Insurance Reservation of Rights Letters in Missouri

A reservation of rights letter informs the insured of the carrier’s potential defenses to coverage under the policy. The following is a brief overview of some of the requirements for ROR letters in Missouri.  As always, please contact a licensed and qualified attorney for recommendations specific to your circumstances.

Applicable Statutes and Regulations

There are no specific statutes or regulations that govern the drafting of a reservation of rights letter. However, Title 20, Division 100 of the Missouri Code of State Regulations generally applies to claims handling practices. 20 CSR 100-1.050 contains specific provisions regarding denials of claims, which should be followed when drafting reservation of rights letters. Mo. Rev. Stat. § 375.1007(12) also identifies improper claims handling practices with respect to notices of denials of coverage.

Timing of the Reservation of Rights Letter

 While there are no regulations specifically applicable to ROR letters, an insurer must advise an insured of its acceptance or denial of a claim within 15 working days after the submission of all forms necessary to establish the nature and extent of any claim.   20 CSR 100-1.050(1)(A). 

If more time is required to investigate the claim, the insurer must write to the insured within 15 working days after the submission of the claim and explain why more time is needed. 20 CSR 100-1.050(1)(C). If the investigation remains incomplete, the insurer must write to the insured within 45 days from the date of the original notification and every 45 days thereafter, setting forth the reasons that additional time is needed. Id. Investigation of claims should ordinarily be completed within 30 days after the insurer receives notice of the claim. 20 CSR 100-1.050(4). 

Required Content of the Reservation of Rights Letter

There is no particular statutory or regulatory language that must be included in a reservation of rights letter. A proper ROR must contain a clear disclaimer of potential liability for coverage, with the grounds for such, along with any facts necessary for the insured to make an informed decision as to whether the insured will accept the defense under a reservation of rights. Brooner & Assocs. Constr., Inc. v. W. Cas. & Sur. Co., 760 S.W.2d 445 (Mo. App. W.D. 1988). The Missouri cases do not explicitly state how much analysis of the bases for non-coverage must be addressed in the ROR letter, but there is case law upholding as proper letters that identify the specific policy provisions at issue and how the facts or claims implicate those coverage positions.   See, e.g., id.  The best practice is for the insurer to set out a thorough analysis of how the policy language applies to the facts and claims. 

Insurers should also be guided by the Missouri regulations on denials of claims. All potentially applicable policy language must be specifically identified in the reservation of rights letter. 20 CSR 100-1.050(1)(A) (“No insurer shall deny any claim on the grounds of a specific policy provision, condition or exclusion unless reference to that provision, condition or exclusion is included in the denial.”) The reservation of rights must be communicated in writing, and a copy retained in the claim file. Id.

Any potential grounds for denial of coverage should be stated in the letter, and supplemental reservations of rights letters issued as the facts are developed and claims amended.

The Insured’s Right to Refuse a Defense Offered Under a Reservation of Rights

Missouri is one of a minority of states that allows an insured to refuse a defense offered under a reservation of rights. State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. banc 1995). A defense under a reservation of rights presents a potential conflict of interest between the insurer and the insured, because the insurer may have a greater interest in developing facts establishing non-coverage rather than in defending against the insured’s liability. State ex rel. Rimco, Inc. v. Dowd, 858 S.W.2d 307, 308 (Mo. App. E.D. 1993). 

If the insured rejects the defense under a reservation of rights, the insurer has three options: (1) defend without a reservation of rights, (2) withdraw from representing the insured in the underlying action, or (3) file a declaratory judgment action to determine the scope of coverage. Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 88 (Mo. App. W.D. 2005). Filing a declaratory judgment action is the preferred and recommended course of action in that event.

If the insurer files a declaratory judgment action, it is treated as a refusal to defend the insured, and if unjustified, the insurer is deemed to have waived its right to control the defense and is bound by the strategy decisions made by the insured.  “If its decision concerning coverage is wrong [the insurer] should be bound by the decision it has made.” Ballmer v. Ballmer, 923 S.W.2d 365, 369 (Mo. App. W.D. 1996).  Filing a declaratory judgment action to determine the construction of the insurance company’s own policy will not insulate the insurer against a bad-faith claim.  Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 562 (Mo. App. S.D. 1990).

If the insured rejects a defense offered under a reservation of rights and coverage is later found, the insurer will be liable for the insured’s defense costs. Fuller v. Lloyd, 714 S.W.2d 698 (Mo. App. W.D. 1986).

Intervention in the underlying tort action to seek a coverage determination has been approved in the Western District Court of Appeals (State ex rel. Mid-Century Ins. Co. v. McKelvey, 666 S.W.2d 457 (Mo. App. W.D. 1984); Whitehead v. Lakeside Hosp. Ass’n, 844 S.W.2d 475, 479 (Mo. App. W.D. 1992)), but the practice is less clear in the Eastern District, where it appears to be disfavored (State ex rel. Rimco, Inc. v. Dowd, 858 S.W.2d 307, 309 (Mo. App. E.D. 1993)). 

When a tendered claim is in litigation, the insurer should issue a reservation of rights letter as soon as it becomes apparent that the insurer has or may assert coverage defenses, so that the insured may make an informed decision whether to accept or refuse the defense under a reservation of rights. 

The Consequences of Failure to Issue a Proper ROR

Missouri courts profess to accept the general rule that neither waiver nor estoppel will establish coverage that otherwise does not exist under the policy.  Martin v. United States Fid. & Guar. Co., 996 S.W.2d 506, 511 (Mo. 1999); Great W. Cas. Co. v. Wenger, 748 S.W.2d 926, 928 (Mo. App. W.D. 1988). As a matter of practice, however, Missouri courts frequently discuss waiver and estoppel in a manner that could invalidate policy exclusions. See, e.g., Shahan v. Shahan, 988 S.W.2d 529 (Mo. 1999) (analyzing potential waiver of the household exclusion in an automobile liability policy).

An insurer that defends a case with an awareness of facts that would defeat coverage, but without a reservation of rights, may be held to have waived its defenses to coverage. Mistele v. Ogle, 293 S.W.2d 330, 334 (Mo. 1956) (“It is defending an action with knowledge of noncoverage under a policy of liability insurance without a non-waiver or reservation of rights agreement that precludes the insurer from subsequently setting up the fact and defense.”) “It is the insurer’s unequivocal conduct, knowingly contrary to the claim provisions of its contract, that betrays the insurer’s purpose to relinquish its right to rely on the contractual language.” Brown v. State Farm Mut. Auto. Ins. Co., 776 S.W.2d 384, 387 (Mo. 1989). Prejudice to the insured is not an element of waiver. Id. Waiver arises only where the insurer has knowingly acted contrary to its coverage defenses. Id.

More commonly, the question will be the effect of the insurer’s failure to state all potential defenses to coverage in a reservation of rights letter. In such cases, the insured will typically be required to prove estoppel, not waiver, to argue that the insurer should be barred from arguing a coverage defense not previously identified. “[E]stoppel, with some element of unfairness, lack of notice, or other detriment to the insured, rather than voluntary waiver . . . is the preferred theory.” Brown, 776 S.W.2d at 388. Proof of prejudice to the insured is required to support an estoppel theory; the mere trouble and expense of bringing suit to establish coverage is not sufficient prejudice to support estoppel. Id.                                                                       

“[U]nder an estoppel theory, the insurer must first announce a specific defense and subsequently seek to rely instead on an inconsistent theory.” Brown, 776 S.W.2d at 388 (emphasis added). Only where the announcement of a specific defense to coverage “lulls the insured into relying to his detriment and subsequent injury” on the stated position is estoppel an issue. Id. “And where the insurer’s initial denial is stated in such a way that it reasonably implies the subsequently, but more specifically stated, consistent reason for denial, the insured cannot claim she changed her position or relied to her detriment on the insurer’s initial denial; estoppel may not be invoked.” Id. at 389 (emphasis added).

To the extent that coverage defenses which are not set forth in the initial ROR letter are consistent with the stated defenses, estoppel should not bar the assertion of these defenses. Nevertheless, the best practice is to be comprehensive in identifying all available coverage defenses. Overlooking the nuanced analysis set forth in Brown, many commentators and lower courts cite the case for the proposition that, when an insurance company denies liability on specific grounds, it “waives all grounds not so specified,” which is the general holding of that case.

Missouri has not recognized the theory of “procedural bad faith.” Failure to promptly provide a reasonable explanation of the basis for a denial of coverage constitutes an improper claims practice. Mo. Rev. Stat. § 375.1007(12). There is no private right of action under the claims handling statutes, however.

Reimbursement for Non-covered Claims is Unsettled Under Missouri Law

An insurer’s right to seek reimbursement of defense or indemnity payments for non-covered claims remains unsettled under Missouri law. At the intermediate appellate level, courts have held that the issuance of a reservation-of-rights letter does not allow an insurer the right to seek repayment from its insured for indemnity payments on non-covered claims.  See, e.g., Benton House, LLC v. Cook & Younts Ins., Inc., 249 S.W.3d 878, 881 (Mo. App. W.D. 2008) (citing cases).

However, if the insurer does not defend and later obtains a determination that some claims were not covered by the policy, federal courts, relying on their interpretation of Missouri law, have held that a settlement must be apportioned between covered and non-covered claims. Esicorp, Inc. v. Liberty Mut. Ins. Co., 193 F.3d 966, 971 (8th Cir. 1999); accord, Nodaway Valley Bank v. Continental Cas. Co., 715 F. Supp. 1458, 1465-67 (W.D. Mo. 1989), aff’d, 916 F.2d 1362 (8th Cir. 1990).