Most commercial general liability insurance policies, as well as other types of liability insurance policies, contain provisions requiring the insurance company to defend lawsuits against its policyholder that allege claims within the coverage afforded by the policy. Insurance companies, however, rarely agree to defend lawsuits against their policyholders unconditionally. Instead, insurance companies typically agree to defend their policyholders under a so-called “reservation of rights,” by which the insurance company defends its policyholder while, at the same time, reserving the right to withdraw the defense or to deny the claim under certain circumstances.
When an insurance company wants to defend its policyholder under a reservation of rights, it must notify the insured of its intent to reserve the right to withdraw the defense and/or deny coverage for certain claims via a “reservation of rights letter.” An insurance company that assumes control of its policyholder’s defense in a lawsuit without issuing a proper reservation of rights may be estopped from later contesting coverage. See, e.g., Founders Ins. Co. v. Olivares, 894 N.E.2d 586 (Ind. Ct. App. 2008). The purpose of a reservation of rights is not only to protect the insurance company from estoppel, however; the purpose also is to provide sufficient information to enable the policyholder to evaluate whether it is entitled to independent counsel. Id. at 594. Thus, a policyholder that receives a reservation of rights letter should carefully evaluate the letter and not blindly accept the defense being offered by the insurance company under the purported reservation of rights.
Courts have established certain requirements for a proper reservation of rights. Blanket statements that attempt to reserve all rights an insurer might have under its policy are generally inadequate. See, e.g., Harleysville Lake States Ins. Co. v. Granite Ridge Builders, Inc., 2009 WL 857412 (N.D. Ind. March 31, 2009), adopting magistrate’s Report and Recommendations at Harleysville Lake States Ins. Co. v. Granite Ridge Builders, Inc., 2008 WL 4935974, at *5-6 (N.D. Ind. Nov. 17, 2008); Armstrong Cleaners, Inc. v. Erie Ins. Exchange, 364 F. Supp. 2d 797, 809 (S.D. Ind. 2005) (“An insurer may not reserve its rights to assert otherwise unidentified defenses with a general statement to the effect that such defenses may arise during the course of its investigation of the claim.”). In Harleysville, the court held that the insurance company’s reservation of rights letter was inadequate in the following particulars:
- It failed to describe the claims or allegations in the complaint, including details of the facts known to the insurer at the time;
- It failed to quote or reference the specific policy provisions that the insurance company contended precluded coverage or formed the basis of the coverage defenses and to explain their applicability;
- It failed to provide a detailed explanation of the claim investigation that would be undertaken by the insurance company to reach a final coverage decision and a timeline for that decision; and
- It failed to advise regarding any issues that would actually or potentially give rise to a conflict of interest between the insurance company and its policyholder.
The Harleysville court also held that a proper reservation of rights must be in writing, noting that an oral reservation of rights is “at odds with the purposes for a reservation of rights letter, which is to provide the insureds with specific reasons for a reservation of rights and a non-coverage decision and to enable insureds to make informed decisions.”
Policyholders who receive reservation of rights letters from their insurance companies should evaluate those letters within the requirements of the law applicable to their insurance policies to ensure their rights are protected.