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June-16-2023

What to Do When You Receive a Reservation of Rights Letter

Both residential and commercial property owners usually have a variety of types of insurance coverage in place to protect their property and their peace of mind. Having the proper policies in place can give the insureds comfort that they have coverage in the case of eventualities that could harm or threaten harm to their property.

Purpose of a Reservation of Rights Letter

However, insurance policies have been known to contain a wide array of exclusions that can limit the insured’s ability to have their claim covered. If the policy has these types of exclusions, the insurance company may send the policyholder something called a “reservation of rights letter” (or an “ROR”) to inform them of potential gaps in coverage, which could result in partial or total denial of their claim.

An ROR will inform the policyholder that the insurance company is investigating their claim, evaluating what they have submitted, and reserves the right to deny the policyholder coverage later. This is an alternative to the insurance company outright agreeing to or denying the claim and instead tells the policyholder, essentially, “Please stand by.”

If insurance companies don’t send policyholders RORs, they may blow a deadline for investigation or response and, in doing so, waive their rights not to cover a claim.  

Components of a Reservation of Rights Insurance Letter

So, what is a reservation of rights letter, and what can you expect to find within? ROR letters may vary in form depending upon the insurance company sending the letter out, but, in general, the substance of most ROR letters will be the same.

Most ROR letters will include a summary of the factual background surrounding the current claim, a detailed analysis citing key language in the insurance policy, a highlighting of applicable exclusions, a reference to endorsements (additions or limitations) that may impact coverage, a reservation of rights statement, and sometimes, partial denial of the claim. The ROR letter may make use of certain legal terms regarding insurance, including the following:

• Duty to Defend: This term means an insurer’s obligation to provide the insured with a defense to claims made under an insurance policy. As a general rule, an insurer’s duty to defend arises when there is potential for coverage under an insurance policy.

• Duty to Indemnify: This term describes an insurance company’s obligation to pay the claim, for example, by funding a settlement or paying a judgment that an insured was liable for causing damage or loss to someone else.
• Tender: Under the terms of an insurance policy, the insured must provide their insurance carrier notice of any claim or suit being made against them, as well as a formal demand to be defended and indemnified by the insurance company.
• Trigger or Coverage Trigger: This term refers to the event that must occur before an insurance policy can be applied to a given loss.

Since ROR letters may be long-winded and chock-full of insurance terms and phrases, they are difficult to understand, and working with experienced insurance legal counsel is recommended.

What To Do If You Receive a Reservation of Rights Letter

Most jurisdictions require a reservation of rights letter to clearly explain what the insurer may not cover and why. The letter must be sent in a timely manner in response to any filed claim because if the insurance company waits until too long after the claim has been made to send out its ROR letter, then the policyholder’s ability to obtain legal counsel could be fatally impacted. 

Although an insurance company’s reasoning for sending out an ROR letter may appear legitimate, it’s still a great cause for concern to a policyholder and something they should look into further with skilled legal counsel. This is because an ROR letter brings up an inherent conflict of interest between the insurance company and the policyholder in that it should be the insurance company’s obligation to cover claims. Still, the insurance company also faces conflicting obligations to conserve money for its shareholders, specifically as an insurance business, for the benefit of other policyholders who have future claims.

In light of these considerations, best practices when receiving a reservation of rights letter are as follows:

• Review the letter and respond promptly: Policyholders should take the time to thoroughly review the ROR letter against the applicable policy to see if what the insurance company says aligns with the policy terms. An insured should not ignore an ROR letter if they receive one. An insured also should not blindly trust what it says in the letter. Instead, an independent review, preferably with an attorney, is recommended.
• Respond to the letter: Policyholders should respond to the insurer contesting the letter and pledging one or multiple subsequent follow-ups. This informs the insurance company that while the policyholder acknowledges receipt of the ROR letter, they disagree with the letter’s contents and have no intention of backing down after paying for insurance coverage.
• Obtain and consult legal counsel: If a policyholder receives an ROR letter about damage, injury, or harm to another third party, they should obtain legal representation right away to investigate and advise them on their defenses.

Contact the Commercial Insurance Attorneys at MMA Law Firm

As professionals who help clients interpret insurance policies, understand their rights, and recover on their losses every day, the Houston insurance attorneys at MMA Law Firm are well positioned to help clients when they receive a reservation of rights letter in Texas. Contact us today so that we can help you.