Insurance Claims And Reservation Of Rights Letters: What Must You Do To Protect Yourself?

My most recent blogs have discussed bankruptcy topics that worry people looking into filing under either Chapter 7 or Chapter 13. I also have extensive experience with insurance policies, both in providing legal representation to people under the terms of their insurance policies, and also to people who have had to sue their own insurance companies for coverage. I have had considerable success in both types of litigation. In the process of both defending insureds faced with suits brought against them and in pursuing the rights of insureds who have not gotten fair treatment by their own insurance carriers, I have come across many issues that confuse the average policy holder.

One significant issue for a policy holder is the meaning of a “reservation of rights letter” received from their insurance company in regard to a claim. Basically, you purchase home and automobile insurance expecting that if you are ever sued or have a claim made against you for damages, your insurance company will represent you and pay on the claim, if warranted.   For example, if you accidently rear end another car, you expect that your insurance company will negotiate with the other driver and pay the claim. If the matter ultimately goes to a law suit, you expect under the terms of your automobile insurance policy that your insurer will supply you at no charge with an attorney to represent you.   And, in most instances, the claim works itself out in just that way.

Another example arises when you have a claim for coverage due to some property damage that you believe is covered under your own policy, such as a tree falling and crushing a portion of your house. You expect your homeowners policy to pay for removal of the tree and the repairs needed to return your house to its previous condition.

There are instances, however, where the insurance company decides that maybe it doesn’t owe you coverage on the claim, or possibly even a legal defense. In those instances, the insurance company will send you what’s called a “reservation of rights” letter. Usually, this letter looks like a generic form letter. However, what it means is that the insurance company is noticing you that it has a right to deny you coverage at a later date based upon the terms of your policy. It is letting you know that just because the insurance carrier is investigating the claim, it has not yet decided whether it will cover it. Obviously, you will be upset and likely puzzled when you receive such a letter. WHAT DO YOU NEED TO DO TO PROTECT YOURSELF?

In any case, a reservation of rights letter should not be taken lightly. At the very least, you should contact your insurance company immediately when you receive a reservation of rights letter. The insurance company will likely tell you not to worry, that they are sending it just to protect themselves so they don’t give up any rights they have to deny your claim based upon how the facts may be revealed in the future. The important fact here is that they are looking towards protecting themselves against your claim, not in protecting your interests as the insured. These letters are not sent to every insured who presents a claim under their policy — your insurance company is signaling you that they are seriously considering not covering you on the claim.

In the car accident example above, the insurance company might have some information that you intentionally hit the other car because you lost your temper with the other driver. Your insurance policy generally will not cover you for damages you cause intentionally. In the second example, they may be contemplating that their investigation will show that the tree that fell on your roof had been dead for years, you knew it was rotten, but you took no action to remove it. Again, if you had knowledge of the peril and could have taken action to prevent the loss that occurred, you may have violated the terms of your policy. The reservation of rights letter may give the company’s interpretation of the law and why they are contemplating not covering the claim. Please understand that you do not have to accept their interpretation and denial of the claim.

What you should do is consult with an attorney of your choosing who routinely handles insurance claims, such as a personal injury attorney. Usually, such an attorney will review the facts of your case and advise you for a minimal fee. If the insurance company has already assigned its own attorney to represent you (such as the in a lawsuit against you by a third party claimant/injured party), you will want to talk to him/her, but even that attorney should advise you to consult with your own attorney. Even though the attorney provided by the company is bound to represent your best interests rather than the company’s in regard to defending against the claimant, that attorney cannot aggressively defend you against the denial of coverage by your own insurance company. Your personal attorney will probably just stay in the wings and not incur many billable hours so long as the issue of the company denying the claim is pending, and not actively participate until an actual denial is made. Unfortunately, you will likely be responsible for paying your personal attorney’s fees.

The insurance company is basing its reservation of rights letter on the specific terms of its policy with you regarding what property is covered, what kinds of perils are insured against and the exclusions enumerated in the policy. Since the insurance company is responsible for writing the policy, any ambiguity in the way these coverages and exclusions come together in terms of your loss should be resolved in your favor rather than in favor of the insurance company. However, in a dispute with your insurer, it is ultimately the court who will decide if the provisions of the policy, read as a whole, are actually ambiguous.

If you’ve ever tried to read through your homeowners or auto policy, you know that they are not easy to understand. They are clearly intentionally drafted that way. The provisions typically bounce back and forth between what’s covered and what’s excluded. Frankly, you need to have someone with experience in dealing with insurance policies carefully review your specific policy to determine whether the circumstances of the claim with which you’re concerned appears to fall within coverage despite the insurance company’s analysis that it does not.

And you should do this shortly after receiving the reservation of rights letter. It is far better to have your own attorney in the background as the claim is being investigated rather than bringing him in later on when coverage is formally denied. If your attorney is in contact with you or with your insurance-appointed attorney as the investigation and discovery unfolds in the claim, he/she will be in a far more favorable position to protect your interests if that becomes necessary.

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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