A reservation of rights letter is a letter that your insurance carrier will send you when you notify them of a lawsuit against your business. The reservation of rights letter is a formal notification that your insurance policy does not cover this type of claim. It gives the insurance company time to investigate the claim and allows them to still deny coverage at a later date.

When you receive a ROR letter, you need to speak to an attorney immediately. They will help you to navigate this tricky situation. Most business attorney in California will offer free consultations for a ROR letter so you can decide the best course of action. In many cases, the attorney’s fees will be covered by the insurance company.

Most of the time, the reservations of rights letter is a tactic to buy the insurer more time to investigate the lawsuit. They want to look into if they are obligated to cover you for the claim or not based on your policy. Also, some claims in the lawsuit may be covered by your policy, and some may not. You should, however, take the ROR letter seriously as it means the insurance company are actively looking for ways to deny coverage. By retaining an attorney right away, you will be able to protect yourself. Never use the insurance company’s lawyer or one they recommend. These attorneys are paid millions of dollars each year to represent the insurance company’s interest, not yours.

Language of Insurance Policies

Most insurance policies will clearly detail two main duties of the insurance company/

  1. A duty to defend the insured business in a lawsuit.
  2. A duty to pay any damages that the insured business is ordered to pay.

The insurance policy will also state that the insurance company has a right to investigate any claims and settle them on the insured company’s behalf. The insurance company also has a duty to investigate, defend, and deny allegations.

The Insurance Company’s Duty to Defend

The insurance company has a duty to defend the insured until either they can prove there is no coverage or the underlying lawsuit has concluded.

If the duty finishes because the insurance company can prove the lawsuit is not covered by the insurance policy, the duty ceases prospectively. This means that up until that point, the insurance company must cover any costs incurred and cannot retroactively refuse to pay. The insurance company is released from their duty to defend if there is no possible way that the claim would be even remotely covered by the insurance policy. This is because the duty to defend is a contractual duty, and if the contract does not cover the claim’s circumstance, then the insurance company has no duty to the insured.

The insurance company has three possible methods when they are unsure if they have a duty to defend:

  1. Accept the lawsuit defense without objection
  2. Deny coverage and therefore not defend the insured. This is a risky tactic because if they are contractually obligated to defend the insured, then they lose control of the outcome of the lawsuit.
  3. Defend the lawsuit but send a reservation of rights letter while they find ways to prove the lawsuit is outside the scope of the insurance policy.

For example:

The plaintiff falls at a grocery store and sustains injuries that mean they have medical bills of $100,000. They sue the grocery store for this money, and the grocery store passes the lawsuit on to their insurance company. In this case, the insurance company must defend the lawsuit because the policy covers trip and fall accidental injuries.

If the insurance company defends the lawsuit without sending a ROR letter, they may not be able to deny coverage in the future. By not sending the reservations of rights letter, they are effectively waiving their reservation. It would be considered estoppel for the insurance company to suddenly say that the lawsuit is not covered by the insurance policy.

When the insurer defends the insured without a reservation of rights, they do not give the insured a reasonable opportunity to seek counsel and build a defense.

In many cases, an insurance company will agree to defend the lawsuit subject to a reservation of rights. This means that they build a defense for the lawsuit and retain control of the outcome if they do have a duty to defend. However, they still have the ability to stop defending the lawsuit if they find that the policy does not cover the lawsuit.

The insurance policy will not be bound by the judgement if they send a ROR letter and decides that they do not cover the lawsuit. Because of the insurance company’s duty to defend, the insurance company and the insured will have the same goal in defending the lawsuit.

Conflict of Interest For Insurance Companies The Issue a Reservation of Rights Letter

Once the insurance company has sent a reservation of rights letter, there is a conflict of interest between the insured and their insurance company. This is because the lawyer representing the insured in the lawsuit is paid to look after the insurance company’s interests. They will be feeding the insurance company information that may affect your insurance coverage. At this point, the insured should seek their own attorney, independent from the insurance company. They can demand that the insurance company pays for their independent lawyers’ fees.

A conflict of interest occurs when the lawyer who is hired to defend the lawsuit will control the coverage issue. This is particularly the case if the underlying issue in the lawsuit is the cause for contention for insurance coverage.

For example:

A customer argues with a grocery store owner outside their store. When the customer walks away, they trip over the grocery store owner, and their serious injuries ran up medical bills of $100,000. The customer sues the grocery store for negligence and intentional act.

The grocery store owner notifies their insurance company of the lawsuit, and their policy covers accidental trips and falls, but not intentional acts. Because of this, the insurance company issues a ROR letter. The outcome of the lawsuit hinges on whether the injury was intentional or accidental, and so too does the insurance coverage.

The insurance company provides a lawyer to defend the grocery store owner. Because they are trying to disclose everything to the attorney, the grocery store owner tells the lawyer that the tripping was, in fact, intentional. The lawyer has to file a report for the insurance company disclosing that the trip was intentional, because they are hired by the insurance company, not the grocery store owner. After reading the report, the insurance company withdraws their defense because its policy does not cover intentional acts.

In this scenario, the grocery store owner should have retained an independent attorney and demanded the insurance company pay their lawyers’ fees. This is allowed under cumis counsel.

However, not all conflicts of interests would require the insurance company to pay for the insured’s independent legal counsel. It is only required if there is a significant actual conflict of interest. The mere fact that the insurer has sent a ROR letter does not create a significant conflict of interest. For the insured to seek coverage of their independent lawyer’s fees, the coverage issues need to relate to the underlying case.

Similarly, not every ROR entitles the insured party to seek independent legal advice. When the coverage issue is separate from the underlying case, and therefore what the insured tells their attorney about the underlying case will not affect their coverage, then it is not necessary.

In Summary

The lesson you should take away from this article is that you should consult with an attorney when you receive a reservation of rights letter from your insurance company. Most business lawyers offer free consultations and can analyze your case to see if there is a conflict of interest that will require independent counsel.