You’ve done the responsible thing and obtained liability insurance. You’ve even made all of your premium payments on time. So, you expect your insurance company to come through for you if you’re ever sued in a related liability action. But what does it mean if the company sends you a reservation of rights letter, outlining all sorts of reasons why they might not pay for things related to your policy? Read on to learn more about reservation of rights letters and how to protect your own rights in an insurance liability case.
What Does a Reservation of Rights Letter Do?
Under your liability insurance policy, the insurance company has a duty to defend you in a lawsuit. So, if someone injures themselves on your property and sues you to cover their medical costs, the insurance company will provide your legal defense under the terms of your homeowner’s policy. However, the duty to defend is generally broader than the duty to indemnify. This means that even though an insurance company will investigate a claim and may defend you in a liability action, they can deny coverage later on based on the findings of the investigation or lawsuit. If they fail to send the reservation of rights letter, it may be considered a waiver of their right to later deny that coverage because they failed to warn you of that possibility.
For example, your policy probably only covers acts of negligence. Therefore, if the lawsuit reveals that you injured someone intentionally, the insurance company will refuse to pay for those damages. Similarly, if you don’t abide by the terms of your policy, the insurance company may claim you’ve breached your contract and deny coverage on those grounds.
How a Reservation of Rights Letter Can Affect the Policyholder
A reservation of rights letter can of course affect you as the policyholder if the insurance company does later refuse to cover certain claims made in the lawsuit. You would then be on the hook for those damages if you’re found liable. But even before the damages phase of a lawsuit, a reservation of rights letter can indicate a potential conflict of interest between you and your insurance company. In that case, it may be necessary to hire your own attorney instead of sticking with the attorney of an insurance company whose interests aren’t identical to yours.
Furthermore, while the insurance company must provide and pay for your defense as long as the underlying claim is potentially covered by your policy, they could try to have you sign an agreement allowing them to recoup their defense costs if they do later decide that the underlying claim isn’t covered. Or, they might try to recoup those defense costs even without such an agreement, despite the laws of your jurisdiction which may prohibit such practices.
Requirements for a Reservation of Rights Letter
Each state has its own laws governing the insurance industry operating within its borders, including what’s required of a reservation of rights letter in order to be effective against a policyholder. For example, many jurisdictions state that the letter must provide an unambiguous explanation of what may not be covered, with reference to specific and applicable provisions from your insurance policy. In some cases, courts have sided with an insured against an insurance company because the reservation of rights letter didn’t provide the policyholder with enough of a justification as to why, under the policy and according to the facts of the case, the insurer might deny coverage.
The reservation of rights letter must also be timely. If your insurance company waits until the middle or end of the lawsuit to tell you they might not cover the claims, you’ve missed out on an important opportunity to seek outside counsel and weigh your other options. Some jurisdictions merely require the letter be sent within a reasonable time, while others mandate a specific timeline within which notice must be given.
Steps to Take After Receiving a Reservation of Rights Letter
Since an insurance company might use a general form letter with no specifics about your particular case, it’s a good idea to follow up with the insurance company to ask if and why they think your claim may not be covered by your policy. This can help you determine how strong they think your case is (and therefore how strong a defense they might provide), as well as how likely they are to deny coverage.
If your insurance company is not forthcoming, or indicates that they will deny all or part of your claim, you should contact an outside insurance attorney for at least an initial evaluation of your case. If there is a conflict of interest between you and your insurance company, it’s better to retain independent counsel early on. This ensures a stronger defense and avoids the possibility of sharing too much information with your insurance company and other parties in the lawsuit.
Protect Your Rights with Help from an Insurance Attorney
It’s bad enough to be sued for someone’s injuries. But when the insurance company you’ve been paying all these years indicates through a reservation of rights letter that it might not pay for the damages of that lawsuit, your headache can go from bad to much worse. Whether you’re dealing with an insurance company that’s acting in bad faith, or you’re simply interested in obtaining independent counsel, contact an experienced insurance attorney to better understand your options and protect your rights.