Included on my “50 Item Reservation of Rights Checklist” are the following two items:  the insurer’s right to withdraw its defense if it is later determined that no defense is owed and the insurer’s right to file a coverage action to resolve the extent of any obligations.  Then I say to webinar attendees: is it mandatory to include these rights?  Will the insurer, I ask, not be able to assert these rights if it does not include these provisions in the ROR letter? 

My response is always the same – I don’t know.  I have never seen any case law addressing the issue.  However, I then go on to state that these provisions should be included because, as I explain, the test of an effective ROR letter is not what it includes, but, rather, what it does not include.  In other words, policyholders challenge ROR letters based on what they allegedly lack – and that can be absolutely anything that a policyholder maintains should have been in the letter and was not.  Then the court must decide if the absent provision was required.  If so, so the policyholder argument goes, the ROR letter is ineffective, and, hence, the insurer has waived the right not reserved.

Well, I can no longer say that I have never seen any case law addressing this issue. 

U.S. Underwriters Ins. Co. v. Kenfa Madison, LLC, No. 20-2761 (E.D.N.Y. Mar. 30, 2023) involved an insurer that undertook its insured’s defense for a construction site bodily injury claim.  While the insurer defended, it also sent a letter to the insured stating that no coverage was owed for any loss.  The basis was an exclusion that amended/expanded the employer’s liability exclusion to include an employee of any contractor or subcontractor.  [If you do CGL work you’ve seen these endorsements that have appeared in some commercial general liability policies over the past decade or so.]

After undertaking its insured’s defense, U.S. Underwriters filed an action seeking a determination that it had no duty to defend its insured and had the right to withdraw its defense.

The insured said whoa, not so fast.  It argued that U.S. Underwriters could not proceed this way.  But the court was not convinced, stating: “Kenfa [the insured] argues ‘[n]owhere in the letter did [U.S. Underwriters] state that it could withdraw this defense coverage,’ and that ‘no reasonable fact trader (sic) would conclude that U.S. Underwriters’ disclaimer was a reservation of rights with regard to its defense.’  But the September 20 disclaimer plainly stated, ‘the policy does not cover this matter,’ ‘[w]e reserve the right to file a declaratory judgment action to have a court determination made to confirm our coverage position,’ and, importantly, that it ‘reserve[d] all of our rights under the policy.’  This language put Kenfa on notice that U.S. Underwriters did reserve the right to withdraw its coverage. Kenfa has also not pointed to language in either disclaimer representing that U.S. Underwriters would provide a defense through the conclusion of the Underlying Action.”

As I read the court’s rationale, for the insurer being able to proceed as it did, it leaves little doubt as to the importance of including, in a reservation of rights letter, the insurer’s right to withdraw the defense if it is later determined that no defense is owed and the insurer’s right to file a coverage action to have its obligations determined.  Both of these were relevant to the insurer’s ability to file the coverage action and seek to withdraw its defense.   

Further, while the court concluded that the letter’s catch-all reservation of rights language – reserving “all of our rights under the policy” -- was sufficient to preserve the insurer’s right to seek to withdraw its defense, my suggestion is to specifically assert a reservation of rights to withdraw the defense.  A catch-all reservation of rights may be effective, but it is certainly better to be specific and not need to argue the scope of the catch-all.

As an aside, the insurer’s motion for summary judgment on the applicability of the employer’s liability exclusion was denied; but thanks to its reservation of rights, at least it was in the game.