When you open your mail, you find a letter from professional liability insurance. You are about to sign off on the letter when you realize that your insurance company has made some allegations about a claim you have recently filed that could potentially affect your coverage. This could indicate that you are not covered for the claim.
It is important to stay calm at all times. Most likely, the letter you received is a Reservation of Rights. Insurance companies sometimes communicate confusion about insurance issues. One area that seems to be in a lot of confusion is the Reservation of Rights letters.
It is important that you understand that every state’s insurance regulatory agency has regulations that require insurance companies to issue Reservation of Rights letters when there are facts or allegations that could lead to a gap in coverage. The regulation obligates the insurance company to give this information, or it could lose certain rights and defenses.
The Reservation of Rights letter outlines the legal rights of both insured and carrier in the event of a potential coverage problem. It doesn’t matter if the claim is a lawsuit. This letter is used to describe the dispute and the coverage of the policy. It also outlines what the parties will need until the claim is settled.
This letter protects both the insurer and the insured. It allows each party to resolve the dispute in their own way while also allowing them to defend the claim jointly from a third-party. The letter gives the designer professional an opportunity to clarify any facts that may have led to the Reservation of Rights. It also gives the designer professional enough time to take steps to avoid any coverage gaps.
Design professionals are most concerned about the part of the Reservation of Rights Letter that the insurance carrier reserves its rights if the allegations of wrongdoing are not clearly proven. No matter the validity of the claims or lawsuits, a Reservation of Rights Letter must be signed. This means that even if the claims against the designer professional are unfounded, a Reservation of Rights Letter will still be required.
A Reservation of Rights letter is sent to a design professional by the carrier. The carrier must accept the allegations in the lawsuit or claim as true and correct, regardless of whether the claims manager suspects or knows otherwise. The position taken in the Reservation of Rights letters should not be understood as an endorsement or denial of the claims. The carrier is only doing what is required by state insurance regulations.
The Insurance company will continue to defend the lawsuit or claim after the Reservation of Rights Letter has addressed the coverage issues. The reservation of rights letter will allow the design professional to hire independent counsel to represent it in relation to the issues.
Many states require that insurance companies pay for separate counsel. It is important to think carefully before taking this type of action. Your professional liability practice policy contains an eroding limit element, and the costs of separate legal representation will be added to your policy limit. Consider the following factors when deciding whether to retain separate counsel: policy limits, claim deductible value, validity of allegations and effect of coverage issues on overall claim handling.
It is important that you remember that the defense attorney assigned by an insurance company represents the interests only of the design professional and not the insurance carrier. Each state has passed legislation that prohibits legal counsel from litigating a claim without coverage. The insurance company cannot give counsel to the claimant, then withdraw from the defense. This counsel must act in the best interest of the designer professional.
Insurance companies generally look for coverage until they are unable to find it in a particular claim scenario. Insurance companies will defend any claim if they find evidence that it could be covered. If you receive a Reservation of Rights email, don’t panic! Usually, an insurance company representative will call the designer professional to discuss the issues before issuing the Reservation of Rights letter. The insured has the right to give additional information and documents in order to clarify the issue and discuss how the claim will be handled. The insurance carrier uses a Reservation of Rights letter to make sure that the design professional is aware of any uninsured exposures.
