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Vol. 7 - Issue 9
December 19, 2018


New Decision Shows Yet Another Possibly “Ineffective ROR” Issue

The Need For Multiple ROR Letters


Readers of Coverage Opinions know that I have been on a mission, of sorts – going back at least 6 years -- addressing the need for insurers to draft reservation of rights letters that “fairly inform” the insured of the reasons why the insurer, despite that it is providing a defense to the insured, may not in fact be obligated to provide coverage for certain claims or damages in a suit.  In other words, an ROR that cites some facts, and then quotes some policy provisions, and then says, viola, we reserve our rights, is at risk for being found to be ineffective.  Translation - the insurer has waived its defenses. 
Several decisions, from state appellate courts over the past few years, have found ROR letters to be ineffective for this reason.  And there are plenty of cases before these.  And this trend continued with the just-adopted ALI Liability Insurance Restatement, which includes this fairly inform standard in its ROR requirements section.

But there is another potential insurer-misstep when it comes to ROR letters.  And it is one that I see insurers fall afoul of not infrequently.  Moreover, it is a risk that exists even if the ROR does a great job satisfying the “fairly inform” standard.  An ROR may be ineffective if it is not sent to all insureds being defended under an ROR.  Think of the situation where a company, the named insured, is sued along with several employees.  The insurer undertakes the defense of the company and employees.  However, the ROR is only sent to the company and not the employees too.  In this situation, and analogous ones, court decisions have held that there is no ROR in place for the employees. 

For example, the Pennsylvania Superior Court held in Erie Insurance Exchange v. Lobenthal (2015) that a reservation of rights letter was never provided to an adult-defendant, who was a resident in her parents’ home, because the letter -- that was intended to be a reservation of rights -- was addressed to her parents.  The court held: “[W]e refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time.  Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter.  Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”  The fact that the ROR was sent to Michaela’s lawyer also did not save it.  Thus, despite that the insurer should have owed no coverage to the insured, on account of an exclusion, such was not to be the case, as no reservation of rights letter was ever sent to her. 

In reaching its decision, the Pennsylvania appeals court relied, in part, on Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678 (6th Cir. 1993), a decision that concluded that there was no reservation of rights in place for an employee, because the letter was not sent to him, despite the fact that it was sent to his employer. 

On October 23, 2018, in Starr Indem. & Liab. Co. v. Verticals, LLC, No. 16-2832 (M.D. Tenn. Oct. 23, 2018), the Tennessee federal court, for various reasons, declined to find that a reservation of rights letter was ineffective for failing to meet the “fairly inform” standard – although it made clear that that was the required test.  The court also declined to conclude that sufficient notice of the ROR was not provided.  However, in doing so, the court, with a citation to, and description of, Knox-Tenn Rental Co. v. Home Ins. Co., was clear that the “notice of an ROR to all insureds standard” applies.   

This can be an administratively complex issue – sending 3 or 4 or 5 ROR letters for a claim.  Thankfully my clients are used to this issue and we’ve worked out some ways to address it.  But can it be an administrative challenge?  Yes.  It’s just the nature of the ROR beast.  But to do all the work to satisfy the “fairly inform” standard, and then have the ROR be ineffective because it was not sent to all insureds, is an unfortunate situation.


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