insurance coverage | Fraser Blog

Coverage Position vs. Reservation of Rights Letters: What They Are and Why Timeliness Matters

When a claim comes in and there are coverage issues, insurers have two key tools to protect their position: the Coverage Position Letter (CPL) and the Reservation of Rights (RoR) letter. These letters serve related but distinct purposes, and sending them promptly can help prevent miscommunication, disputes, and legal exposure.

This article explains the difference between the two, when and why they’re used, and why delay can create unnecessary risk.

What Is The Difference Between a Coverage Position Letter (CPL) and a Reservation of Rights (RoR) Letter?

The term Coverage Position Letter (CPL) is most commonly used when an insurer affirmatively denies coverage on a claim in its entirety. A Reservation of Rights (RoR) letter is issued when there is a question of whether some or all aspects of the claim may be covered under the policy. An RoR states that the insurer is investigating coverage and has the right to disclaim coverage in the future once the coverage issues have been fully investigated and analyzed. If it is clear that some aspects of a claim are not covered under the policy, but there are still questions about whether the other aspects of a claim are covered under the policy, an insurer will issue a letter that combines aspects of a CPL and an RoR.

When Should an Insurer Send a CPL or RoR—And the Risk of Delay

In short, an insurer should send a CPL or RoR as soon as possible after the insurer knew or should have known of a coverage issue. This means that an insurer should be on the lookout of potential coverage issues as soon as it receives the claim—not just, for example, when a lawsuit is filed. A common misconception is that a CPL or RoR only needs to be sent when there is a question of whether there is a duty to defend. However, as noted in a previous blog post: “Duty to Defend and Indemnify,” the duty to indemnify is a distinct and separable duty. Therefore, it is important for the insurer to determine if there are coverage issues at the outset of receiving the claim that would therefore impact if it has a duty to pay the claim (such as a pre-suit settlement).

Michigan law does not impose a fixed deadline for issuing an RoR or CPL. But the longer the delay, the greater the risk. Courts will evaluate timeliness based on the facts and circumstances, and whether the insured was prejudiced by the delay.

An RoR or CPL issued weeks—or even months—into a claim may still be legally valid if the insurer continues to investigate in good faith and communicates consistently. However, long periods of silence followed by sending a late CPL or RoR can raise estoppel concerns (an issue we’ll address in greater detail in a subsequent article).

Additionally, insurers should re-evaluate their coverage position as new information becomes available. If facts develop that change the analysis, a follow-up CPL or RoR should be issued promptly. For example, even when an insurer has already begun defending a case, it is still prudent to issue an RoR if coverage questions arise after the fact.

The Contents of a CPL or RoR

A CPL or RoR should outline the insurer’s coverage analysis under the policy and the basis for its decision. Importantly, a CPL or RoR should be specific. Vague or boilerplate summaries that fail to reference key exclusions, policy terms, or factual issues can undermine the letter’s value and create ambiguity that could give rise to future litigation. The letter should state that the insured should provide additional information that supports any disagreement with the current coverage determination, and to provide additional information in the future that may warrant the need to reconsider the current coverage determination. More details on best practices of what should be included in a CPL or RoR will be addressed in a subsequent article.

Summary and Final Thoughts

In sum, the primary reasons an insurer sends a CPL or RoR letter are:

- - To document the insurer’s coverage analysis early in the process,
  - To preserve defenses that might otherwise be waived or challenged later,
  - And to avoid estoppel.

Timely, specific communication helps preserve legal defenses, avoid unintended estoppel, and demonstrate good faith. Whether used separately or together, these letters allow insurers to stay proactive, protect their position, and encourage a more informed dialogue with insureds.

If you have questions about CPL or RoRs, or need assistance with drafting one, our insurance team can help.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions. When it matters in Michigan, we are the trusted legal advisors for businesses and individuals.

Dakota A. Larson is an experienced attorney handling complex liability, coverage, and bad faith claims in multiple lines of insurance and in multiple jurisdictions. You can reach her at 517.377.0872 or at dlarson@fraserlawfirm.com.

Duty to Defend and Indemnify

This is a continuing series on navigating insurance coverage issues, stay tuned for more!

When an insurer receives a claim, the question of whether it will defend and/or indemnify is easier to answer in some cases than others.

Background

When interpreting an insurance policy, there are two questions involved: (1) Does the policy provide coverage?; and (2) If the policy provides coverage, is there an exclusion that negates the coverage? Auto Owners Ins Co v Seils, 310 Mich App 132, 146; 871 NW2d 530 (2015). The insured has the burden of establishing the claim falls within the terms of the policy and the insurer has the burden of establishing that an exclusion applies. Id.

“The duty to defend and the duty to indemnify are distinct and separable duties.” Michigan Ed Employees Mut Ins Co v Turow, 242 Mich App 112, 116; 617 NW2d 725 (2000). The duty to defend is broader than the duty to indemnify. Auto-Owners Ins Co v City of Clare, 446 Mich 1, 15; 521 NW2d 480 (1994).

“The duty to defend arises from the language of the insurance contract.” Citizens Ins Co v Secura Ins, 279 Mich App 69, 74; 755 NW2d 563 (2008). “Insurance policies are interpreted like any other contract.” Bridging Communities, Inc v Hartford Cas Ins Co, 345 Mich App 672, 681; 9 NW3d 92 (2023). A court must enforce policy language that is unambiguous. Matouk v Michigan Muni League Liab & Prop Pool, 320 Mich App 402, 409; 907 NW2d 853 (2017). If there is any doubt as to whether a claim against an insured falls within the parameters of coverage under the policy, the doubt must be resolved in favor of the insured. Polkow v Citizens Ins Co of Am, 438 Mich 174, 180; 476 NW2d 382 (1991). An insurance contract is ambiguous when the language is “capable of conflicting interpretations.” Farm Bureau Mut Ins Co of Michigan v Nikkel, 460 Mich 558, 566; 596 NW2d 915 (1999). See also Farmers Ins Exch v Kurzmann, 257 Mich App 412, 418; 668 NW2d 199 (2003) (stating that language in an insurance contact is ambiguous when it is “subject to more than one reasonable interpretation”). Terms that are not defined in the policy will be given their “commonly used meaning.” Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 113-114; 595 NW2d 832 (1999) (quotation marks and citations omitted). “An insurance policy must be read as a whole in order to discern and effectuate the intent of the parties.” Farmers Ins Exch, 257 Mich App at 418.

“An insurance company will not be held responsible for a risk that it did not assume.” Allstate Ins Co v Fick, 226 Mich App 197, 201; 572 NW2d 265 (1997). “An insurer is not required to defend its insured against claims specifically excluded from policy coverage.” Am Bumper & Mfg Co v Natl Union Fire Ins Co, 261 Mich App 367, 375; 683 NW2d 161 (2004). However, “[i]t is well settled that if the allegations of the underlying suit arguably fall within the coverage of the policy, the insurer has a duty to defend its insured.” Radenbaugh v Farm Bureau Gen Ins Co of Michigan, 240 Mich App 134, 137; 610 NW2d 272 (2000) (quotation marks and citations omitted). This duty applies even if a claim is groundless or frivolous. Am Bumper & Mfg Co, 261 Mich App at 451. An insurer must look beyond the language of the pleadings to determine whether coverage is possible. Citizens Ins Co v Secura Ins, 279 Mich App 69, 75; 755 NW2d 563 (2008). Exclusionary clauses “are strictly construed in favor of the insured.” Auto-Owners Ins Co v Churchman, 440 Mich 560, 567; 489 NW2d 431 (1992).

Conclusion

In sum, although an insurer may deny coverage and in turn, decline to provide a defense, it should not do so unless it is very clear that none of the allegations are covered under the policy at issue. It is also important for insurers to consider whether the policy language might be governed by the laws of a different state. See, e.g., Farm Bureau Ins Co v Abalos, 277 Mich App 41, 45; 742 NW2d 624 (2007) (stating that the court must balance the expectations of the contracting parties and the interests of the states to determine which state law to apply).

Five Stories That Matter in Michigan This Week – April 28, 2023

Effort to Mandate Hands-Free Phone Use While Driving in Michigan Stalls

Michigan House Bill 4250, the first bill of a three-bill package, failed to gain majority support in the House this week. The proposed legislation would ban the use of hand-held electronic device for drivers.

Why it Matters: 57 House members voted against the bill. One of the major concerns cited is that the penalties proposed to be imposed under the bill would be punitive, including the possibility of a license suspension of up to 90 days for a habitual offender.

———

Michigan Cannabis Sales Near $250 Million in March

Cannabis sales nearly hit $250 million in March, via the monthly report from the Michigan Cannabis Regulatory Agency. Michigan adult-use sales came in at $239,857,322.13, while medical sales came in at $9,816,894.70, altogether totaling $249,674,216.70.

Why it Matters: Marijuana sales remain strong in Michigan, particularly for recreational use. However, there still are significant concerns about profitability and market over-saturation that the industry is contending with.

———

May 2023 Business Education Series Program

During the May Business Education Series, Emmie Musser will discuss the challenges faced by businesses in building trust and transparency in a hybrid world, and explore strategies to overcome them including the importance of clear communication and regular updates, as well as the need to establish and maintain strong relationships.

Why it Matters: We will share practical, evidenced based tips on policies, workplace communication norms, and technology that can be used to help mitigate some of the biggest pain points of a hybrid work environment. Learn more.

———

Coverage Spoken Here

Commercial litigator and Chair of Fraser Trebilcock’s Real Estate Department, Jared Roberts, along with Shareholder and litigator Ryan Kauffman, successfully defended a mechanical contracting firm in an insurance coverage dispute initiated by its insurer.

Why it Matters: In this instance, in summary, the insurer argued that policy language excluded coverage for events of pollution or efforts by the insured at responding to it. Attorneys Roberts and Kauffman argued that, while some pollution-related events were clearly excluded under the policy here, the exact conduct of the insured in this case was covered, despite the exclusion. The Circuit Court agreed with the insured mechanical contractor and summary disposition was awarded in the contractor’s favor. Learn more.

———

CRA Publishes March 2023 Data, Average Price Hovers

Per data released by the Cannabis Regulatory Agency, the average retail price for adult-use sales of an ounce of cannabis is $86.87, a tiny increase from $86.00 in February. This is still a large decrease from March 2022, where the average price was $190.65.

Why it Matters: While the prices of cannabis and cannabis-related products continue to decrease and make consumers happy, growers on the other hand are seeing profits decrease resulting in them seeking ways to halt new licenses to be granted in an effort to steady prices. Contact our cannabis law attorneys if you have any questions.

Related Practice Groups and Professionals

Cannabis Law | Sean Gallagher
Litigation | Jared Roberts
Litigation | Ryan Kauffman

The Importance of Insuring Your Teen Drivers

Teenage drivers in Michigan must be named on an automobile insurance policy covering the vehicle they will be driving. This means that once your teen has passed their road test and is legally licensed to drive, as the parent, you should notify your insurer before your teenager actually begins driving independently. Your insurance company can then add your teenager to your policy as a “named driver” for all of the vehicles that they will regularly be driving. This would also be a good time to confirm with your insurer whether any additional coverage should be added.

On a separate note, if the vehicle your teen will be driving is going to be purchased and titled in only your teen’s name, most insurance companies will require that a separate automobile no-fault insurance policy be purchased specifically for that vehicle. In instances such as these, only the teenage driver’s name will be listed on the insurance policy.

It may come as no surprise that adding your teen to your policy will likely increase your insurance rates significantly. In an attempt to combat this increased expense, some people may be tempted to withhold information from their insurance company regarding their teen drivers.

DO NOT DO THIS!

If a policy is purchased without full transparency and honesty, the insurance company can legally cancel your policy, even after an automobile accident has occurred. This could mean that you and your teen driver will lose out on your benefits, including your insurer not paying your medical bills and you losing the ability to bring a lawsuit against an at-fault driver. This is true even if your teenager is completely free of fault and/or was seriously injured in the accident!

By keeping your insurance company up to date with who will be driving your vehicles, you’ll ensure that you are not paying your insurance premiums for benefits you will be disqualified from receiving.

If you have any questions, please contact Emily or your Fraser Trebilcock attorney.

Emily M. Vanderlaan is a litigation associate at Fraser Trebilcock serving some of the largest and most sophisticated insurers in Michigan. From case evaluation, to settlement negotiations, to trial and appeal work, Emily has experience representing insurance companies in a wide range of cases in Michigan state courts. You can reach her at (517) 377.0882 or at evanderlaan@fraserlawfirm.com.

Federal Court Rules in Favor of Restaurant Group for Insurance Coverage Related to Loss of Business Income Due to COVID-19 Shutdown Orders

In one of a series of closely watched cases concerning the extent of insurance coverage available to businesses who have suffered damages as a result of the COVID-19 crisis, a federal district court recently ruled in favor of a group of restaurants that were ordered closed by government authorities.

The U.S. District Court for the Northern District of Ohio ruled in favor of the policyholders on cross-motions for summary judgment in Henderson Road Restaurant Systems, Inc., dba Hyde Park Grille, et al. v. Zurich American Ins. Co., No. 1:20 CV 1239, 2021 WL 168422 (N.D. Ohio Jan. 19, 2021). In the Henderson case, the court ruled that business interruption coverage was available to the restaurant group under a policy issued by Zurich American Insurance Company (“Zurich”).

The property policy at issue provided coverage for suspension of operations caused by order of civil authority or a government order that prohibited access to the covered premises. The policy required that the suspension result from “direct physical loss of or damage to” property located within one mile from the covered premises.

The parties disagreed as to whether such “direct physical loss of” or “damage to” the policyholders’ restaurants occurred under the circumstances. Ultimately, the court sided with the policyholders about the meaning of the phrase “direct physical loss of” the real property, construing what it found to be ambiguities in the language in the policyholders’ favor.

The policyholders argued that they “lost their real property” when state shutdown orders were issued that prevented the properties from being used for their intended purposes as dine-in restaurants. Since the policy language was susceptible to this interpretation, and ambiguities are strictly construed against the insurer in Ohio, the court ruled that Zurich was obligated to provide business income coverage since the policy language could be interpreted in the policyholders’ favor.

The court rejected Zurich’s argument that coverage shouldn’t be available because the restaurants could still conduct carry-out business, finding it unreasonable to expect that the restaurants, which previously relied almost exclusively on in-person dining, should be expected to shift their businesses to a carry-out model. The court also rejected Zurich’s assertion that the policy required a permanent loss.

Zurich next argued the applicability of two exclusions to coverage. First, Zurich argued that a microorganism exclusion precluded coverage. However, the court rejected the microorganism exclusion’s application, finding there was no coronavirus at the restaurants themselves and that “it was clearly the government’s orders that caused the closures,” not the coronavirus. Moreover, the court noted that the parties had stipulated that “none of Plaintiffs’ Insured Premises were closed as a result of the known or confirmed presence of SARS-CoV-2 or COVID-19 at any of the Insured Premises.”

Zurich also argued that the policy’s loss-of-use exclusion should exclude coverage. The court rejected this argument, as well, ruling that “the Loss of Use exclusion would vitiate the Loss of Business Income coverage.”

We will continue to monitor and provide updates on other court decisions happening across the country on the extent of insurance coverage for losses related to COVID-19. If you have any questions about these issues, please contact Thad Morgan, Fraser Trebilcock’s Litigation Department Chair.

Thaddeus E. Morgan is a shareholder with Fraser Trebilcock and formerly served as President of the firm. Thad is the firm’s Litigation Department Chair and serves as the firm’s State Capital Group voting representative. He can be reached at tmorgan@fraserlawfirm.com or (517) 377-0877.

Till Death Do Us Part – But Do Not Drive My Car!

If you are married it is advised that you leave the title to the vehicle you drive solely in your name. Quite often attorneys are asked to defend a husband and wife in a lawsuit over an automobile accident/lawsuit where the married couples’ joint assets are at risk. This is because the husband and wife have placed both of their names on the title to a vehicle which is driven almost exclusively by only one of them. When there is an accident involving personal injury or death both are sued as owners under Michigan’s Owner Liability Statute. MCL 257.401 (1). The joint assets of the married couple would not be at risk in such a situation if the couple did not place both of their names on the title as owners.

Continue reading Till Death Do Us Part – But Do Not Drive My Car!