Tag: Reservation of Rights Letter

Settling Insurance Claims: Good Faith or Bad Faith?

Insurance companies have a general duty of good faith when settling the claims of their policyholder. This duty of good faith can come from statute, common law, or both. For example, in addition to having a common law duty of good faith, insurance companies in Florida have a statutory duty to act fairly and honestly toward their insureds. Insurance companies that fail to act in good faith may end up in court defending a claim for bad faith.

Contrary to what many believe, it’s not bad faith for an insurance company to deny a claim that is not covered under a policy or to defend a claim subject to a reservation of rights. So what does it mean to act in good faith? According to one court, the duty of good faith requires insurance companies to investigate the facts, give fair consideration to settlement offers that are not unreasonable, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.

Those damaged by an insurance company’s failure to act in good faith may be able to sue the insurance company for bad faith. Bad faith claims can be first-party or third-party.

A first-party bad faith claim occurs when an insurance company is sued by its insured for refusing to settle the insured’s own claim in good faith. First-party claims typically involve allegations that the insurer improperly denied coverage, underpaid a loss or delayed payment without adequate justification. A common example of a first-party bad faith claim is when an insured is involved in an accident with an uninsured motorist and does not reach a settlement with his or her own uninsured motorist liability carrier for costs associated with the accident.

A third-party bad faith claim arises when an insured is exposed to liability in excess of insurance coverage because the insurer failed in good faith to settle a third party’s claim against the insured within policy limits. Third-party bad faith claims often arise in situations where there is clear liability on the part of the insured, severe injury to the third party, and minimal policy limits available.

Assume, for example, an insured with $100,000 of automobile liability coverage runs a red light and injures a pedestrian. Despite the pedestrian’s significant injuries and the insured’s clear fault, the insurance company rejects the pedestrian’s reasonable $90,000 settlement offer. The pedestrian goes to court and is awarded $200,000 in damages. By failing to act in good faith and settle the case within the $100,000 policy limit, the insured is liable for the excess judgment amount of $100,000.

In this example, the insured could file a third-party bad faith claim against its insurance company. The injured pedestrian may also be able to sue the insurance company, either directly if permitted by applicable law, or through an assignment of the insured’s rights. Note that in some jurisdictions insurance companies are entitled to notice before a lawsuit can be filed. In Florida, for example, those wanting to file a bad faith claim must give the insurance company 60-days’ notice before filing a lawsuit.

The claims settlement process can be long, complicated and stressful, even when the insurance company is handling the process in good faith. Since bad faith claims, particularly those involving third parties, can be very complex, it helps to have a reputable and experienced insurance agent to guide you through the claims process.

If you have any questions or would like to discuss your insurance options, please contact us.

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Why Did I Get a Reservation of Rights Letter?

Upon receiving notice of a claim, an insurance company must determine whether it is covered by a policy. If a claim is clearly covered, the insurance company will begin the process of defending or indemnifying the insured. Alternatively, claims that are clearly not covered will be denied. A Reservation of Rights letter is used when the insurance company isn’t sure whether a claim is covered.

Assume a customer files a lawsuit after being injured by a falling box. If the box fell because it was carelessly placed on a high shelf, a general liability policy would likely cover the claim. Coverage would be unlikely, however, if the box was intentionally dropped on the customer.

Though it may take months to find out what happened, the insurance company may only have days to take action. Rather than risk denying a covered claim, the insurance company can send the insured a Reservation of Rights letter, which gives the insurance company time to investigate the claim, and defend it, if necessary, without waiving its right to deny all or part of a claim at a later time if the facts ultimately establish a lack of coverage.

A Reservation of Rights letter also puts the insured on notice that all or part of a claim may not be covered. According to the California Supreme Court, by providing a Reservation of Rights letter, “the insurer gives the insured notice of how it will, or at least may, proceed and thereby provides it an opportunity to take any steps that it may deem reasonable or necessary in response–including whether to accept defense at the insurer’s hands and under the insurer’s control or, instead, to defend itself as it chooses.”

Reservation of Rights letters are used when the facts or the policy language may justify denying coverage for a claim. For example, insurance companies may use a Reservation of Rights letter when:

  • An exclusion in the policy does or may apply
  • The allegations in a lawsuit may be beyond the scope of coverage under a policy
  • Some or all of the damages are not covered by the policy
  • The insured may have failed to satisfy their obligations under the policy

A Reservation of Rights letter will typically:

  • Identify the specific policy covered by the letter
  • Summarize relevant facts
  • Quote relevant policy language
  • Identify and explain coverage and policy defenses

Though a Reservation of Rights letter does not necessarily mean that a claim will be denied, it must still be taken seriously. Depending on the nature of the claim and the potential exposure, professional guidance may be necessary when responding to a Reservation of Rights letter. An experienced and reputable insurance agent can help identify concerns, evaluate options and prepare a response.

If you have any questions or would like to speak with one of our Risk Management Professionals, please contact us.

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