The Reservation of Rights Letter

What to Do If You Receive a Reservation of Rights Letter

A Reservation of Rights letter will be issued if there is a perceived conflict of interest between the insurer and the insured.

Every insurance policy has a list of covered acts or events, as well as excluded acts or events. It used to be difficult to understand insurance policies, but most states have required them to be written in “plain English” for years now.

If you will find and read your homeowners or auto liability policy, it should not be too difficult to see what events the insurance company is intending to defend you against, and which it is not.

To simply matters, most insurance companies use standard forms prepared by the Insurance Services Office.

So, eight common exclusions in your auto liability coverage pertaining to “bodily injury” might be:

• (1) bodily injury or death when you are using your vehicle to carry persons or property (including delivering magazines, newspapers, food, etc.) for compensation or a fee;
• (2) liability assumed under a contract;
• (3) bodily injury or death to an employee;
• (4) bodily injury or death caused by an intentional act;
• (5) damage to property owned by, rented to, or in the charge of an insured person;
• (6) bodily injury or death to you or relative;
• (7) bodily injury or death or property damage resulting from a relatives use of a vehicle, other than a covered vehicle, owned by a person who resides with you;
• (8) bodily injury or property damage resulting from your operation or use of a vehicle owned by you, other than a covered vehicle.

Let’s look at number four and use the following example: you are married, but had a lover, with whom you recently had a public argument.

You go out with friends and drink too much or snort cocaine or both.

On your way home, you happen to run into your ex-lover’s car and wind up killing him/her.

You ex-lover was a surgeon, making $250,000 a year and leaves behind a spouse and three children.

Your limits of liability are $100/$300,000.

You are sued for $10 million by the spouse and children.

The insurance company will investigate the claim and will see fit to write you a reservation of rights letter.

Why?

It is unlikely that it will be because of the use of drugs or alcohol. Most states would declare denial of coverage under those circumstances to be against public policy – in other words the states would not want to see innocent victims of drunk drivers to be unable to collect damages because of the intentional act of driving while drunk or under the influence of drugs.

However other factors would lead to the reservation of rights: first the low liability coverage versus the claimed damages. In other words, this case is going to cost someone more than the $100,000 bodily injury coverage the driver had.

Second, the public animosity between the ex-lovers might lead a jury to conclude that the act was intentional.

In this case, even though the insurance company will probably conclude it has an obligation to defend the lawsuit, it will also conclude that it will either be absolved of providing coverage at all or that at most it will only have to pay the policy limit, leaving the insured to fend for himself as far as the rest of the damages go.

The reservation of rights letter will inform the insured that the insurance company will undertake to defend him, reserving to itself the rights to raise an intentional act as a defense to paying anything at all and that it is also notifying the insured that he’s on his own once the policy limits have been paid.

If you ever receive such a letter, it is probably because your policy limits are too low to cover the claimed damages. But the claimed damages and the real damages are two different things and in many cases, the letter should not be a cause for alarm.

However, if you do receive such a letter you are entitled to hire your own lawyer, paid for by the insurance company. I would strongly urge you to do so.

In the situation described above, the insurance company would probably file a “declaratory judgment” action against the insured seeking a dismissal of its obligations to pay damages or defend the action. If it loses, it will likely tender the policy limits and walk away from the case.

Obviously you would need an experienced attorney to help you in that situation.

But even if the only dispute is over the limits of coverage, it pays to have your own counsel, if for no other reason than to help convince the injured person’s lawyer that it is in his client’s best interests to settle within the policy limits.

Juries can get out of hand even where simple injuries are concerned. The last thing you need is a million dollar judgment against you when you only have $50,000 in coverage.

Take reservation of rights letters seriously and immediately consult with an attorney if you ever receive one. And read and understand your insurance policies before anything goes wrong and buy coverage for any gaps that currently exist in your coverage.

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