When an insurer agrees to defend a policyholder against a lawsuit, the insurer often will assert that it reserves various rights that could have the effect of limiting or denying coverage for the policyholder, and may allow the insurer to seek reimbursement from the policyholder for amounts paid by the insurer for defense and indemnity.  In conducting its investigation and handling the claim, the insurer may look for ways to do so.

The policyholder should be proactive in response. Below are a several issues to consider when a policyholder receives a reservation of rights letter:

  1. Promptly Review the Insurer’s Reservations. A policyholder should be mindful of reservations in terms of how the case is litigated and what statements are made.  Sometimes just a few words can make the difference between being covered or not. The policyholder also should evaluate the strengths and weaknesses of the insurer’s reservations sooner rather than later. Early discussions with the insurer might eventually lead the insurer to change its mind about limiting or denying coverage. Waiting until shortly before a settlement conference or the start of trial could be much too late to do any good.
  2. Consider If Independent Counsel Is Warranted. The insurer is not always entitled to select defense counsel.  When an insurer reserves rights on issues that may affect insurance coverage, a conflict of interest is created because the defense counsel potentially could steer the case in a way that is favorable to the insurer.  Thus, the insurer is required to pay for independent defense counsel that is selected by the policyholder. This independent defense counsel represents only the insured’s interests, and not those of the insurer.
  3. Comply With Reasonable Requests for Non-Privileged Information. Insurance policies typically require the policyholder to cooperate in the investigation and defense of a claim. If a policyholder refuses to cooperate, the insurer may attempt to use that as a basis to deny coverage. However, policyholders should not assume they have to provide all information that an insurer requests. The insurer’s requests must be reasonable. Also, courts have ruled that in some circumstances a policyholder and its defense counsel can withhold privileged documents and information from the insurer.
  4. Explore Other Insurance. If an insurer has reserved rights, consider if other insurance policies too might provide a defense or indemnity coverage for the lawsuit. The reservation of rights letter also may request that you notify other insurers of the lawsuit. Generally, notifying all relevant insurers is a good thing to do even if the first insurer does not reserve rights. Having multiple insurers involved may increase the possibility that the policyholder can use insurance limits to fund potential settlements or judgments. This is especially important if the policyholder’s potential exposure in the lawsuit exceeds the possible policy limits available under an insurer’s policy, or if the first insurer might not actually be required to pay.

A reservation of rights letter indicates that the insurer believes there might be grounds for denying part or all of a claim and/or seeking reimbursements from the policyholder for amounts paid under the insurer’s policy. The policyholder should respond by determining how best to protect its rights and present its claim to the insurer in a way that maximizes the potential for coverage.

Aneeta Kumar
Aneeta Kumar is an attorney and partner in Kumar & Gerchick. Her practice focuses on assisting policyholders in obtaining maximum recovery from their insurance carriers for claims and losses, litigation expenses, settlements and judgments. Aneeta also serves on NAWBO-OC’s Board of Directors as Vice President of Community Relations.