The Effect of a Reservation of Rights Letter in Auto Insurance Claims
A Reservation of Rights Letter Alerts You to Potential Liability Insurance Coverage Issues. And Potential Coverage Issues May Make it Difficult to Collect on any Judgment You Receive for Personal Injuries Caused by Another’s Negligence
When investigating and developing a personal injury case based on someone else’s negligence, one of the first things you should do is try to determine if there was any policy of insurance in effect at the time of the incident that may pay for losses arising out of the incident. This includes bodily injury liability insurance, medical expense coverage (“Med Pay”), uninsured motorist insurance, and excess liability coverage.
Finding available insurance coverage is just the first step. You also need to make sure there are no coverage disputes between the defendant (“the insured”) and the defendant’s liability insurance company. If there are, you may have difficulty using the policy of insurance to collect a judgment.
One way to know if there are potential coverage issues is to ask the insurance company if it has issued a Reservation of Rights letter to its insured. Though the insurance company is required to notify you if it has, mistakes happen. That is why I recommend asking the insurer informally or through the use of discovery tools such as interrogatory questions.
The purpose of this article is to discuss what a Reservation of Rights letter means for your tort claim. This type of letter is common in personal injury actions arising out of automobile accidents and defective products. And it is a red flag that you may have difficulty collecting a judgment, even if you prove the defendant’s negligence caused your injuries.
If you have any questions after reading this article and want to speak with a top-ranked car accident lawyer, call me: (804) 251-1620 or (757) 810-5614.
An Insurer’s Options When It Disputes that the Liability Insurance Policy Covers the Losses Claimed
Here is how liability insurance is supposed to work.
A person or business purchases a policy of insurance from an insurance company. Upon purchase, that business or entity becomes a policyholder.
When a claim is made against the policyholder, the policyholder notifies the insurance company. The insurance company has two options: (1) pay the claim or (2) defend the policyholder against the claim.
This process is simple and easy to understand when there is no question that the claim is covered under the policy of liability insurance. But what if there is a legitimate question about whether a claim is covered? What does an insurer do?
An insurer that disputes that the policy of insurance covers the losses and damages you claim has three options:
First, it can accept coverage of the claim and provide a legal defense to the policyholder, which may include hiring and paying an insurance defense law firm to handle the claim. If the insurer takes these steps, then it may be barred from abandoning the claim if it later determines the claim is not covered under the terms of the liability policy.
Second, it can deny the claim is covered and refuse to defend the policyholder.
This is risky for several reasons. If the insurer chooses this option, it loses control of the defense of the claim which may result in a larger judgment. It also puts itself at risk of a court later determining the loss is covered and that the insurer acted in “bad faith.” This could result in the insurer having to pay its policyholder a significant amount of money for refusing coverage.
The third option is the one that insurers often choose – sending a Reservation of Rights letter.
What is a Reservation of Rights Letter?
A Reservation of Rights letter is a document from the liability insurance company to the policyholder stating that it will defend the claim but, depending on what happens and what the investigation uncovers, some losses might not be covered by the active insurance policy.
In other words, the insurance company will provide legal defense and pay for litigation costs but, if a judgment is entered against the defendant at trial, the insurer reserves the right to refuse to pay the judgment. This means the defendant may have to satisfy some or all of the judgment from its own assets, which may be difficult if not impossible to do.
Defending the claim does not create or extend insurance coverage in effect at the time of the accident giving rise to the claim, so long as the insurer gives notice of its reservation of rights.
An insurer does not need the insured policyholder’s consent to send a Reservation of Rights.
What are Some of the Reasons an Insurer May Issue a Reservation of Rights?
Insurers do not issue Reservation of Rights letters in every case.
Usually they do so when they have received some information or conducted a preliminary investigation that reveals the insurance policy may not cover a particular claim.
There are several reasons an insurance company may issue a Reservation of Rights letter, including the following:
- Some of the allegations in the Complaint do not fall within the scope of the insurance policy’s coverage.
- Some of the causes of action are not covered by the policy. For example, the policy may cover losses resulting form the policyholder’s negligence but not their intentional acts. If your pleadings, specifically the Complaint, allege that the policyholder was both negligent and acted intentionally, the liability insurance may not cover all the losses.
- The claim seeks punitive damages, which are not covered under the policy.
- The claim seeks damages in excess of the policy agreement, in which case the insurer is not responsible for the payment of those excess losses.
- A policy exclusion in the insurance contract may apply.
- The policyholder breached its contract. For example, the policyholder may not have given timely notice or cooperated with the insurance carrier in the defense of the claim. I’ve seen Reservation of Rights letter issued when the insured could not get in contact with the policyholder to get their side of the story.
- The liability policy has been exhausted by the number of claims or the aggregate amount of payments made during the period when the incident giving rise to the claim occurred.
Usually, the Reservation of Rights letter lists multiple reasons the insurer could deny coverage, resulting in a scared policyholder who is now worried about having to use other assets to pay a judgment or filing for bankruptcy to avoid payment.
What Does a Reservation of Rights Letter Say?
The insurer must give the policyholder written notice that it may not cover a particular claim. This way the policyholder can take actions it thinks are necessary to defend the claim and protect their assets, which may include hiring separate legal counsel.
At a minimum, the Reservation of Rights letter should state:
- The relevant policy language that applies to your claim for damages
- Every potential defense to coverage
- Every policy exclusion, coverage provision, and general condition that may bar coverage
- That the insurer reserves the right to abandon the claim and disclaim coverage based upon further factual investigation and that it will conduct the investigation promptly
- The allegations in the Complaint that support the denial of coverage
- Which claims are covered by the policy of insurance and which are not
- That the policyholder may seek independent counsel in the underlying suit
- The insurer’s position regarding coverage of the claims in question
Failure to raise a defense to coverage in the Reservation of Rights letter may bar the insurer from raising the defense later in the claim.
Does the Insurer Have to Tell Me – the Injured Person – That It Issued a Reservation of Rights Letter to the Defendant?
Yes.
Virginia Code Section 38.2-2226 protects third-party claimants who may use the policy of liability insurance to recover losses resulting from the policyholder’s negligence. If you have filed a lawsuit against a negligent driver or business, you are considered a third-party claimant.
Under this statute, the liability insurer has a duty to notify you that it may rely on a breach of the terms and conditions of the insurance contract by the policyholder to deny coverage.
The liability insurer also has a duty to notify you when the policyholder executes a Non Waiver of Rights Agreement or when the insurer sends a Reservation of Rights letter.
The insurer must notify you of potential coverage issues to “prevent, without difficulty, a claimant’s wasting of finances and time pursuing a judgment that later proves to be uncollectible.”
When Does the Insurer Have to Tell Me There are Potential Coverage Issues?
The insurer must send two notices to you or your attorney.
First, the insurance company must notify you or your attorney that it has discovered a breach of the terms or conditions of the insurance policy by the insured within forty-five days after discovery by the insurer of the breach or of your claim, whichever is later.
Discovery occurs when (i) the insurer becomes aware of facts that indication a violation of the policy and (ii) the insurer has an opportunity to evaluate those facts to determine if the breach occurred.
Second, if the insurance company and the policyholder have signed a Non Waiver of Rights Agreement, or a Reservation of Rights letter is sent by the insurer to the policyholder, the insurer must notify you or your attorney within forty-five days after the agreement is executed or the letter is sent, whichever is later. This notice must be in writing.
Notwithstanding these two notices, the insurer must also give written notice of its reservation of rights to you or your attorney not less than thirty days before the date set for trial of your negligence claim.
What Happens if the Insurance Company Doesn’t Notify Me of Coverage Problems Within the Time Allowed by Statute?
The insurer’s failure to give notice within the deadlines set forth in Code Section 38.2-2226 will result in waiver of the defense of no coverage.
This is a good thing for injured plaintiffs.
Does a Reservation of Rights Letter Mean My Insurance Claim Isn’t Covered?
No.
Often an insurance company cannot determine whether a claim is covered under the policy of liability insurance until it investigates the facts giving rise to your injury. And a thorough investigation takes time.
The Reservation of Rights letter gives the insurer more time to investigate the claim. It may complete its investigation and determine that it must cover the claim.
Does a Reservation of Rights Letter Affect the Value of My Motor Vehicle Accident Claim?
Maybe.
The Reservation of Rights letter is a signal that you may have difficulty collecting on any judgment you receive at trial, which affects the potential settlement value of your personal injury case.
It is important that you investigate and analyze the strength of the insurer’s allegations that it does not have to cover the claim. If you determine that the insurer has a good argument as to why it should not provide coverage to its policyholder and there is a high probability that it will succeed with its argument, I recommend conducting an asset search to determine if the policyholder has the financial ability to pay a judgment on its own if the insurer does not have to cover the loss. If it doesn’t, you may need to adjust your expectations.
Problems Finding Insurance Coverage to Pay Your Losses Caused by Another’s Negligence? Call Me
If you were hurt by another driver’s negligence or a company’s decision to needlessly endanger you, but have been told there is no liability insurance coverage and a Reservation of Rights letter was issued, call me for a free consultation.
I help accident victims find insurance coverage to pay for their losses. And I want to help you.
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