The Journal of Insurance and Indemnity Law, State Bar of Michigan, Volume 16 Number 3, July 2023.
By Rabih Hamawi, CPCU®, CIC, CRM, LIC, MSF
Copyright © 2024 Rabih Hamawi
Whether you are the plaintiff or the defendant in a tort case, you can count on being on the receiving end of a reservation of rights (“ROR”) letter in some cases and a denial of coverage letter in others.¹ Each of these letters has the magical effect of making adversaries into allies, as both the defendant and the plaintiff seek to confirm coverage. Although the reasons for these new-found allies are different, their goal is essentially the same.
The Reservation of Rights Letter
The ROR is the insured’s first indication that an insurance-coverage problem may exist. The purpose of the ROR letter is to inform the insured that the insurer is defending the underlying action but is reserving its rights to contest coverage later. The insurer must advise the insured that potentially some of the asserted claims in the underlying action may not be covered under the policy. The insurer must also suggest that the insured consult personally retained counsel regarding uninsured claims.
There are a few hard-and-fast rules that apply to ROR letters. Generally, a ROR letter must be timely, and preferably as soon as the insurer learns that the underlying claim may not be covered.² “[W]hen an insurance company undertakes the defense of its insured, it has a duty to give reasonable notice to the insured that it is proceeding under a reservation of rights, or the insurance company will be estopped from denying its liability.”³
Still, the timeliness requirement is somewhat loose. In one case, the insurer sent a letter within two weeks after receipt of a claim stating that it was investigating the claim; then it sent follow-up letters two weeks after the initial ROR letter; 21 months later; and then 16 months after that. The Michigan Supreme Court found the ROR letters to be adequate.⁴
Another case holds that a ROR letter sent one month after receipt of the suit was timely.⁵ It is noteworthy, however, that the Michigan Supreme Court applied a“prejudice” standard where one of the additional grounds for reserving rights was not asserted initially.
“We hold that Allstate is not estopped from raising the motor vehicle exclusion because Allstate did not delay unreasonably in asserting the exclusion and the defendant has suffered no prejudice from the short delay.”⁶
The natural question then becomes “how long is too long?” Well, to give you a lawyer’s answer: it depends.
In one instance, the Michigan Court of Appeals answered, stating that “We feel that four months is, as a matter of law not an unreasonable length of time.”⁷ In another instance, the Michigan Court of Appeals held that a two-year delay between the initiation of the underlying action and a ROR letter was too long.⁸
In addition to the timeliness requirement, the content of the letter is also important. The Michigan Supreme Court has held that a generic boilerplate reservation of right was insufficient, where it merely repeated a formula with no substantive content.
[T]he Company in undertaking your defense, does so under a reservation of rights, and without prejudice, and subject to the conditions, limitations, exclusions and agreements of said policy, and subject to the express understanding that by so doing the Company does not waive any of its rights to rely upon the provisions of said policy, and does not waive any defense it may have to any claimed liability under said policy.⁹
The Court declared that the ROR was “legally insufficient,” because it was “vague and uncertain.”¹⁰ In focusing on the insurer’s lack of full disclosure and the lack of specific reference to the basis of the ROR, the Court found that the “insurer’s notice failed the [reasonableness] test because it left [the insured] in the dark as to the nature of the policy defense or defenses the insurer had in mind.”¹¹
On the other hand, where the insurer enumerated the reasons for reserving its rights by explaining that it appeared that the claimant was not a resident of the policyholder’s household and that the injury was not the result of an “accident,” the ROR was found acceptable.¹²
The principle that underlies these requirements is a basic one that an insurer owes an “implied covenant of good faith and fair dealing which arises from the contract between the insurer and the insured.”¹³ There is no relationship at all between the defendant’s insurer and the tort claimant, so the insurer has no duty to advise the tort claimant of its position on coverage.¹⁴
Further, generally, an insurer which undertakes the defense of an insured while having actual or constructive knowledge of facts which would allow avoidance of liability will be deemed to have waived its right to avoid coverage unless reasonable notice is served to the insured of the possible disclaimer of liability.¹⁵ Alternatively, an insurer can satisfy the requirement that it advise the insured of the grounds for denying coverage by filing a declaratory action.¹⁶
The Denial Letter
When the insurer takes the stronger position and refuses to defend at all, the stakes are higher. Two things follow from an outright denial of coverage. First, the insured is free to make his or her best deal, and if the settlement is “reasonable,” the insurer is bound by it. One result of the insured’s freedom to make a reasonable settlement is that the insurer cannot deny coverage and then later claim that an insured who has reached a settlement has violated the obligation to cooperate with the insurer.
“[A]n insurer breaches its own policy of insurance by refusing its duty to defend the insured [and] is bound by any reasonable settlement entered into in good faith between the insured and the third party.”¹⁷ The fact that the settlement includes a covenant to collect only from the insurance policy and not from the defendant does not invalidate the settlement.¹⁸ It also follows that the insurer cannot deny coverage on the ground that the insured has violated the policy requirement that it cooperate with the insured. “An insured is released from any agreement not to settle without the insurer’s consent where the insurer has denied liability and wrongfully refused to defend.”¹⁹
The second principle that applies when the insurer declines coverage is that the insured is bound by the reasons it gives; but this principle is less strong than it appears. Generally, once an insurance company has denied coverage to an insured and stated its defenses, the insurance company has waived or is estopped from raising new defenses.²⁰
But the application of waiver and estoppel is limited, and, usually, the doctrines will not be applied to broaden the coverage of a policy to protect the insured against risks that were not included in the policy or that were expressly excluded from the policy.²¹ This is because an insurance company should not be required to pay for a loss for which it has charged no premium.²
Obviously, this rule starts out strong but quickly loses much of its force. It is clear that when the insurer comes up with a new reason after the insured has suffered a judgment, it is too late.²³ But apart from a judgment being entered against the insured, which seems to be a per se rule, adding new reasons to deny coverage will require more strenuous argument, with focus on the prejudicial effect of the declination on the insurer’s defense.
Endnotes
1. This article addresses reservation of rights and denial letters whenissued in response to a liability claim. Although the general principlesare the same, they don’t discuss additional concerns when they are issued in response to a property insurance claim.
2. City of Grosse Pointe Park v Michigan Mun Liab and Prob Pool, 473 Mich 188, 205; 702 NW2d 106 (2005).
3. Kirschner v Process Design Assoc, Inc, 459 Mich 587, 593; 592 NW2d 707 (1999).
4. Id.
5. Allstate Ins v Keillor, 450 Mich 412; 537 NW2d 589 (1995).
6. Id. at 416 note 2.
7. Fire Ins Exchange v Fox, 167 Mich App 710, 714; 423 NW2d 325(1988).
8. Multi-States Transport v Michigan Mutual Ins Co, 154 Mich App 549; 398 NW2d 462 (1986).
9. Meirthew v Last, 376 Mich 33; 135 NW2d 353 (1965).
10. Id. at 38.
11. Id.
12. Allstate Ins Co v Harris et al, unpublished opinion per curiam of the Court of Appeals, issued [April 24, 2001] (Docket No. 215264).
13. Commercial Union Insurance Co v Medical Protective Co, 426 Mich 109, 116; 393 NW2d 479 (1986).
14. Auto Club Group Ins Co v Rush, unpublished per curiam of the Court of Appeals, issued [Jan 24, 2006] (Docket No. 257419).
15. Fire Ins Exchange v Fox, 167 Mich App 710, 713-714; 423 NW2d 325 (1988).
16. Multi-States Transport, Inc v Michigan Mutual Ins Co, 154 Mich App 549, 557; 398 NW2d 462 (1986).
17. Alyas v Gillard, 180 Mich App 154, 160; 446 NW2d 610 (1989). See also Clay v American Continental Ins Co, 209 Mich App 644, 647-650; 531 NW2d 829 (1995).
18. Id.
19. Alyas, supra, 180 Mich App at 161.
20. Michigan Twp Participating Plan v Federal Ins Co, 233 Mich App 422, 435–436; 592 NW2d 760 (1999).
21. Lee v Evergreen Regency Coop & Mgmt Sys, Inc, 151 Mich App 281, 285; 390 NW2d 183 (1986); see also Bartlett Invs Inc v Certain Underwriters at Lloyd’s London, 319 Mich App 54; 899 NW2d 761 (2017).
22. Kirschner v Process Design Assoc, Inc, 459 Mich 587, 593-594; 592 NW2d 707 (1999) (citations deleted).
23. Meirthew v Last, 376 Mich 33; 135 NW2d 353 (1965).
If your insurance company has denied, delayed, or underpaid your insurance claim, contact Law Office of Rabih Hamawi for a case evaluation at (248) 905-1133 or www.hamawilaw.com.
Who is Rabih Hamawi?
Attorney & Counselor
Rabih Hamawi is a principal at the Law Office of Rabih Hamawi, P.C. and focuses his practice on representing policyholders in fire, property damage, and insurance-coverage disputes against insurance companies and in errors-and-omissions cases against insurance agents. He may be reached at (248) 905-1133.