Frank, who owns multiple warehouses, decides to save funds by doing his own snow and ice removal.
The morning after a heavy snowfall, a truck driver delivering supplies slips and falls on the ice on the warehouse parking lot.
The truck driver sues Frank.
After a brief panic, Frank remembers he bought an insurance policy for the warehouse and files a claim.
The insurer, while appointing counsel to represent Frank, issues a reservation of rights letter to Frank.
The letter states that, while the insurer will, for the moment, provide a defense, it is acting under a “reservation of rights,” detailing policy provisions that may jeopardize coverage, including an exclusion for snow and ice removal.
What does this mean?
It means that the insurer, if it believes it has no coverage obligations under its policy, will pay for your defense unless and until it obtains a judicial declaration that it owes no obligations under the policy.
By notifying its insured that it believes a claim may not be covered, and paying for the insured’s defense while that issue is determined, the insurer preserves its right to later contest coverage.
This way, the insurer avoids any conclusion by the court that it acted in bad faith against the insured.
A successful reservation of rights letter must, among other things, include citations to and quotations of each specific policy provision justifying any coverage defense, plus an explanation why such provision(s) could result in a denial of coverage.
In Frank’s case, the insurer likely would seek a declaratory judgment from the court that the policy’s snow and ice removal exception means that it has no defense or coverage obligations.
If successful, the insurer will no longer have to pay for Frank’s defense and will not have to pay any damages awarded against Frank. I
f you receive a reservation of rights letter, contact FOS to determine what, if any, policy exceptions or other coverage issues may exist.