By Michael J. deBarros

A lawsuit is on the horizon, or you have been sued, so you have given proper notice to your insurance company.  Your insurance company sends a letter acknowledging the claim or suit, acknowledges its duty to defend, and states variations of any of the following:

"Please be advised that our review of this matter is continuing subject to a full reservation of rights and defenses under the referenced Policy and applicable law”

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“[Insurance Company] reserves the right to issue a partial or complete declination of coverage in the referenced matter should it determine that coverage does not apply to some or all of the asserted claims.”

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“[Insurance Company] is continuing to investigate this matter under a full reservation of rights and invites you to provide us with any further facts or documents that you feel might support coverage.”
 

You scratch your head in confusion.  What does the insurer mean?  You paid for insurance coverage.  How should you react to the letter?

A reservation or rights letter is a notice which states that the insurance company is investigating the claim.  While a reservation of rights letter does not mean that your claim is not covered, it indicates that the insurer has doubts concerning your coverage and may not pay the claim or a judgment.

You have several options when you receive a reservation of rights letter.  You can ignore it, you can ask for clarification, or you can dispute the reservation.  Here are a few tips to remember when dealing with an insurer who has issued a reservation of rights letter:

  1. Do not ignore a reservation of rights letter.  Insurance policies typically contain provisions that require the insured to cooperate with any reasonable requests of the insurer.  Insurers issuing reservation of rights letters may request additional information, but you should exercise care in providing information to minimize the possibility that the insurer will build a coverage case against you.
  2. If a reservation of rights letter has been issued, get your broker, agent, or lawyer involved.  You should have “conflict counsel” review the insurer’s position and give advice related to actions you should take to pursue coverage under the policy.  Seek assistance from a lawyer with insurance contract experience if the amounts at issue justify the expenses.
  3. If you disagree with your insurer’s position, do so immediately in writing.  Your response letter does not require great detail.  The purpose is to put the insurer on notice that you do not agree with its conclusions.
  4. If you do not understand the insurer’s reservation, or if the letter does not specifically refer to policy provisions, you can ask for a further explanation.  Insurers owe a duty of good faith and fair dealing to their insureds.  Thus, it is likely that you will receive some type of response from your insurer.
  5. Liability policies generally provide that the insurer has the right and the duty to defend the insured.  The obligation to defend usually begins when the insured gives notice of the suit.
  6. If your policy provides for a defense, request that the insurer provide independent counsel to represent you before the insurer embarks on a significant investigation.  You may be entitled to hire a defense lawyer of your choice at the insurer’s expense.  While your insurer is entitled to conduct a reasonable investigation, an insurer cannot delay in deciding to defend you.  The longer you wait, the more opportunity for your insurer to obtain facts to deny coverage.
  7. If your insurer unreasonably delays, or misstates the facts or provisions of its policy, it could be liable for bad faith damages.  You or your lawyer have the right to have a court resolve insurance disputes.