A reservation of rights letter lets insurers investigate claims while preserving the option to deny coverage later. California policyholders should know how ROR letters affect defense duties, Cumis counsel, and potential coverage disputes.
By Brad Nakase, Attorney
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An official written notification from an insurance provider to its policyholder is called a reservation of rights (ROR) letter. It states that the insurer will look into a claim and may even offer a defense in court, but it retains the right to later refuse coverage due to policy limitations or other circumstances. It’s not a rejection. The claim is being accepted conditionally by the insurance, but they have the option to refuse payment if the investigation warrants it.
To put it plainly, we have received your claim, will look into it, and may even defend you in court, but we won’t guarantee payment. In the event that the inquiry reveals a policy omission, a breach, or some other reason to walk away, the insurer will still be able to refuse coverage.
Consider it a presumptive “yes.” The insurer arrives, assigns defense attorneys, & gets to work on the case. However, the letter raises a red signal. Without it, California’s waiver-by-conduct concept might bar an insurer from later refusing coverage after starting to defend a claim. Thus, the insurer is protected by the letter. Not you.
The policy in reference, the claim made under the policy, and the portion of the claim that might not be covered are all included in the ROR insurance letter. To learn more about an insurance claim and the review procedure, insured parties who get an ROR insurance letter may get in touch with their insurer. The insurer may give some preliminary details about the elements of the claim it is looking at. If it appears that the insurer plans to reject the claim, the insured party might think about getting in touch with a lawyer.
An insurer still has to reply to lawsuits pertaining to a claim while it is conducting an inquiry, even if it has sent an ROR insurance letter. Because failing to do so could result in the rights being waived, insurers write the letter to reserve their rights.
Three parties, three distinct interests:
It is inevitable that these parties will clash. Since most policies do not cover purposeful activities, the insurer may profit from demonstrating the insured’s deliberate actions in an automobile accident case alleging both careless and intentional conduct. Your own insurance provider may be financially motivated to prove a condition that renders your coverage void.
California realized the risks associated with this arrangement. When a company’s reservation creates a real conflict, the insured may choose independent counsel (referred to as “Cumis” counsel) according to Civil Code 2860, and the insurer is required to pay the fees. The disagreement must be actual, not hypothetical.
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When coverage is truly unclear, insurers send out ROR notices. Although the triggers are different, these often occur:
Receiving this notice does not imply that the insurer has decided to reject the claim. It indicates that they have a cause to investigate more.
The insurance company might only have a few days to act, even though it might take months to determine what went wrong. The insurance company can provide the insured person with an ROR insurance letter instead of taking the chance of rejecting a covered claim. This gives the insurance provider time to look into the claim and defend it, if needed, without giving up the right to later reject all or part of a claim if the facts ultimately show that there is no coverage.
Additionally, an ROR insurance letter informs the insured that a claim may not be fully or partially covered. According to the California Supreme Court, the insurance company gives the covered party notice regarding how it intends to, or at least may, move forward by sending a Reservation of Rights letter. This gives the insured a chance to take any reasonable or appropriate action in response, such as accepting defense at the insurance company’s hands and pursuant to the insurer’s control, or choosing to defend itself.
Some of the nation’s best policyholder protections are available in California. The responsibility to defend is much more expansive than the obligation to indemnify, according to Montrose Chemical Corporation vs. Superior Court (1993). Unless the accusations “can by no possible explanation” trigger coverage, the insurer is required to offer a response. Any doubt is settled in the insured’s favor.
Additionally, insurers must abide by California’s Fair Claims Settlement Practices Rules. Within fifteen days, confirm the claim. After obtaining proof of claim, you have forty days to accept or reject coverage. If the inquiry takes longer, written updates will be provided every 30 days. A bad faith claim pursuant to Insurance Code Section 790.03(h) may be supported by a violation of these deadlines.
According to Brandt vs. Superior Court, which is still applicable in first-party bad faith proceedings, the policyholder may be entitled to legal costs if an insurer manages the ROR procedure in bad faith. Although their use in outside-party failure-to-settle situations is more restricted, Brandt fees are generally accepted when your own insurer refuses to pay benefits due to you.
Don’t put it in a closet. To “clear things,” do not contact the adjuster. Additionally, don’t assume the defense lawyer chosen by the insurance is completely on your side.
Read your real policy and the letter together. Examine the insurer’s cited coverage positions against the exact wording of the policy. Insurance companies occasionally mention clauses in ways that exaggerate their scope or claim exclusions that don’t relate to the circumstances.
Next, get independent legal advice. Not the lawyer the insurance company designated to defend you (they have conflicting allegiances). The validity of the insurer’s views, your eligibility for Cumis representation at the insurer’s expense, and the insurer’s compliance with California’s claims handling requirements can all be assessed by an impartial lawyer.
Write a response. If you think any coverage positions are incorrect, dispute them. From now on, keep a record of every interaction.
The defense obligation begins when a possibly covered claim is tendered and continues until the underlying case is resolved or it is established that there is no possibility of coverage. The responsibility is only terminated prospectively rather than retroactively when it is shown that no claim is actually covered after it has arisen.
However, the insurer doesn’t have a responsibility to defend in an action where none of the claims are even theoretically covered, since it does not even conceivably embrace any provoking harm of the stated sort within the insurance policy term produced by an included incident.
The language of the policy implies this freedom. It is based on the reality that the insured hasn’t paid premiums to the insurer for this kind of defense. It is a contractual obligation to defend. For claims that aren’t even possibly covered, the insurer has not agreed to cover defense expenses.
When the question of whether or not the insurer must defend arises, the insurer has three options on how to proceed:
A conflict of interest typically arises between the insured and the insurer when the insurer releases a ROR letter. An independent attorney may be hired by the insured or business owner, and the insurer is required to cover the attorney’s fees. A conflict arises when the attorney employed by the insurer to defend the litigation controls the result of the insurance coverage.
The insured has a right to request independent counsel when the reservation of rights puts the insurer & the insured in a conflict of interest. When counsel initially hired by the insurer to defend the claim has the ability to influence the result of the coverage issue, there is a conflict. This typically occurs when the conflict-causing issue is one that needs to be resolved in the fundamental action. Additionally, any affirmative relief action pertaining to coverage ought to be stayed until the underlying action is addressed if the conflict-causing issue needs to be resolved.
Not all conflicts of interest require the insurer to pay for independent legal representation for the insured. For instance, the insured is not entitled to independent counsel just because the insurer disputes coverage, nor is the case seeking punitive damages or damages exceeding policy limitations. Civ. Code, section 2860 (b).
Since the rule mandating independent counsel is founded on an attorney’s ethical duty to avoid serving conflicting interests rather than insurance law, the insurer has no obligation to provide it in these circumstances. The conflict of interest has to be substantial, not just hypothetical, and real, not just potential, in order for independent counsel to be necessary.
The scope of the coverage concern in relation to the concerns raised in the underlying lawsuit determines the insured’s entitlement to independent counsel. There can be no conflict of interest necessitating independent counsel in which the reservation of rights is founded on coverage problems unrelated to the matters being contested in the underlying case.
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