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“The life of the law has not been logic; it has been experience.”

-Oliver Wendell Holmes, Jr.

Denial of Coverage and Reservation of Rights Letters Pose a Trap for Unwary Counsel


Counsel for insurance companies are frequently called upon to offer advice about or to actually draft a letter to an insured either denying coverage or providing a defense while reserving the carrier’s rights regarding coverage. This usually happens when it is not clear if the claim made against the insured is covered under the terms of the insurance policy.

Defending a claim with reservations

The accepted practice has been for an insurer to provide the policyholder with a defense while it continues to investigate the coverage issue. The proper reservation of rights by the insurer permits it to later deny coverage, if the facts revealed by the investigation ultimately warrant it, and be reimbursed by the policyholder for defense or the for amounts paid out in settlement of a claim.

The importance of researching and adhering to state laws

When drafting a letter containing a reservation of rights or one in which an insurer denies coverage of a claim and informs a policyholder of a denial of the company’s duty to defend or to indemnify, it is important for coverage counsel to research the laws of the particular state. Each state has its own laws or insurance regulations that dictate the specifics of what must be included in such letters sent on behalf of insurers. Counsel who fails to include the correct language or information called for by a particular state could cause an insurer to lose the right to recover its costs in the event it is later determined that coverage was not available under the policy.

For example, in a recent case from the Ninth Circuit Court of Appeals, Dowson v. Scottsdale Insurance Co. 2016 U.S. App. LEXIS 5400 (9th Cir. 2016), the Court found Scottsdale’s denial letters, denying a duty to defend and to indemnify the insured, were not adequate because the letters merely quoted various provisions of the policy and referenced exclusions within the policy restricting the scope of coverage. According to the court, the letters did not, as required under Montana laws, explain how the policy provisions and exclusions were applicable to the facts of the particular lawsuit filed against the insured.

As a result of the improperly drafted denial letters sent on behalf of Scottsdale, the insurance company was held liable for all of the defense and settlement costs incurred in the underling lawsuit. Adding to the insurer’s losses was a provision of Montana law imposing upon an insurer the payment of a policyholder’s attorney’s fees for breaching its duty to defend.

This case should stand as an important reminder for insurance adjusters or for coverage counsel called upon to draft denial and reservation of rights letters to review and faithfully follow state laws. Otherwise, the insurer could be compelled to defend and to indemnify the insured for any settlement or judgment award.

Learn more about reservation and denial letters

If you would like more information about insurance coverage and insurance, please contact Kelly E. Purkey at McKenna Storer.

Categories Insurance Litigation Defense

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