WHY IS THIS IMPORTANT?
BECAUSE COVERAGE CAN HINGE ON IT.
An insurance company has three options after tender of a claim:
1. It can accept the defense and payment of the claim; or
2. It can deny the claim outright because there is no coverage under the exact terms of the policy; or
3. If coverage is in doubt, it can agree to defend you but issue a reservation of rights (ROR) letter to reserve some or all of its policy defenses in case you are found liable. City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F. 2d 1052, 1060 (8th Cir. 1979).
Historically ROR letters were issued ONLY when the insurance company was uncertain about the facts, but certain about coverage terms. NOW some companies are issuing such letters regularly as a way to buy time before paying a claim. Why the change in tune? Time is money to an insurance company. Investing in their “float,” or the money they have in their coffers from unpaid claims and accrued premiums, has become a lucrative strategy for maximizing profits. The longer a company can stave off payment of a dubious claim, the more money earned on investments. Delay benefits the insurers. Delay harms the policyholder.
Because of this potential for abuse and the uptick in proliferation of ROR’s, courts are taking a stern look at this practice. If the letter does not meet certain standards it will not adequately reserve coverage rights. The claim must then be paid. We can glean some rules on ROR letters by looking at case law across the states. What does it take to write a ROR letter that will act as a “stay” on paying a claim?
It must “fairly inform” the policy holder. Fairly inform means that the insurer must explain exactly why the policy would not cover the specific incident giving rise to the claim. See, Safeco Inc. Co. of Am. v. Liss, DV 29-99-12, 2005 Mont. Dist. LEXIS 1073 at 41 (Mont. Dist. Ct. Mar. 11, 2005).
It must be unambiguous. It must make clear the defenses that the insurer is seeking to assert by referencing the exact policy language and the lack of facts to support the coverage. If it is ambiguous, it will be strictly construed against the insurer. See, World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149, 152, 695 S.E.2d 6, 10 (2010).
It must tie together the facts and policy terms to show why there is no coverage. The insurer must set forth the relevant facts and the cited policy provisions, and then tie them together in a coherent explanation as to why there is no coverage at this time. It is not enough to list the facts in detail and then separately list policy provisions. The insurer has a duty to explain. See gen., Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678, 683 (6th Cir. 1993).
It must be timely. A letter issued 6 months after the insurer had a chance to investigate the claim was too late. See, City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052, 1061 (8th Cir. 1979).
Boilerplate language is not sufficient. The letter must be specific to the exact claim. See, W. Heritage Ins. Co. v. Love, No. 4:13-CV-0034-DGK, 2014 WL 2472267 (W.D. Mo. June 3, 2014).
Reserving arguments for the future may be unacceptable. A denial letter purporting to reserve the right to assert a myriad of other defenses at a later date, including that coverage could be barred to the extent the insured failed to comply with the notice provisions under the policy, did not clearly put the policyholder on notice of the insurer’s position. See, Builders Ins. v. Tenenbaum, 327 Ga. App. 204, 211, 757 S.E.2d 669, 676 (2014). But see, Portal Pipe Line Co. v. Stonewall Ins. Co., 256 Mont. 211, 845 P.2d 749-750 (Mont. 1993) (reserving future defenses is acceptable if the reservation is clear and unambiguous) and Britz Fertilizers, Inc. v. Nationwide Agribusiness Ins. Co., No. 1:10-CV-02051-AWI, 2013 WL 5519605, at *30 (E.D. Cal. Oct. 3, 2013) (an insurer is not precluded from raising additional defenses later, after it has issued its initial ROR).
A ROR letter must be issued timely. It must fairly inform the insured as to the reasons for the initial denial of coverage. It must tie the facts to the policy provisions. It must not be ambiguous. It must not use boilerplate language. It will be construed against the insurer. If it does not meet these general rules, the insurance company may be estopped from denying coverage.