Reservation of Rights? . . . Wrong!

Reservation of Rights? . . . Wrong!

When shippers file an insurance claim, they can expect to receive a notice from their insurers, reserving the insurer's rights to defend the policyholder. Invariably these notices are sent by ordinary mail as initial acknowledgement that the insurer has received the claim.

These "reservation of rights" letters are not at all reassuring to policyholders, and are hardly what they expect as an acknowledgement. Sadly, the acknowledgement cites almost every exclusion upon which the insurer might rely in its effort to deny the claim, and is couched in cryptic language.

What these acknowledgements really should say in plain English is that the insurer acknowledges receipt of the claim, and that it forewarns each policyholder that if there is any possible way the insurer can interpret an exclusion as being applicable, it will try diligently to deny coverage.

Despite reassurances from the shipper's insurance broker that such acknowledgements are anticipated, routine and merely sent as a matter of record, we admonish readers to understand these acknowledgements for what they are. They are valid confirmations of the insurer's intention to rely upon exclusions that may or may not be applicable. In the interim period, often months after the claim is presented, the policyholder must notify its own legal counsel that the policyholder's insurer is trying to walk away from its obligation.

We think such letters should be sent only after the insurer completes its investigation. Rarely, if ever, are these Reservation of Rights letters retracted or substantially amended by the insurer, even when their investigation confirms their inapplicability.

This month, for example, an airfreight forwarder presented us with an unusual claim that resulted in a three-page Reservation of Rights letter by a major domestic insurer. The forwarder entered into a master transportation agreement with a major financial institution to supply logistics and transportation services for both domestic and international shipments. A concealed-damage claim was filed for damage to electronic and computer equipment in the amount of approximately $250,000.

The forwarder had a clean delivery receipt. The consignee had the goods in his possession for not less than 72 hours before he discovered the equipment was damaged. The claimant admitted that at all times subsequent to receipt of the shipment the equipment had been moved to various locations within the consignee's premises. The forwarder investigated the loss, reported it to its insurer, which denied voluntary payment based upon the forwarder's investigation.

The master transportation agreement contained an arbitration agreement that granted either party, at its option, the right to seek that remedy. The forwarder's insurer, while acknowledging its own right to settle and mediate any claim, refused to participate in the arbitration proceedings. It refused to reimburse the forwarder for any legal expenses incurred as a consequence of the arbitration proceedings. The forwarder subsequently negotiated the claim downward from $250,000 to $45,000 and settled the loss with the shipper. At all times, the forwarder and its own counsel kept the insurer advised of their negotiating activities. The insurer continues to reserve its rights and steadfastly refused to become a party to the settlement process, while acknowledging it would contribute an undetermined amount, which it would subjectively determine after the claim was concluded. Comforting, isn't it?

The claim is now settled, and the forwarder has commenced litigation seeking reimbursement by the insurer. We await with interest the results of the policyholder's suit against its insurer. What continues to concern us is the insurer's reliance upon its right to reserve defense, and then promising to reimburse the policyholder at some future time for "something" that the insurer thinks is "fair and equitable."

All parties to a master transportation agreement should have their risk management advisers review the agreement before it is signed. They should obtain the insurer's consent, in writing, that the insurer agrees to be bound to arbitration provisions if such provisions exist. Recognize the insurer's Reservation of Rights letters for what they actually are. They are advance notices of the insurer's intentions to walk away when you need them most.

Thomas A. Laffey is chairman of Polaris Risk Managers Inc., a transportation insurance consulting firm. He may be reached at (973) 882-3100, or via e-mail at polarisins@aol.com. On Insurance is a monthly column.