A. What is a Reservation of Rights Letter?
When you file a claim with your insurance company, it is common for the insurance company to send you a “Reservation of Rights” letter (“ROR” for short). An ROR letter is supposed to fairly inform you of the insurance company’s position on whether the claim that you have submitted is covered, and enable the insurance company to fulfill its duty to defend you while at the same time preserving its right to assert any defenses to coverage, such as policy exclusions. If an insurance company undertakes to defend its insured without reserving its right to deny coverage, it likely will be precluded from raising any policy defense which it was on notice of at the time it assumed the defense.
B. Is the ROR letter done properly? Selective Way v. MAK Services
The specific contents of the reservation of rights letter is very important, and should be reviewed carefully by the insured and by its lawyer. This was made clear in a recent case from an Appellate Court in Pennsylvania, Selective Way Insurance Company v. MAK Services, No. J-A 27010-19, 2020 Pa. Super 103 (filed April 24, 2020).
MAK Services’ only business was snow and ice removal. It had an insurance policy with Selective Way. For reasons unknown, the policy contained a specific exclusion for snow and ice removal. MAK Services was sued by a man who slipped and fell on ice while walking through a parking lot from which MAK Services had removed snow and ice. Selective Way appointed defense counsel to represent MAK Services in the lawsuit, and sent a Reservation of Rights letter to MAK Services. The ROR letter said that Selective would provide a defense in the lawsuit, and that Selective would be handling the matter under a reservation of rights, including “all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop.” However, the ROR letter did not acknowledge or discuss the snow and ice removal exclusion that was contained in the policy.
For the next eighteen months, the lawyer that Selective Way had provided defended MAK Services in the underlying case. Then, Selective Way filed a separate lawsuit seeking a declaratory judgment against MAK Services that the snow and ice removal exclusion contained in the policy meant that Selective Way did not owe a defense or indemnity to MAK Services. In other words, Selective Way asked the Court, in a separate action, to determine that it no longer had to pay for a defense for MAK Services, and that if any damages were awarded against MAK Services in the underlying case, Selective Way did not have to pay them.
Both Selective Way and MAK Services filed motions for summary judgment in the declaratory judgment action, and the trial Court sided with Selective Way. The Pennsylvania Appellate Court reversed, because the ROR letter that Selective Way had sent was insufficient.
C. Was the ROR Letter Sufficient to Preserve the Exclusion?
The issue on appeal was sufficiency of Selective Way’s ROR letter, and thereby its preservation of the snow and ice removal exclusion in the policy. The rule is that while an insurance company does not automatically waive claims related to policy exclusions by providing a defense to an insured, it is still required to provide both (1) timely and (2) sufficient notice of any such reservation of rights to its insured. A reservation of rights must fairly inform the insured of the insurer’s position in order to preserve an insurer’s assertion of policy exclusions once it provides a defense to the insured.
In this case, Selective Way’s ROR letter was timely (it was sent within three weeks of the filing of the underlying case), but it did not fairly inform MAK Services of Selective Way’s position with respect to the policy exclusions, and therefore it did not preserve those exclusions. Rather than specifically identifying any coverage issues -- such as the snow and ice removal exclusion -- the ROR letter just said that Selective Way generally preserved all of its rights under “applicable law, insurance regulations and policy provisions,” including the right to deny coverage.
Accordingly, while the language and the ROR letter may have informed MAK Services that future contingencies might affect coverage, it did not provide any notice of the existing coverage issue appearing on the face of the policy, i.e. the snow and ice removal exclusion. Instead, the boilerplate language the Selective Way used in the ROR letter obscured any reliance on snow and ice removal exclusion, and caused MAK Services to reach the reasonable conclusion that there was no pressing need to hire backup counsel.
Because the snow and ice removal exclusion was apparent on the face of the policy, the Pennsylvania appellate court found that Selective Way had not conducted an adequate investigation of the claim, and as a consequence of that defective investigation, its ROR letter failed to clearly communicate the extent of the rights that it reserved, which resulted in presumptive prejudice to MAK Services. As a result of that prejudice, Selective Way was estopped from asserting the snow and ice removal exclusion.
The takeaway from this case is that the language used in reservation of rights letters is very important and should be carefully reviewed. An insurance company may not simply use boilerplate language about reserving “all defenses that may be available,” but instead must specify what defenses or policy exclusions that it believes may apply, so that the insured can make decisions accordingly.
In MAK Services, there was a very obvious exclusion in the policy that, if it had been raised by the insurance company in its ROR letter, would have meant that the insurance company did not have to provide a defense, and would not have had to pay any damages that were awarded. However, because the insurance company did not specify that exclusion in its ROR letter, it was not allowed to rely on that exclusion eighteen months later.
In sum, if you have submitted an insurance claim, it is likely that you received a reservation of rights letter. You should review that letter very carefully, or have your attorney review it, to determine what, if any, policy exclusions or other coverage issues exist.