Malpractice Insurance and the Dreaded Reservation of Rights Letter

I suspect having to deal with an allegation of malpractice isn’t something anyone would put on a list of “things I look forward to” for all kinds of reasons, not the least of which is the emotional roller coaster so many experience throughout the life of a claim. Of course, once the claims reporting process is complete, there is that initial comfort that comes from knowing someone is about to step in and defend you — unless and until this happens: You find a reservation of rights letter from your insurer in the morning mail and things change in an instant.

It’s this change in an instant response to receiving a reservation of rights letter that I’d like to address because I believe the common negative, and sometimes even angry, response so many seem to have is wasted energy more often than it needs to be. In order to explain why I say this, I have asked and answered a few questions that should help.

What is a reservation of rights letter?

Reservation of rights letters allow insurers to acknowledge a reported claim without confirming the particular act, error, or omission will be covered because all the facts are not yet known. Even though counsel may be appointed to start defending a claim, the insurer often needs to reserve its right to either discontinue the defense or not pay the claim until the insurer knows all of the relevant facts from which a coverage determination can be made. In short, the purpose of this letter is to both acknowledge a reported claim and spell out pertinent terms and conditions contained in the insurance policy. So, for example, if a complainant is seeking punitive damages as part of their claim and your policy doesn’t provide coverage for punitive damages, your insurer will issue a reservation of rights letter on the issue of coverage for punitive damages.

Why do insurance companies issue them?

Because insurers are obligated to issue them; and by doing so, the insurer is actually providing a benefit to you, the insured recipient. Think about it. As an insured, which of the following would you prefer? Having your insurer promptly identify and provide notice of any potential coverage issues up front or having it take six to twelve months before your insurer shares only a few short hours before formal mediation is set to begin that they have finally been able to conclusively determine that no coverage is available for your claim. The better choice seems obvious to me because the more you know, the more you will be able meaningfully participate in the claims resolution process. In other words, knowledge is power.

Do insurance companies issue them for every claim?

While the issuance of these letters might appear to be a standard practice for some insurers, particularly those in the legal professional liability insurance sector, the truth is a number of claims are resolved without a reservation of rights letter ever being issued. And here’s the good news. On those claims where a reservation of rights letter has been issued, it’s not uncommon to find that coverage is eventually confirmed, which means the insurer will continue to provide a defense and ultimately pay any indemnity payment if one is called for.

What should you do if you get a reservation of rights letter?

If for no other reason than to be prepared for an adverse coverage determination, talk with your malpractice insurer’s claims department contact as soon as possible in order to make sure you understand the consequences of any coverage issues that might arise down the road. If the claims department and your firm do not agree on the interpretation of coverage, it may be a good idea to hire an attorney that specializes in malpractice insurance cases to intercede on your behalf.