Reserving Coverage Rights does NOT Equal "Bad Claim Service"!

"Quinley" is an Irish name and my descendants doubtlessly hailed from Hibernia. My Irish acted up as I scanned the results of a recent Greenwich Associates study on claim service. Perhaps I was the only reader doing a double-take recently, reading the Business Insurance article of 12/10/07, “Claims Service Quality Varies Widely: Study.” On one level, this would seem to be a dog-bites-man story. The fact that there is variation amongst claim service quality by carrier is no more surprising than, say, underwriting expertise varies by company or investment management savvy, etc. Tell me something I don’t know. This is akin to headlines reading,

"Gravity Causes Objects to Fall to the Ground"
"Stocks Vary on Return and Yields"
"Britney Enters Rehab Again"

Thank you for delivering this hard-hitting news!!

But that is not what got my Irish up.

The article quotes an anonymous construction risk manager as pointing to one piece of evidence for lamentable claim quality the fact that commercial insurers “are quick to issue reservation of rights letters on some claims.”

Say what? The innuendo here is that such letters are invariably groundless, a claim which is unsupported at best and ridiculous at worst. Sending a reservation of rights letter is not tantamount to poor claim service. In many complex construction losses, legit coverage issues abound. Insurers are justified in notifying policyholders regarding the existence of coverage questions. Courts stand ready to “nail” insurers on waiver and estoppel if they do not meticulously reserve rights. Further, many states have exacting time guidelines within which insurers must reserve rights, lest they be estopped. If they fail to reserve promptly, they may be forced to cover gray area – or even uncovered – claims. Ultimately, the costs of such claims are passed on to the insured.

Sending a reservation of rights letter is no more bad claim service than submitting a gray area claim makes one a “bad” policyholder. Doubtlessly there are instances of specious reservation of rights letters. There is also no doubt instances of farfetched coverage tenders by insureds who are “fishing” for coverage that they knew they never really had or paid for. There are doubtlessly instances of sloppy brokering which leave risk managers exposed to perils which they thought were insured.

The reflexive notion that reserving coverage rights quickly signals “bad claim service” strikes me as ridiculous. It does underscore, however, that insurers could do a better job in making sure that such letters do not rub policyholders the wrong way. For example, claim reps could give the insureds an advance heads-up by phone call to discuss and explain what they were doing and why. They could do the same with the broker. They could emphasize the time requirements they have which force them to reserve rights in the face of incomplete information. They could make the letters’ tone more conversational and less legalistic. These are ways to soften but not emasculate the import of reservation of rights letters.

If foregoing the exploration of potentially valid coverage defenses is the price of good claim service, I submit that price is too high. Claim reps should look at other ways to “sell” the reservation of rights so that insureds will not reflexively assume it represents an effort to evade coverage.