Posted In: Insurance Recovery
Practical Tips for Responding to Reservation of Rights Letters
on May 1, 2014
Your company has been named as a defendant in a lawsuit, and timely notified its insurer. Like many policyholders, the company expects that its insurer will do exactly what it promised to do—defend the company in the suit. The insurer, however, has provided the company with a lengthy letter “reserving its rights” to deny the claim, but agreeing to provide a defense to the lawsuit for the time being. What does it all mean? And should the company provide any sort of response?
A policyholder must cooperate with its insurer.
Insurance policies usually contain a provision that requires their policyholder to cooperate in any investigation they conduct and in the defense of the claim. These provisions can require the policyholder to provide documents or submit to oral examinations at the insurers’ request. In response to notice, an insurer will frequently request information from a policyholder regarding the claim, and the policyholder should be aware that it has a contractual obligation to respond.
A policyholder should protect itself from claims for reimbursement of defense costs.
In our view, insurers in Ohio do not have a right to recover defense costs they paid absent a policy provision to the contrary. The Sixth Circuit Court of Appeals, however, interpreting Ohio law, found that there might be circumstances in which the policyholder could be required to repay defense costs paid by its insurer. The court found that if the insurer indicates in a reservation of rights letter that it will seek repayment of defense costs if it is ultimately determined that there is no coverage for the claim, and if the policyholder fails to object to that statement, a “new agreement” is created which permits the insurer to recoup its fees. Policyholders should be aware of this case and the fact that insurers may attempt to use it to obtain recovery of defense costs.
What should a policyholder do when it receives a reservation of rights letter?
While it depends upon the specific items raised in a reservation of rights letters, in most instances, the policyholder will want to respond. Typically, the parties will deal with issues relating to selection and control of defense counsel at this time, including whether that counsel will follow any litigation management guidelines of the insurer. The policyholder should definitely respond if the insurer attempts to assert that it is entitled to recoup defense costs if there is ultimately a finding of no coverage. The policyholder should also consider responding substantively to dispute the application of exclusions or grounds for non-coverage that are asserted by the insurer in its reservation of rights. If a policyholder intends to engage coverage counsel, it is advisable to do so before the policyholder responds to the reservation of rights letter. Counsel can assist in preparing a response and can identify for the policyholder any potential issues regarding coverage.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.