Reservation of Rights Letter and    Non-waiver Agreement
by Robert Carper



A.     Reservation of Rights Letter:  Definition

          A reservation of rights letters is a unilateral declaration or notice sent by the insurer to the insured, another potential claimant, or representatives of either,  stating that the insurer is reserving its right to later assert coverage defenses or otherwise contest liability upon completion of its investigation of the claim.  It is the insurer's statement that even though the insurer undertakes an investigation of the events related to a loss, the insurer does not intend to give up its right to later contest liability.  Such a letter does not contemplate that there will be an explicit acquiescence or any other response by the recipient.
 
   B.     Nonwaiver Agreement:  Definition

          A nonwaiver agreement is a bilateral contract between an insurer and an insured granting the insurer authorization to conduct its investigation of the claim while preserving its rights to later contest liability depending upon the outcome of its investigation.
 
 C.     Comparison of Reservation of Rights Letter and Nonwaiver Agreement

          Unlike nonwaiver agreements, reservation of rights letters are declaratory and self-serving and do not contemplate an explicit acknowledgement or agreement by the insured.  They are therefore much more common than nonwaiver agreements.

          The nonwaiver agreement is similar to a reservation of rights letter in that it preserves the insurer's right to contest its liability to the insured.  Once the parties sign the agreement, it can be assumed that the insured assented to the contents of the agreement.

          Insurers may use either a reservation of rights letter or a nonwaiver agreement to prevent the operation of waiver and estoppel.  Assuming that the insured is willing to sign a nonwaiver agreement, from the insurer's point of view the nonwaiver agreement is preferable to a reservation of rights letter since it can potentially serve as a better rejoinder to an insured's allegation of bad faith claim investigation practices:  the nonwaiver agreement contains the insured's specific acknowledgement of the need and reasons for the insurer's continuing investigation.

What does an underwriter do?

By Robert Carper

Insurance underwriting

Having spent time as an underwriter, this is what I learned. Underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk.

Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical. However, the type of automobile is actually far more critical. As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.^[2]

The underwriters may decline the risk or may provide a quotation in which the premiums have been loaded or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business), insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance. Some insurance companies, however, rely on agents to underwrite for them. This arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence.