If you have a renters insurance claim and you receive a reservation of rights letter from your insurer, what does that really mean to you? What impact could it have to coverage under your Albany, NY Renters Insurance policy?
What Is A Reservation Of Rights Letter From An NY Renters Insurance Company?
When an NY renters insurance company sends a reservation of rights letter to you, they’re doing two things. One is a prerequisite for the other. The letter is designed to inform you that the claim may not be covered under your policy, but that as of the date of the letter no decision has yet been made.
By notifying you of those facts, the insurer is making sure they can later deny the claim if necessary under the language of the policy. If they didn’t notify you, they might have trouble denying the claim down the road when the necessary information to make a determination is available.
A reservation of rights letter may include a wide variety of potential reasons for claim denial. Listing those reasons allows the insurer to use them later, since they’ve informed you. The letter is necessary to make sure the insurer can exercise their rights later on if necessary.
A reservation of rights letter is not a denial of coverage, a denial of defense coverage, or anything of the sort. You are well advised to consider what might be necessary to pay for your own defense against the claim if it becomes necessary to do so, of course, but nothing is being denied. It’s simply an informational communication letting you know that there is not yet enough information to determine whether or not your claim is covered.
Why Would An Insurer Send A Reservation Of Rights Letter?
Jonathan A. Judd, a partner with Hawkins Rosenfeld, Ritzert, & Varriale, LLP, published an excellent article discussing reservation of rights letters from a defense standpoint. The article offers significant clarity on when such a letter may be necessary.
Examples of common situations where insurers may issue RORs include the following:
1.) Some of the allegations of the complaint do not fall within the scope of the policy’s coverage,
2.) There is an applicable policy exclusion,
3.) Some of the damages are not covered by the policy,
4.) The damages alleged exceed the policy limits,
5.) The coverage has been exhausted under an aggregate limit of liability, and
6.) The policyholder breached a condition of the policy.
What does all of that really mean to you as the policyholder when you get a letter like this?
Renters insurance policies don’t cover every possible situation where liability may arise. If parts of the complaint in the suit against you allege things that the policy would not cover such as an intentional act or the expected or intended results of your actions, there may not be coverage for part of all of the claim.
If an exclusion in the policy applies to the situation, you would not have coverage for defense or to indemnify you against the claim itself. Generally an NY renters insurance policy will exclude coverage for damages arising from the use, manufacture, or storage of controlled substances. If the claim is for a fire that started because of a drug lab on your premises, you can expect a reservation of rights letter as well as a quick denial of the claim altogether.
If some of the damages are not covered by the policy, you may find yourself with partial coverage or with no coverage. A reservation of rights letter for this reason might be appropriate if your teenager hit a baseball through the neighbor’s window (negligence, of an insured, resulting in property damage, that was not expected or intended – that’s probably covered) but then got in a fight with the neighbor and hit him when the neighbor tried to make him pay for the damages (not negligence, expected or intended injury, unlikely to be covered unless the teenager is under the age of 13).
If the damages are more than the policy limits, a reservation of rights letter might be telling you that you have defense coverage and indemnification up to the point where the limits of the policy are exhausted, but you’re on your own after that. From the other perspective, however, some claims of this type are settled for the policy limits because the aggrieved party knows that the insured has no money to pay the remainder of the claim, and they’d rather take what they can get.
If your policy contains an “aggregate” limit of liability, that means the policy will under no circumstances pay more than a total limit, no matter how many claims are paid at or below the policy limit to reach that number.
One of the more common reasons for a reservation of rights letter is that the policyholder breached a condition of the policy. You have certain duties under your Albany, NY Renters Insurance policy. Those duties are set out in the policy form. They include things such as mitigating damages to the extent possible, prompt reporting of the claim, and alerting the company to changes in risk such as getting a new dog of certain breeds. If you don’t follow through on those duties, your claim may not be paid.
Does Receiving A Reservation Of Rights Letter Mean Coverage Is Invalidated?
Not based on the letter. A reservation of rights letter is exactly that – reserving rights for the future. At the beginning of a claim, facts are often murky. The insurance company may have every intention of paying your claim as they believe the facts to be, but if those facts are proven during the lawsuit to be different that could change.
The insurer might believe there are other witnesses or people with relevant information about the claim to whom they have not spoken. The company has a limited amount of time to pay the claim, deny the claim, or proceed after a reservation of rights letter to let you know they’ve chosen neither option just yet.
The letter is not a denial of coverage – that would be a separate letter citing specific sections of the policy as the reason for the denial. The letter is intended so that you know there may not be coverage available under the policy. That allows you to make decisions and plan for the possibility of the policy not covering you rather than being blindsided by a later denial.
Reservation of rights letters are not uncommon, but neither are they common. If you get one, don’t panic. Plan accordingly, but the policy may still offer coverage. According to Judd, the letter means the insurer can defend against the claim, before they it is decided whether the insurance company is required to pay for the damages. Often, this will mean the insurer pays for your defense until coverage is determined.
The specific facts and circumstances of your claim and the suit will, of course, vary. Your counsel as offered by the insurer may be able to advise further. In addition, you may also have a right to hire a lawyer of your choosing. In New York, even though the insurer pays for the attorney, you are the client. It is to you that the attorney owes ethical duties, including confidentiality.
The letter you receive should clearly and concisely set out the parts of the policy the insurer is depending on to potentially deny coverage, which parts of your claim they believe may be covered and which parts may not, the insurer’s intentions as to cover or not cover the claim based on current available information, as well as significant additional information required by statute.