Nevertheless,
when an insurer issues a reservation of rights,
and depending on the basis of the reservation
and applicable law, a conflict of interest may
arise such that the policyholder is entitled to
select counsel of its own choosing to be paid
for by the insurer. This typically happens when
the insurer’s potential liability could be reduced
if the insured were defended in a particular
manner. For example, in a lawsuit alleging both
covered and non-covered claims, the insurer’s
interest may not be aligned with the interest of
its insured.
Consider, for example, a lawsuit alleging
negligent design of a building and copyright
infringement in preparation of the plans.
Negligence may be covered, but copyright
infringement may be excluded. The insurer
might have an incentive to eliminate the
covered negligence claim in order to leave only
the excluded copyright cause of action. Or, the
insurer might be tempted to shift the focus of
the case to the excluded claim in order to reduce
its own exposure.
In its 2004 decision of Northern County Mutual
Insurance Co. v. Davalos [No. 02-1007, 2004],
the Texas Supreme Court recognized the
existence of a disqualifying conflict of interest
where the insurer’s reservation of rights overlaps
with the issues in the underlying lawsuit. The
court found that a reservation of rights letter
creates a potential conflict of interest, and that
“when the facts to be adjudicated in the liability
lawsuit are the same facts upon which coverage
depends, the conflict of interest will prevent the
insurer from conducting the defense.”
Not every reservation of rights creates a conflict
of interest allowing an insured to select independent counsel. For example, as in Davalos,
the insured’s disagreement regarding the
insurer’s decision regarding whether to challenge
A Risk Manager’s Guide to RESERVATION OF RIGHTS
CONCLUSION
venue does not raise a conflict. If every dispute
regarding the conduct of the defense created a
conflict of interest, the insured, not the insurer,
could control the defense by merely disagreeing
with the insurer’s proposed actions. As such, a
conflict of interest does not arise unless the
outcome of the coverage issue can be controlled
by counsel retained by the insurer for the
defense of the underlying claim. If the issue
on which coverage turns is independent of the
issues in the underlying case, the reservation
of rights itself does not create a disqualifying
conflict, although other grounds of independent
counsel may exist.
Situations in which courts have recognized a
conflict of interest include where the insurer
reserves rights based on certain allegations in
the lawsuit including, inter alia, punitive
damages, intentional and negligent conduct,
covered versus non-covered defendants, whether
the policyholder’s employee was acting as
an agent of the policyholder, when a default
judgment has been entered against the policyholder, and whether the alleged conduct by the
policyholder was part of its normal business
operations.
Reservation of rights letters pose a significant
challenge to an entity’s ability to realize the full
value of its insurance policies in covering its
claims. While reservation of rights letters were
developed in response to issues of “bad faith”
in the conduct and coverage decisions made by
insurers, interpretations in case law have refined
the application and force of these documents.
Given that reservation of rights notice of limitations have been upheld in court, risk managers
and legal counsel should not dismiss the
importance of a timely response. Receipt of a
reservation of rights notice should prompt a
review by risk managers—ideally, in conjunction
with legal counsel—leading to an informed
decision and deliberate action: whether to
accept the insurer’s interpretation of the coverage
and defense obligations, or respond with a
reservation of its own rights. If not, unexpected
and unintended consequences may result.
Risk managers hold an important role as
coordinator among the many stakeholders
involved in a claim or suit that is under a
reservation of rights. Stakeholders can include
general counsel, assigned defense team selected
by general counsel, coverage counsel, adjusters
and attorneys for the insurance companies,
brokers, additional insureds, and possibly
others. Communication issues involving
reservation of rights letters may complicate
claims if handled poorly, or alternately simplify
claims if handled well. Topics that require
decisions on the part of the insured entity can
include the timing of the notice, involvement
of coverage counsel, duty to cooperate in the
investigation and resolution of the claim, effect
of tolling agreements and conflicts of interest.
By understanding, anticipating and properly
responding to reservation of rights letters, risk
managers are better prepared to protect their
organizations, and realize the full value of its
insurance policies. n
6
Copyright © 2017 Risk and Insurance Management Society, Inc. (RIMS). All rights reserved.