Handling insurance claims

How to protect your rights when dealing with your insurance company  

By Mark Bajalia, Esq.

As a business owner, you will very likely need to make a claim under one of your insurance policies at some point. If you do, you may receive a “reservation of rights” letter from your insurer.

A reservation of rights letter often leaves insured parties confused and unsure about how to respond; however, you will find information about what a reservation of rights letter is and the various options and opportunities it presents for an insured party follows.

What it is

A reservation of rights letter does not necessarily mean the claim is not covered under the insurance policy. It does mean that the insurer thinks it may have grounds to deny coverage for some part of the claim or the entire claim. For example: Most policies have what is called an “intentional acts” exclusion. If it appears that the damages or injuries were the result of an intentional act on the part of the insured party, then the insurer may send a reservation of rights letter indicating that, under the terms of the policy, it may have grounds to deny coverage.

In some cases there may be claims that are covered and claims that are not and the insurer may send a reservation of rights letter indicating that it is providing coverage for only a portion of the claim.

Why they are sent

Insurers send reservations of rights letters to keep their options open. If the insurer does not reserve its rights and provides a defense to the claim, but later discovers that circumstances exist that trigger an exclusion or otherwise call into question coverage under the policy, then the insurer will be stopped from raising a coverage defense.

Under those circumstances, courts could, and have, said that the acts of the insurer in providing a defense without reserving its rights constitutes a waiver of its right to deny coverage. Thus, rather than deny coverage outright, the insurer will send a reservation of rights letter and keep its options open.

Essentially, the insurer is letting the insured party know there is going to be an investigation but is preserving its right to deny coverage if the investigation shows that it is not a covered loss.

What are your options?

You have several options when you receive a reservation of rights letter:

•Ignore it: The insurer may be correct in reserving its rights as to part of the claim.

•Dispute the reservation: As the insured party, if you disagree with the reservation of rights and your insurer’s interpretation of the policy language, you should go “on record” that you dispute the reservation and set forth the reasons that you dispute it.

You should also send it to the claims representative by certified mail and request a response. This will cause the insurer to reassess its position and even if the insurer’s position does not change, you have created a paper trail, which may be useful if the coverage dispute ends up in court.

•Ask for more information: Some insurers will intentionally keep the reservation of rights letter vague to keep their options open. An insured party should counter by asking for specifics as to the purported basis for the coverage issue and the rationale for it.

•Start the clock: Once an insurer reserves its rights, it must eventually declare whether or not it is going to provide coverage for the loss. If the insurer continues to investigate the claim but never conclusively disclaims or accepts coverage within a reasonable time frame, then the insurer may be stopped from doing so. Keep following up with the insurer and periodically ask the insurer to state its position.

•Explore new opportunities: If an insurer reserves its rights, you may have the right to hire your own lawyer to defend the claim, not one picked by the insurer. The insurer will nevertheless be required to pay for your lawyer of choice.

Courts have said that when an insurer hires a lawyer for the insured party, it creates an inherent conflict of interest, which may allow the insured to retain its own counsel. Thus, when confronted with a reservation of rights, it may create an opportunity for the insured party that didn’t previously exist.

•Seek a declaratory judgment: Despite the reservation of rights, if you or your attorney feels that coverage for the loss does exist, then you can seek to have a court review the policy language and the facts as presented and make a determination as to whether coverage exists.

In essence, you are asking the court to “declare” what the policy language means and whether coverage exists. This forces the insurer to address the coverage issues before proceeding on the merits of the underlying lawsuit or claim. The prospect of spending more on legal fees to defend itself in a declaratory judgment action may also encourage the insurer to go ahead and provide coverage and defend the claim.

If you feel strongly that the insurer is reserving its rights on false grounds, you may want to sue the insurer for breach of contract and bad faith claims handling as well. Ultimately you need to understand your rights and protect your rights when you receive a reservation of rights. When in doubt, consult an attorney with experience dealing with insurance matters.

Mark Bajalia is a partner and a managing member in Brennan, Manna & Diamond’s Jacksonville office. He is an experienced commercial, business and insurance litigator, having prosecuted and defended numerous cases in state and federal courts and in arbitration. He is rated AV Preeminent by Martindale Hubble, has been recognized as one of Florida’s Legal Elite by “Florida Trend” Magazine and has been selected as a Florida Super Lawyer in the field of business and insurance litigation.

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