The lawyers of the Insurance Commando Blog are frequently asked to write, or help write, reservation of rights letters. Recently, a federal judge in Missouri listed 10 requirements for reservation of rights letters. Western Ins. Co. v. Love. This case inspired us to tailor these requirements to the states where our clients often defend under a reservation of rights: Alaska, Idaho, Montana, Oregon, Utah, and Washington. Our suggestions follow.
1. List All Policies
Correctly identifying all relevant policies should include verifying if the insured has excess or umbrella policies. This is particularly important in construction defect or environmental litigation, which may entail multiple policy periods at different layers.
2. Get the Policy Language Right
Quote the relevant policy language either within the body of the letter or at an appendix.
3. Get the Facts Right
If an insurer is sued for bad faith, it must demonstrate it read the complaint and thoughtfully analyzed why the complaint’s allegations may not be covered. Therefore, a well drafted reservation of rights letter should accurately summarize the allegations against the insured. This summary should strike a balance between saying nothing more than the insured has been sued, and providing a stenographic regurgitation of all (whether relevant or not) allegations.
4. Tell the Insured What’s Going On and About Independent Defense Counsel (If Required)
Inform the insured that the insurer is hiring a lawyer to defend the insured against the allegations. The letter should identify who the defense attorney will be and provide this lawyer’s contact information. The appointed defense lawyer should be provided with a copy of the letter.
Depending on the state, an insurer may also need to advise the insured of its right to independent defense counsel. Independent counsel refers to defense counsel the insured chooses, but the insurer pays, because of a perceived conflict of interest between the insured and defense counsel the insurer hires. These independent defense lawyers are frequently referred to as Cumis counsel. This refers to the now famous (or infamous) 1984 California case, which established the insured’s right to choose additional defense lawyers independent of the insurer. San Diego Navy Federal Credit Union v. Cumis Ins. Soc., Inc.
The states listed above vary in their approaches to Cumis counsel. Washington does not require them. Its courts decided conflicts of interest are eliminated if defense counsel follow the rules laid out in a 1986 Washington Supreme Court case, Tank v. State Farm. Johnson v. Continental Cas. Co. The Montana Supreme Court, similar to Washington’s, held counsel defending under a reservation of rights does not represent the insurer. In Re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures. But as far as we can tell, the Montana Supreme Court has never mentioned or discussed Cumis counsel. Idaho and Oregon apparently either do not require Cumis counsel, or its courts have not squarely addressed the issue. In 1978, the 8th Circuit Court of Appeals predicted Utah courts would hold that a conflict of interest exists between appointed defense counsel and the insured. U.S. Fid. and Guar. Co. v. Louis A. Roser Co., Inc. Saying a conflict exists is often the first step towards requiring Cumis counsel. But as far as we can tell, no Utah state court has stated if the 8th Circuit guessed correctly. At the other end of the spectrum, Alaska seems to require Cumis counsel in most reservation of rights cases. CHI of Alaska, Inc. v. Employers Reinsurance Corp.
5. Conflicts?
Tell the insured about actual or potential conflicts of interest. Like the right to independent defense counsel, advising the insured about conflicts depends on which state’s laws apply. For example, Washington (uncharacteristically) makes it comparatively easy for insurers in this regard. Any conflicts of interest retained defense counsel may have are eliminated by the defense attorney following the rules set out in the Washington Supreme Court case of Tank v. State Farm. Johnson v. Continental Cas. Co. The most important of these rules is that the insured is defense counsel’s only client.
6. Tell the Insured Why the Insurer Is Reserving Its Right Not to Pay
This is the most important requirement. It is also the one whose violation lands insurers in the most hot water.
The reservation of rights letter should explain what will happen if the allegations are proven. For example, if the complaint alleges the insured contractor performed its work poorly, tell the insured its liability may be excluded by ongoing or completed operations exclusions. If the complaint alleges economic damages, tell the insured these may not be covered because they do not allege the insured is liable for “bodily injury,” “property damage,” or “personal and advertising injury.” If the insured has been sued for beating or shooting someone, say these allegations may not be covered because they may not be accidents, and they may also be excluded as intentional conduct. Again, an insurer must be prepared to prove that it thought carefully about how its policy applied to the alleged facts and summarized its analysis for the insured.
7. Reserve the Right to Say Goodbye
It is rare for insurers to safely withdraw from defending under a reservation of rights. But a carefully written reservation of rights letter should nonetheless state that the insurer reserves its right to withdraw from defending the insured.
8. There May Be More
Reserve the right to assert other defenses to coverage, and tell the insured additional reasons not stated in the letter may exist for why the allegations may not be covered. This language should also help defeat arguments that an insurer may have given up coverage defenses (“waiver or estoppel” in lawyer speak).
9. Use the Words “Reservation of Rights”
Make sure the magic three words appear somewhere in the letter, preferably at the beginning.
Conclusion
Not to be kill-joys, but of course, as lawyers, we remind you that the requirements of an actual reservation of rights letter depend upon the facts and the relevant state’s rules. But we hope this will provide you with a starting point and some useful tips on drafting reservation of rights letters. You know where to find us if you need additional help.
