When Roadmaps are a BAD Thing . . .
Unfortunately for insurance professionals dealing with claims in multiple jurisdictions, the state-specific rules regarding reservations-of-rights (“ROR”) letters (aka coverage positions letters, non-waiver letters, etc.) can be as varied as insurance laws themselves. Further uncertainty is created because most of these “rules” are judicially created, are rarely set forth in absolute terms, and often require context that may or may not be evident in the scant case law addressing them. Because some jurisdictions treat the failure to properly reserve rights with draconian harshness, it always pays to review RORs with coverage counsel in the jurisdiction if there is any doubt about compliance.
Texas’s rules on RORs are favorable to insurers because Texas does not allow coverage by waiver or estoppel and requires actual prejudice to the insured from the insurer’s actions before damages from an insurer misstep are recoverable. “[T]here is no ‘right’ of noncoverage that is subject to being waived by the insurer, even by assumption of the insured’s defense with knowledge of facts indicating noncoverage and without obtaining a valid reservation of rights or non-waiver agreement.” Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 782 (Tex. 2008); see also id. at 785 (noting that in “some circumstances” insurers who take control of their insured’s defense can be liable for the equivalent of policy benefits if “the insured is actually prejudiced by the insurer’s actions”). Texas’s relative leniency with regard to the content and timing of RORs creates a different quandary for the adjuster: resisting the urge to overshare and thereby create a roadmap to coverage for the claimant and the insured. RORs that apply in detail policy exclusions or limitations to the facts alleged or to facts discovered in litigation or through investigation allow the litigants to tailor pleadings and strategy to keep the insurer in the picture as long as possible. (Because Texas follows the complaint-allegation rule on the duty to defend, the actual facts are irrelevant at that stage.) This caution applies with extra force to pre-suit RORs or investigation notices the carrier sends—queuing up potentially applicable exclusions based on surmised or hypothetical factual scenarios increases the risk of an artfully pled petition or complaint that triggers coverage once suit is filed.
Takeaways: While under-reserving rights might pose a danger in some jurisdictions, in Texas “less is more” in RORs. Claim professionals charged with drafting or reviewing RORs should take care not to create an unintended litigation roadmap.