Commercial property owners must have a range of insurance policies in place to effectively manage their operations and ensure they are protected in the event of the unexpected. Having the proper coverage offers peace of mind to the insured that their insurance carrier will honor its obligations and protect the policyholder in the event of a claim.
However, insurance policies typically contain a wide array of exclusions that 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 possible gaps in coverage. Knowing what to expect and how to respond to this correspondence is key following a major disaster or unforeseen event that results in a property damage claim.
Reservation of Rights Letter – What is it?
Insurance companies have a legal duty to pay for certain damages under a covered claim. When the owner of a commercial property files a claim and further investigation is needed to determine coverage, the insurer may send the policyholder a reservation of rights letter.
Reservation of rights letters alert the insured of an investigation into a claim by stating that the company reserves the right to deny coverage for some or all of the claim at a later date. Often, these letters will include facts about the claim in question, such as excerpts of language from the policy, and detail what the insurer is contesting as not being covered under the policy. In short, a reservation of rights letter states that while the carrier is actively investigating the loss and potentially addressing any specific claim issues, it has not yet determined whether the loss is covered. This means that although a claim has been opened, coverage is neither approved nor guaranteed for the specific loss in question.
Insurance companies may use these letters as an alternative to immediately denying or agreeing to cover a loss. This effectively allows the insurer to address the claim and evaluate it before making a final decision on coverage. While reservation of rights letters may appear generic, they also serve as a formal indicator to the policyholder that some or all of the claimed losses may not be covered or require further evaluation.
If an insurance provider fails to send a reservation or rights letter, it may effectively waive their rights in the event of a coverage dispute. If a commercial property owner receives one, they should contact their insurance company to determine why the claim may not be covered and consult an experienced insurance claims attorney as soon as possible.
Reservation of Rights Letters in Texas
Under Texas law, insurance companies are required to pay out claims promptly. Unfair settlement practices are prohibited under Texas Statutes § 541.060, which requires insurers to affirm or deny coverage of a claim or submit a reservation of rights letter.
Additionally, Texas Administrative Code Rule § 21.203(10) states that the insurance company must respond to the policyholder regarding whether coverage may be granted. A reservation of rights letter is essentially a “maybe.”
If coverage is clear, the insurance provider is obligated to pay the claim. Failing to do so could result in a bad faith claim, in which case the policyholder should immediately contact legal counsel to hold the insurer accountable.
How to Respond to a Reservation of Rights Letter
Although an insurance provider’s reasoning for sending a reservation of rights letter may appear valid, it can be a significant cause for concern to a policyholder. Receiving a reservation of rights letter creates a conflict of interest between the carrier and the insured, making it crucial for commercial policyholders to know how to respond to one effectively.
If a commercial property owner receives a reservation of rights letter, they should do the following:
- Carefully review the letter and insurance policy: Policyholders should take the time to thoroughly review both the letter and the applicable policy to ensure that what the insurance company states aligns with the policy’s terms. An insured should not ignore a reservation of rights letter if they receive one. Failure to respond will likely be seen as implicit agreement with the insurer’s contentions.
- Respond to the letter: Policyholders should respond to the insurer contesting the letter and pledge 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 address it effectively.
Standard Exclusions in Commercial Property Policies
While an insurance company may send a reservation of rights letter to inform a policyholder of a potential coverage gap, commercial property owners must understand which events are commonly excluded from coverage. Most often, a commercial property insurance policy excludes events such as:
Flooding
While coverage for water-related damage is often included in most commercial property policies, flooding is typically excluded. Suppose a commercial property is located in a state prone to flooding events, such as Texas or Louisiana. In that case, owners should obtain a separate flood insurance policy to ensure the property is adequately covered.
Earthquakes
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 zones, such as California, they should take extra care to obtain a separate earthquake or earth movement policy.
Commercial Vehicles
A commercial property insurance policy typically covers only the store, warehouse, and/or office where a business operates, but not the company’s vehicles. Insurance for vehicles and insurance for buildings involve two distinct processes that require different types of coverage. While insurance for both the business facility and its vehicles can be bundled together, this is typically achieved by purchasing two separate policies.
Equipment Breakdown
Equipment breakdown is inevitable during a business’s lifetime and is not a risk that can be managed like a potential fire. As a result, commercial property insurance typically does not cover damage resulting from an equipment breakdown or malfunction.
Excluded Property
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. Instead, this would be covered by a general liability policy.
Commercial Property Damage Lawyers
If your insurance provider claims that your loss is not covered under your commercial property policy, you should consult a commercial property damage lawyer. At Raizner Slania, our team of Board-Certified attorneys offers free consultations to review your claim. We have successfully handled a numerous cases against major insurance companies and we are confident we can help you, too.