You have purchased a liability insurance policy and believe that your insurance coverage will protect you from any claims that may be made against you. You receive a claim letter or are served with a legal document that says “complaint” and initiates a lawsuit against you. You send it to your insurer and receive a letter from it that outlines the reasons why it may not pay for the claim(s) asserted against you. This letter is called a Reservation of Rights letter. Read on to learn more about these letters.
Basic Terms
Before we can discuss what a Reservation of Rights letter is and what an insurer is saying in it, you need to understand some basic terms.
Duty to Defend: This describes your insurer’s obligation to provide you with a defense against the claims made against you that are covered by your insurance policy. The duty to defend is broader than the duty to indemnify because it arises if there is a reasonable potential for coverage under the policy (with the insured getting the benefit of the doubt).
Duty to Indemnify: This describes your insurer’s obligation to pay the claims made against you that are covered by your insurance policy. Unlike the duty to defend, which is typically determined at the beginning of the case, the duty to indemnify typically is determined at the end of the lawsuit and is based on all information developed in the case. If there is a duty to indemnify, then your insurer must pay the claim either by funding a settlement or paying any judgment that may enter against you.
What Is a Reservation of Rights Letter?
Your insurance company may send you a Reservation of Rights letter to alert you of its analysis of the claim(s) asserted against you and stating that it reserves its right to deny coverage for some or all of the claims at a later date. In other words, when your insurer issues a Reservation of Rights letter, it agrees to comply with its duty to defend you against the claim(s) asserted in the lawsuit while reserving its right to later contest coverage for the claim(s) and try to establish that it does not have a duty to indemnify you.
The letter typically will include certain facts about the claim(s), excerpts from the language of your policy, and what your insurer is contending may not be covered. While the letter may seem generic, it is a formal notice that some of the losses that are claimed may not be covered.
The letter may ask you to provide information about the claims against you and provide you with the details of a contact person for further inquiries. It may also provide you with next steps about how the claim process will proceed. The letter also may identify counsel that it has appointed to defend you against the claim(s) asserted against you in the lawsuit.
Significantly, a Reservation of Rights letter does not deny a claim; however, the letter tells you that your insurer is investigating the claim and reserves the right to deny some or all of the claims at a later time.
What Should You Do When You Receive a Reservation of Rights Letter?
While receiving a Reservation of Rights letter may feel intimidating, knowing what to do when you receive one is crucial. You should not ignore the letter. Your first step should be to review the letter and your policy with your insurance broker or other insurance professional to understand what your insurer is saying in the letter and to see if what your insurer is saying in the letter lines up with the terms of your policy. Next, you should consider responding to the letter, contesting any coverage positions that you believe are improper.
If in the letter, your insurer tells you that it has appointed defense counsel to defend you in the lawsuit, you should know that a Reservation of Rights letter may create a conflict between your insurer and you. States do not have a consensus solution for resolving the potential conflicts that arise when an insurer sends a Reservation of Rights letter.
Massachusetts and several other states apply the simplest and most insured-friendly approach. It provides that when an insurer sends a Reservation of Rights letter, then the insured has the right to select independent counsel to be paid for by the insurer. On the other end of the spectrum, Hawaii and several other states apply an equally simple approach that is the most insurer-friendly. It permits an insurer to retain the right to appoint defense counsel because defense counsel has a duty of undivided loyalty to the insured. Most states take a middle approach to the question of whether an insurer must pay for insured-selected defense counsel. This middle approach requires an actual conflict to exist between the insurer and the insured before the insured can select its defense counsel. Typically, actual conflicts exist when the outcome of a coverage issue raised in the Reservation of Rights letter could be controlled by defense counsel.
Key Takeaways
- Insurers will issue a Reservation of Rights letter to insureds to serve as notice that they are investigating the claim(s), and that the claim(s) may not be covered under the insured’s policy.
- A Reservation of Rights letter may appear generic, but it is a formal notice from an insurer to its insured that, even though the insurer is defending against the claim(s) asserted against its insured, it may later contest coverage so some losses may not be covered. It is important for you to discuss the letter with your insurance broker or attorney and review copies of your insurance policies.
- States take different approaches to determine if a Reservation of Rights letter triggers a right to independent defense counsel or if the insurer may appoint defense counsel for you. You should talk with your attorney to determine if you are in a state that requires your insurer to pay for your independent defense counsel, and inform your insurer about your selected counsel in your response to the Reservation of Rights letter.
Alexis Theriault is an attorney at the Boston-based law firm Conn Kavanaugh Rosenthal Peisch & Ford, LLP. She can be reached at atheriault@connkavanaugh.com
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