Business and commercial property owners must have a variety of types of insurance coverage in place to effectively run their operations. Having the proper policies often gives the insured peace of mind, in that they believe the insurance carrier will honor its obligations and protect the policyholder in the event of a claim. However, insurance plans can contain a wide array of exclusions, which often limit the insured’s ability to recover payment on a claim in whole or in part. When this happens, a reservation of rights letter may be sent to the policyholder to inform them of potential gaps in coverage.
Reservation of Rights Letter
Under most insurance policies, the insurance company has a legal duty to pay damages for a covered claim. When a claim filed by a commercial property owner falls into a gray area where further investigation may be needed to determine coverage, the insurance company may send out a reservation of rights letter to inform the policyholder.
Insurance companies typically utilize reservation of rights letters to alert policyholders of an investigation into a claim, stating that it reserves the right to deny coverage for some or all of the claim at a later date. These letters usually include certain facts about the claim, such as excerpts of language from the policy and what the insurer is contending is not covered. Essentially, a reservation of rights letter is used to state that while the carrier is actively investigating the loss and/or addressing any specific issues related to a claim, it has not yet determined whether or not the loss is covered. This means that while a claim has been opened, coverage of the claim is neither approved nor guaranteed for the specified loss.
Insurance companies sometimes use a reservation of rights letter as an alternative to immediately denying or agreeing to cover the claim. This allows the insurer to address the claim and evaluate the loss on its end before it makes a final decision on whether or not to cover it. While these letters can appear generic, they are a formal indicator that some of the losses being claimed by the policyholder may not be covered. Often, receiving the letter also lets the insured know the information provided in the original claim requires further evaluation.
Insurance companies will routinely send a reservation of rights letter, as failing to send one can waive their rights. If a commercial property policyholder receives one, they should contact their insurance company to find out why the claim may not be covered. If an insurance company is heading toward claims denial, an experienced insurance coverage attorney should be consulted.
How to Respond to a Reservation of Rights Letter
The law regarding the use of reservation of rights letters varies from state to state; however, most jurisdictions hold that the letter must include an unambiguous explanation of what may not be covered and why. The letter must also be sent timely in response to the claim. If the insurance company waits until well after the claim was initially filed to send out a reservation of rights letter, it could negatively impact a policyholder’s ability to obtain legal counsel.
Although an insurance provider’s reasoning for sending out a reservation of rights letter may appear valid, it’s still a great cause for concern to a policyholder. This is because a reservation of rights letter brings up an inherent conflict of interest between the carrier and the insured, making it critical for commercial policyholders to know how to effectively respond to one.
If a commercial property owner receives a reservation of rights letter, they should do the following:
- Review the letter and respond promptly: Policyholders should take the time to thoroughly review both the letter and the applicable policy to see if what the insurance company says lines up with the terms of the policy. An insured should not ignore a reservation of rights letter if they receive one. Failure to respond to it will likely be seen as implicitly agreeing with the contentions of the insurer.
- Respond to the letter: Policyholders should respond to the insurer contesting the letter and pledging a subsequent follow-up. This informs the insurance company that while the policyholder acknowledges receipt of the letter, they do not necessarily agree with the insurer.
- Obtain and consult legal counsel: If a policyholder receives a reservation of rights letter about a valid commercial property damage claim, they should obtain legal representation to effectively address it.
Common Commercial Property Insurance Exclusions
While an insurance company could send out a reservation of rights letter to inform a policyholder of a potential coverage gap, it’s important that commercial property owners understand which events are commonly excluded from coverage. Most often, a commercial property insurance policy excludes events such as:
While coverage for water-related damage is often included within most commercial property coverage, flooding is not. If a commercial property is located within a state prone to flooding events – like Texas or Louisiana – owners should obtain a separate flood insurance policy to be certain the property is covered.
Similar to flood events, most commercial property policies exclude coverage for damage related to earthquakes. If a commercial property owner has facilities located in active earthquake areas like California, they should take extra care to obtain a separate earthquake or earth movement policy.
A commercial property insurance policy covers only the store, the warehouse, and/or the office where a business operates, but not the vehicles the company owns. Insuring vehicles and insuring buildings are two very distinct processes that require different coverage. While insurance for both the business facility and its vehicles can be bundled together, this is still accomplished by purchasing two different policies.
Equipment breakdown is inevitable during the lifetime of a business and is not a risk that can be managed like a potential fire. Because of this, commercial property insurance will not cover damage due to an equipment breakdown or malfunction.
Property that is not owned by the business or by the commercial property owner is generally not covered under a commercial property policy. If a fire breaks out at a restaurant and a customer’s property is damaged as a result, it will not be covered, as the customer’s belongings are not owned, used, or rented by the business. Rather, this would be covered by a general liability policy.
Commercial Insurance Coverage Attorneys
If your insurance provider is claiming that you may not have coverage for a valid claim under your commercial property policy, it is in your best interest to consult with a commercial insurance coverage attorney. At Raizner Slania, our team of experienced attorneys offers free consultations to review the facts of your claim. Over the years, our trial attorneys have handled a wide variety of lawsuits and claims against national corporations and major insurance providers. We are confident we can help you succeed.
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