I have done my “50 Item Reservation of Rights Checklist” seminar/webinar about 20 times, from sea to shining sea, over the past two years.  Each time I explain at the outset why ROR letters are so challenging to draft: There is no established format for them. 

In other words, there is no formal checklist that an insurer can use and know that, if it crosses off every item, it has foreclosed every possible challenge to the letter from a policyholder.  In essence, a policyholder can challenge a ROR for any reason whatsoever.  It can do so based on what the letter says or doesn’t say.  For this reason, I explain that an “Effective ROR” is any ROR that a court finds is not ineffective.  I know that sounds like a silly definition, but that’s exactly what it is.  RORs are judged by courts based on what may be wrong with them.  To be effective, a court must conclude that not a single thing was. 

This definition was demonstrated clearly by the Maryland District Court in Osprey Consulting I v. Westport Insurance Corporation, No. 19-3092 (D. Md. June 10, 2020).  The court held that Westport could not withdraw from the defense of an insured, without filing a declaratory judgment action, because it did not reserve the right to do so in its reservation of rights letter. 

Westport did reserve the right to “file a declaratory relief action for the determination of its duty to defend and/or indemnify.”  This, the court concluded, meant that “Westport only intended to exercise its contractual right to challenge its voluntarily-assumed duty to defend through the institution of a declaratory judgment action.”  Therefore, the court concluded that “Westport effectively waived its right to contest its duty to defend, except on those specific, unambiguous terms reserved in the Coverage Letter.”  The court observed: “Indeed, if Westport already had the right to change its mind unilaterally and terminate payment of defense costs, it would have no reason to reserve only a right to ‘file a declaratory relief action for the determination of its duty to defend.’”

As I see it, based on the totality of the language in the ROR, as set out by the court, Westport’s letter said enough to have reserved its rights to withdraw its defense without needing to file a coverage action.  But the court was not convinced, principally based on Westport’s express reservation of the right to file a declaratory judgment action to determine its duty to defend.  So Westport may have been better off not reserving that right.  By saying more in the ROR, Westport was given less protection.   

The opinion also put the ROR under a microscope in analyzing Westport’s assertion of a “full reservation of rights” to determine if that encompassed the right to withdraw its defense without filing a DJ action.  The court concluded that the breadth of the “full” ROR must be interpreted in conjunction with the specific bases on which Westport reserved its rights.  Following that review, the court concluded that “full” was not all encompassing.
  
In the end, the opinion suggests that, even if Westport had reserved the right to withdraw its defense, it would not have mattered.  The court seemed inclined to rule that, as a matter of law, Westport could not withdraw its defense without filing a coverage action.      

I have read a lot of cases where courts address the effectiveness of an ROR letter.  Often times the RORs are lacking and the court’s decision, that the ROR is ineffective, is not surprising.  But this is not one of them.     

Simply put, Osprey Consulting I demonstrates the difficulty of writing an ROR.  With no checklist covering every base, there is no way to know every possible way that the ROR can be challenged as ineffective.  

The moral of the story -- An “effective ROR” is any ROR that a court finds is not ineffective.

[Let me know if you’d like me to virtually drop by your office to do my “50 Item Reservation of Rights Checklist” webinar.]