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By Hernán Cipriotti and Darren Thompson 
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Upon notification of a loss, and in order to avoid waiving its rights to rely on a defense to a claim for indemnity under the policy, the insurer may issue a reservation of rights. In the context of liability insurance, an ROR generally allows an insurer to comply with its duty to defend without admitting coverage for the underlying claim. In first-party property claims, a timely ROR may allow an insurer to complete the investigation and adjustment without conceding coverage or waiving defenses.

While RORs are customary in some jurisdictions, they are infrequently used in others, or not even a concept in some. As the (re)insurance markets continue to expand to every corner of the world and the industry has become more globalized, (re)insurers must be aware of the intricacies of each jurisdiction and how business practices in one region of the world may translate into another. This article explores some of these differences by looking at the legal status, effect and best practices for RORs in three different regions: the United States, England and Wales, and Latin America.

U.S. Jurisdictions

All U.S. states regulate the handling of insurance claims. For example, most states require an insurer to acknowledge a claim notification, make a coverage determination or request an extension from an insured within a specific amount of time.[1] Failure to comply with these requirements may result in penalties against the insurer. ROR letters enable insurers to comply with statutory requirements, communicate with insureds and investigate the underlying claim, without the risk of waiving defenses under the policy. In this context, “waiver” refers to the abandonment or relinquishment of a right as a result of either (i) the voluntary relinquishment of a known right, such as a coverage defense; or (ii) by the creation of an estoppel, which arises where an insurer acts in a manner inconsistent with a lack of coverage, and the insured reasonably relies on those actions to its prejudice.[2]

The effectiveness of an ROR letter will in part depend on the requirements of each state with respect to the letter’s timeliness and content. While the standard regarding the timing of an ROR letter varies from state to state, as a general rule an insurer should send it as soon as it becomes aware of a potential coverage or policy defense. Some states have fixed deadlines (30 days mostly) and others use the “reasonable time” standard.[3] Failure to meet these requirements can result in penalties, waiver or being estopped from asserting defenses.[4]

The information that must be provided in an ROR letter also varies from state to state. At the most basic level, the letter must fairly inform the insured of the status of the claim and the insurer’s position. All RORs must identify the policy and claim numbers, the insurance carrier and clearly express that it is a “full” reservation of rights. An insurer should also reserve its right to amend or supplement the ROR letter based upon factual or claim developments.

While some states allow the letters to be general, others add certain qualifications or require them to be specific.[5] In California, an insurer must disclose all the benefits, coverages and relevant provisions that may apply to the claim.[6] The insurer, however, does not automatically waive any coverage defenses it fails to assert at the time of its reservation of rights.[7] Courts require a high standard of proof before finding waiver or estoppel. A ROR makes it harder for an insured to argue that its insurer has waived its rights, because there is a written communication expressing the contrary. For example, in Nutmeg Insurance Co. v. Clear Lake City Water Authority, decided under Texas law, an insured argued that an ROR letter was inadequate and the insurer had waived or should be estopped from asserting that there was no coverage under the policy. The court disagreed: “[w]hile the letter could have been more specific, [the insured] has failed to provide any law demonstrating that there are specific requirements for a valid reservation of rights letter.”[8] Lastly, some states have statutory language that must be included in the letter.[9]

The U.S. belt and braces approach to reservation of rights letters has influenced the global insurance industry. Often, it is perceived as an aggressive step that can damage relations with policyholders. Optics and context are key, brokers have a critical role as an intermediary. Reserving rights should, where possible, not come as a surprise.

England and Wales

Similar to the U.S., the purpose of the ROR in England & Wales is to make clear that the insurer’s statements or actions do not waive rights to assert certain defenses.

When to use an ROR

The ROR should be issued before the insurer gives the insured an unequivocal communication that the insurer has waived its rights to rely on a particular defense.

English courts generally discourage issuance of an ROR as a knee-jerk reaction upon notification of a claim. The courts are keen not to allow the insured to claim waiver on the basis of a routine communication.[10] While the early stages of investigating a claim probably do not amount to waiver, extended delay may give rise to a court treating an insurer as having waived its rights.

Form of ROR

When issuing an ROR in England & Wales, there is no need to be expansive. The insurer need only set out from the outset that “it reserves all its rights” and should refer to this in subsequent correspondence. Should the insurer give reasons, the general principle is “less is more.” Where rights are reserved in respect of one contention made by the claimant, but not in relation to another matter known to the insurer, then this may amount to a tacit representation that the insurer will continue not to reserve its rights in relation to that second matter, which may result in an unintentional waiver.[11] While a general reservation may be appropriate at first, specific issues should be highlighted by further reservations as soon as these can be identified (out of caution, the general reservation should also be maintained). If coverage rights are mentioned, then the insurers should also mention any applicable avoidance rights; these are treated as distinct. Care should be taken when contemplating avoidance defenses while simultaneously asserting policy defenses.

Latin America

Because the legal concept of waiver is fundamentally different in civil law jurisdictions, RORs simply do not exist in most Latin American jurisdictions. The term ROR does not have a specific meaning or effect in those countries, and receipt of an ROR by an insured from foreign insurers may be puzzling.

Generally, insurers’ rights are protected as a matter of law and there is no need to produce an additional ROR. For example, in Mexico insurers do not waive their rights to deny coverage by adjusting and investigating the circumstances of the loss.[12]

With respect to reinsurers, the position is less straightforward. The answer may depend on the law applicable to the reinsurance contracts, which varies by jurisdiction: (i) insurance law based on the theory that a reinsurance contract is an insurance of the direct insurer; or (ii) general commercial or civil law if the nature of reinsurance is considered different from a direct insurance policy.

If a reinsurance contract is governed by insurance regulations, reinsurers’ rights are typically protected as a matter of law in the same manner as insurers’ rights are. However, where a reinsurance contract is regulated by commercial or civil statutes, some reinsurers’ rights might not be protected and it might be necessary to reserve rights. It is generally prudent for reinsurers to confirm the protection of their rights in regards to specific insurance practices, such as the appointment of adjusters.

Insurance statutes in several countries in Latin America set out specific deadlines to avoid or deny coverage under an insurance policy. For example, Mexican law gives insurers 30 days to terminate the insurance contract for nondisclosure or misrepresentation.[13] If (re)insurers fail to void the policy within this period of time, they may be waiving their right to do so.

Conclusion

A reservation of rights letter can be a very effective tool to facilitate the fair investigation and settlement of claims. It can also provoke an unintended response from policyholders, ranging from lawsuits to the withdrawal of cooperation in an adjustment. But the purpose of an ROR is simply to prevent insurers from inadvertently waiving rights. Preserving rights and understanding waiver in a given jurisdiction is key. Waiver rules determine the legal parameters, and in many civil law jurisdictions, the necessity of an ROR. Within this framework, using an ROR to begin or continue discussions with the policyholder about a claim adjustment is a judgment call for (re)insurers.

—By Hernán N. Cipriotti and Darren O. Thompson, Zelle LLP

Hernán Cipriotti is an associate and Darren Thompson is a solicitor in Zelle's London office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g. N.Y. Comp. Codes R. & Regs. tit. 11, §§ 216.4(b), 216.6(c).

[2] Burt Rigid Box, Inc. v. Travelers Prop. Cas. Corp., 302 F.3d 83, 95 (2d Cir. 2002).

[3] See, e.g. Tex. Ins. Code § 541.060.

[4] See e.g, Aetna Commercial Ins. Co. v. Am. Sign Co., 687 So. 2d 834 (Fla. Dist. Ct. App. 1996) (CGL insurer waived right to rely upon intentional acts exclusion); Stone & Webster Eng'g Corp. v. Am. Motorist Ins. Co., 458 F. Supp. 792 (E.D. Va. 1978) (insurer waived or was estopped from asserting ground of noncoverage.)

[5] Central Armature Works, Inc. v. American Motorists Ins. Co., 520 F.Supp. 283, 288 n. 4 (D.D.C.1980) (reservation of rights language should indicate specific coverage defenses.)

[6] Cal. Code Regs. tit. 10, § 2695.4.

[7] Garamendi v. Golden Eagle Ins. Co., 116 Cal. App. 4th 694, 721 (2004).

[8] Nutmeg Ins. Co. v. Clear Lake City Water Auth., 229 F. Supp. 2d 668, 696 (S.D. Tex. 2002).

[9] See N.H. Code Admin. R. Ins. § 1002.05.

[10] See Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147.

[11] Vitol SA v Esso Australia Ltd [1989] 2 Lloyd's Rep. 451.

[12] Mexican Insurance Contract Act, Article 19.

[13] Mexican Insurance Contract Act, Article 48.