Episode 39. Coverage Position Letters

Coverage Position Letters (CPLs) are supposed to be straightforward and informative letters about why a claim may not be covered.  

But Bob has noticed that these letters are often overbroad, throwing in everything but the kitchen sink. Actually, a lot of them probably throw that in too, because that leaky sink is not part of the damage they agreed to cover.

This week, Bob addresses how insurers can balance clarity in CPLs while still covering their bases on potential defenses. 

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Transcript

In this episode of Coverage Counsel is in we're talking about coverage position

letters, the good old CPL. How could something that's supposed to be so

straightforward become so complex? Well that's what we're about to discover.

In its simplest form the coverage position letter is a denial letter.

It's a denial that says the insurance company rejects coverage and is not going to

cover the claim, whether it be a first -party claim or a third -party claim.

Sometimes the denial letter is also called the disclaimer letter. The disclaimer

letter has the same fact.

In some places though, denial letters and disclaimer letters are distinct.

The denial letter generally being a presuit letter issued by an insurer to an

insured or a claimant, advising that at that stage in the claim the insurer does

not consider the insured to be liable and that a presuit payment will not be

contemplated. In contrast in those jurisdictions the disclaimer letter advises the

insured that there is no coverage for the claim. So both of them have the same

function but some people use the word denial to mean the letter to the claimant and

disclaimer to mean the letter to the insured. Either way,

both are saying there's no coverage for the claim. Then you have the coverage

position letter that's known as a reservation of rights and that letter usually

explains that there are some coverage issues out there that Depending on how the

case develops or what facts come to light, certain aspects of the claim,

perhaps even the entirety of the claim, may not be covered for one reason or

another. A fourth category of coverage position letter is called the non -waver letter

or non -waver agreement. That's something that has to be signed by the insured.

Even though the non -waver agreement is archaic at this point,

some jurisdictions still require it. So that's an opportunity for the insurer to get

the insured's consent to the Reservation of Rights. Most other jurisdictions however

allow a unilateral reservation of rights. The unilateral reservation of rights letter

is makes more sense in the context of why these letters are important.

Their importance traditionally lies in protecting the insurer against a claim of

waiver or a stop of coverage defenses. Once there was a time where an insurer

accepted the defense of a lawsuit and then decided that parts,

some or all of it, were not covered, the insurers would argue that the insurer had

waived those coverage defenses because it had acted inconsistently and they had

reasonably relied on this action as a representation,

and as you know the elements of a stop -all are a representation upon which somebody

reasonably relies to their detriment. Then the idea of a stop -all is that the

insurer can no longer raise those coverage defenses having lulled the insured into a

false sense of security.

Older cases refer to the insurer as having waived its coverage defenses,

but the more modern trend is to say that the insurance company does not waive its

defenses

by failing to issue a reservation of rights letter, but rather the insurer has to

be shown to have intentionally relinquished a known right. I believe it's conceptually

more accurate to say that the reservation of rights letter or the non -waver

agreement are intended to prevent an unstoppable argument than they are to avoid a

waiver because it's too hard to show an intentional relinquishment of a known right.

There are instances where insurers in their claims handling memoranda will say

something like we know we have this defense but we're not going to raise it at

this time. that could be viewed as an intentional relinquishment of a known right

but that has nothing to do with the reservation of rights letter or non -waver

agreement itself.

That having been said in federal court the the district court will sometimes say

that a coverage issue that is not raised and preserved in a reservation of rights

letter is waived because the policyholder has relied on what was said in the

reservation of rights letter. So it's the reservation of rights letter that actually

creates the basis for a waiver and prevents the insurer from asserting any coverage

defenses that are not included in the reservation of rights letter. The reservation

of rights letter should be straightforward. Its purpose is to simply advise the

insured of coverage issues that may result in a denial of coverage depending on how

the case develops. Considering that the purpose of the Reservation of Rights letter

is to inform the insured, that's just what it should be. Informative,

but I see many that are not informative at all. Let me talk about two examples.

One is the coverage position letter /reservation rights that has a cover letter with

an addendum that lists every part of the policy. Just all the exclusions,

all the definitions, all the conditions doesn't explain how they may apply within the

context of the case, but in the cover letter reserves the right to assert those

defenses. To me, that doesn't inform the insured of anything.

It's basically a recapitulation of portions of the policy and is not informative.

The addenda are usually multiple pages long and don't give any more information than

the insured could have just by reading the policy itself. I know a lot of insurers

use those kinds of formats and I think that insurers that do that are at risk of

being deemed to have waived a claim by waived a defense by not explaining the

defense. Just listing a bunch of policy terms is not a reservation of an issue or

identification of an issue or informing the insured of an issue, it's just saying

here's language from the insurance policy. So I think those are dangerous,

but I know many insurers and some large insurers use them and use them a lot.

The second type of reservation of rights letter that I want to talk about is

similar to what I just described, the boilerplate letter with an appendix of policy

language.

The second type just does away with the appendix and incorporates it all into the

letter so that you have a big long letter that just says some of these policy

provisions may apply to preclude coverage and then they quote the policy. That to me

has the same risks as the other iteration. In my opinion,

a proper reservation of rights letter is limited to the issues that the insurer sees

at the time the reservation of rights letter is issued and explains what facts are

triggering the concern. In these types of letters not all provisions of the policy

are listed. Only those that are potentially implicated are listed and there is a

brief explanation.

Let me give you an example. Let's say it's a construction defect case where there's

a question of whether some of the damage constitutes property damage.

The way a proper reservation of rights letter should read, in my opinion, is that

the insurer quotes the definition of property damage says that the claims that the

claimant is making have to fall within the definition of property damage and then

explaining that some of the things that the claimant is asking for perhaps something

like repair of the use of substandard materials or completion of unworkmanlike

construction do not qualify as property damage. Those are not physical injury to

tangible property. They're just poor workmanship. That of course depends on the

substantive law of your jurisdiction, but in many where construction defect claims can

constitute an occurrence, claims of substandard workmanship or the use of defective

materials without more doesn't qualify as physical injury to tangible property.

This needs to be explained to the insured in my opinion and it also helps later on

if there's coverage litigation where the insurer then is able to lay out and say,

"We told the insured this part of the claim was not covered for this reason and

you're not going to have a waiver or a stopo problem."

Sometimes people push back on me and say, "Well, they're afraid of losing out on

being able to later raise a coverage defense if it's not put in the CPL.

And I think that that's an unfounded concern in most places,

especially because you can issue supplemental reservation of rights letters.

So moving along down through the course of litigation if the or identifies a new

coverage issue that wasn't previously discussed or listed in the Reservational Rights

Letter, it's easy to send out a new Reservational Rights Letter, supplementing the

previous one and explaining what the new issues are. That way the insured is fully

informed, the insurer is as protected as can be at the time and

both sides are communicating with each other a

Question that often arises is who should send the letter? I have some insurance

company Clients who want me to sign the letter And I've done so I have other

insurance company clients who want the letter to be signed by one of their

personnel. It can be the front line claims adjuster, the claims manager, or somebody

else. That's a decision that the insurer needs to make. But here are a couple of

guidelines.

In any coverage or bed faith litigation, the person who signs the coverage position

letter is likely to be a witness. Therefore, if coverage counsel signs the coverage

position letter, she's likely to end up as a witness in the case,

even though there won't be much useful testimony. The kinds of deposition questions

that are often asked of coverage counsel who sends out a CPL revolve around what

information was available at the time the letter was written. Often that is subject

to attorney -client privilege, so it becomes complex when Coverage Council sign the

letter. By the same token, if the Coverage Council ghostrates the letter and the

claims person merely signs it, Well, the claims person is going to have to be fully

brought up to speed on all the facts and theories that underlie the letter when she

gets deposed in any subsequent litigation. So have the attorney do it,

but no, the attorney is not going to be able to represent the insurer in any

subsequent litigation because of a potential conflict, or have somebody at the

insurance company sign it expecting that that person will have to be made fully

conversant with the issues and the facts of the cases they existed at the time of

the letter should their deposition need to be taken. The corollary question to who

should send the letter is who should get the letter. Generally,

this is a fairly simple thing. If the tender has come from an attorney for the

insured, then respond to the attorney. If the insured has tendered,

respond to the insured. And sometimes you respond to both, carbon copying one or the

other. So that's not a very difficult question. There can be other scenarios whether

you want to include the broker, whether you want to include the claimant.

Sometimes these are strategic decisions, sometimes these are decisions based on the

law of the jurisdiction, but it's a question that should be asked and answered

before the letter is released.

The next question is when the CPL should be sent. California as an example requires

the insurance company to respond to a notice of claim within 45 days and then to

respond to inquiries from the insured every 30 days. And while these are guidelines

set forth in the California regulations, and I'm sure other states have similar

regulations, the idea is while meeting the letter of the law,

so to speak, with those, you need to communicate with the insured as often as is

necessary. So let's not try to just meet the timing guidelines under the code or

under the regulations, but let's try to communicate to keep the insured fully

informed and send out supplemental letters as necessary as soon as practicable,

meaning as soon as developments in the case warrant.

I have standard language that I use in my coverage position letters that informs the

insured that as the case develops additional facts and theories may arise

that implicate other coverage issues or that cast the coverage issues discussed in

the letter in a new or different light and reserving the right to supplement the

letter for those other coverage issues. If you include that kind of language then

you need to act on it and keep the insured advised of those developments and that

way you have fewer disagreements with the insured,

and it actually becomes easier toward the end of the case because you've told the

insured what you're going to do, why you're going to do it, and maybe had a

conversation with them about it so that you can avoid supplemental coverage litigation

and even bad faith litigation. Finally, in the interest of insurer policy holder

relations, it's a good idea to state in the coverage position letter that you're

dealing with allegations that have been made by the plaintiff or by the claimant,

that you do not accept them as true or is proven,

but that for purposes of a coverage analysis you have to deem them to be true.

So while you as the insurance company are defending against those allegations,

you may defeat them and they may never be proven, but for current purposes in the

coverage position letter, if they turn out to be true, this is the effect that they

could have.

So in summary, you want to know what kind of coverage position letter you were

writing. Is it the denial issued to the claimant? Is it the disclaimer issued to

the insured? Is it a reservation of rights letter or do you have to do a non

-waver letter signed by the insured? That will all depend on the law of the

jurisdiction where you are and the status of the claim or suit.

Which means you're going to want to know the rules of the jurisdiction that you're

in for dealing with these things.

Then you want to decide intentionally who should send the letter. Your lawyer,

your claims handler, your manager, because that person may well end up being a

witness later on. Make sure you send the letter to the right person.

The insured and their attorney are usually the right person maybe the maybe others

are appropriate to put on the letter but that has to be thought through at the

time.

Next tip is to make sure that you explain the how the policy language and issues

arising under that language or other issues, maybe under the insurance code,

are impacted by the facts that are alleged so that the insured understands why there

is a coverage issue.

Try not to use boilerplate language throughout the letter that is not informative and

that is over inclusive and under explanatory.

those allegations is true because that's what the law requires in evaluating a

coverage position, but make clear to the insured that you're not admitting those for

purposes of liability and that you expect to fully defend the insured.

And finally, be timely in your communications. Don't wait too long,

keep the insured informed, and supplement the letter as necessary.

Well, I hope this is helpful to you about coverage position letters, and until next

week, this is Bob Salander for Coverage Counsel was in, signing off.