In an industry that is built on standardization of policy forms, the reservation of rights letter is anything but standardized. This lack of set guidelines means that there are countless reasons why a reservation of rights letters can be found to be deficient. Courts have been penalizing insurers for issuing what they see as an inadequate reservation of rights letter, with the resulting huge potential loss of otherwise applicable coverage defenses.
According to an article in the December 2015 issue of Claims Magazine, the most common – yet easiest to prevent – reason for the deficiency is that the explanation provided to the insured of why coverage may not be owed for some claims or damages was not sufficiently specific. For example, a reservations of rights letter that sets forth a brief factual summary of the claim, followed by several pages of (sometimes irrelevant) policy language, and a concluding statement that the insurer reserves its rights. Mainly, it did not “fairly inform” the insured why, despite a defense being provided, coverage for any damages may not be owed.
The best way to approach drafting a reservation of rights letter is to remember its purpose. It needs to make it abundantly clear to the insured that, just because the insurer is defending, it should not get a false sense of security when it comes to coverage for any damages. In other words, fairly inform the insured. The way to achieve this is by including a thorough and clear explanation in the letter of why coverage may not be owed. Matsen Insurance can help you navigate through the complex ends and outs of your coverages, contact us today.