Reservation of Rights Letters

When an insurance company agrees to defend you or your company under a “reservation of rights,” warning bells should go off in your head.  The letter means that, when you are sued, the insurance company will reluctantly agree to defend the policyholder as the insurance policy requires, but they “reserve the right” to later deny coverage.  In essence, this means that the insurance company does not necessarily have all the facts it needs to outright deny coverage at that time, but if the lawsuit against you proceeds in a certain manner, they may very well have the excuse they need to deny coverage later.  In other words, they may defend you against the lawsuit, but they could pull the defense at any time, or worse, they may leave you high and dry if the lawsuit results in a judgment.

A defense under a reservation of rights can sometimes be even more damaging to a business than an outright denial of coverage.  For instance, the insurance company gets to choose which law firm will defend you and that law firm has to report back to the insurance company.  Although your defense lawyer has an obligation to defend you to the best of his ability, the insurance company is the one paying his bills.  Further, the insurance company sometimes reserves its rights to seek reimbursement of the amount it paid the attorney to defend you.  So at the end of the lawsuit, you could be looking at a huge bill from the insurance company for an attorney that you didn’t even want in the first place!

The letter is also an insurance company’s attempt to bind you to conditions that you may not agree with.  These conditions include: terms of the defense, their choice of the attorney that they will hire to defend you, and whether the insurance company can later seek reimbursement from you for attorney’s fees.  You do not have to accept the terms in a reservation of rights letter.  Usually, the reservation of rights letter will end with something like, “by accepting this defense under a reservation of rights, you agree to the terms of this letter.”  The letter is usually several pages long and contains conditions that you don’t have to agree to.  In fact, you can even reject the defense under reservation of rights altogether, although there are pros and cons to doing so.

One common question we often receive is “Why do insurance companies reserve their rights when they could just deny coverage from the beginning?”  The answer is partially based on the lower standard for a defense and partially based on the insurance company’s desire to avoid acting in bad faith.  You see, a liability policy requires an insurance company to do two things when an insured party is sued: (1) defend the insured and (2) indemnify the insured.  In Florida, the law requires insurance companies to defend the insured policyholder when sued (i.e., hire a lawyer to argue on the policyholder’s behalf) if the mere allegations against the policyholder fall within the policy.  But, an insurance company is only required to indemnify the policyholder (i.e., pay for any losses the policyholder sustains, such as a judgment) if the actual facts of the case show the loss falls within the policy.  In sum, the standard for a defense is much lower than the standard required for indemnity. 

When an insurance company reserves its rights to later deny coverage, you need an experienced insurance attorney to fight back on your behalf.  A reservation of rights letter requires swift action on your part.  When you receive a reservation of rights letter from your insurance company, call us immediately. 

The Davis Law Firm is located in Jacksonville, Florida and serves clients throughout the states of Florida and Georgia, including Jacksonville, Miami, Pensacola, Orlando, Tampa, St. Petersburg, St. Augustine, Fort Myers, Daytona Beach, Panama City, Destin, Melbourne, Fort Lauderdale, West Palm Beach, Tallahassee, the Florida Keys, and everywhere in between.

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| Phone: 904.400.1429

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