Professional Liability (E&O, D&O, EPL, Cyber) insureds are often surprised and concerned when a reservation of rights letter is received in response to a claim notice. A reservation of rights letter should not be a surprise, but the contents of the letter should be reviewed carefully.
The purpose of a reservation of rights letter is to put an insured on notice that a claim may not be covered in part or in full (see here). Reservation of rights letters are often used with professional liability claims because both the claim situation and the coverage can be complex, and because the actual claim situation will not be fully understood when notice is first made. Therefore an insurer must give notice of the possibility that coverage may not apply in a timely manner and before the insurer has full knowledge of the situation.
It is important to understand that each and every state insurance regulatory department has regulations requiring insurance companies to prepare and issue Reservation of Rights letters whenever there is an allegation or facts that arise in a claim matter which could possibly create a gap in coverage. As such, the insurance company is compelled by regulation to provide this information or it risks losing certain rights and defenses.
Insurers must follow strict requirements in order to ensure that they have reserved their rights to deny coverage in part or full in the future, and therefore always consider providing notice of reservations of rights. Insurers typically utilize a standard structure and process in sending reservation of rights letters (see here & here). Reservation of rights letters must:
- Identify the policy & purpose
- Be unambiguous
- Fairly inform
- Be timely
A timely notice of claim or of an incident which may lead to a claim can be helpful in minimizing the impact of a reservation of rights letter (see here). Late notice is a major driver of reservation of rights letters.
More detailed explanations of the requirements for reservation of rights letters can be found here & here, and additional information that might prove helpful regarding reservation of rights letters can be found here, & here. Please let us know if you have situation where our expertise may be helpful.
Tennant Risk Services is division of Worldwide Facilities, a specialty wholesale broker and underwriting manager, and delivers expertise, markets and exemplary services to our retail insurance agent clients in the placement of professional liability insurance (E&O, D&O, EPL, Cyber).
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