Reservation of Rights by the Insurer and Rights of the Insured
| Publication year | 1983 |
| Pages | 1974 |
1983, December, Pg. 1974. Reservation of Rights by the Insurer and Rights of the Insured
A purchaser of a liability insurance policy is actually buying two things: (1) indemnity for the claims covered by the policy and (2) legal defense for claims which purport to fall within the policy coverage.(fn1)
The duty to defend(fn3) is generally broader than coverage.(fn4) It is not uncommon for a situation to arise where the insurance company agrees to provide a defense for a claim, but attempts to reserve its rights so it can deny coverage if any liability is ultimately assessed against the insured. This article deals with the rights of the insured in such a situation.The promise to defend the insured, as well as the promise to indemnify, is the consideration received by the insured for payment of the policy premiums. Although the type of policy here considered is most often referred to as liability insurance, it is "litigation insurance" as well, protecting the insured from the expense of defending suits brought against him.(fn2)
After receiving notification of a claim against the insured, the insurance company has basically three choices: (1) it can admit coverage and provide a defense; (2) it can deny coverage and defense of the claim; or (3) it can offer to provide a defense, while attempting to reserve its rights to deny coverage as to all or part of the claim. If an insurance company assumes and conducts the defense of an action without reserving its rights to deny coverage, it will generally be held that the insurer has either waived any coverage defenses it may have or will be estopped from attempting to assert these coverage defenses. "[T]he insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert the defense of noncoverage."(fn5)
One way an insurance company can reserve its rights is by entering into a non-waiver agreement with the insured. Under such an agreement, the insurance company agrees to provide a defense, and the insured agrees that this defense by the insurance company does not constitute a waiver of any rights the insurance company may have to deny coverage should liability be assessed against the insured.(fn6) Alternatively, the insurance company may unilaterally issue a letter informing the insured that the company will provide a defense, but that it is reserving its rights as to the coverage dispute.(fn7) This is generally referred to as a "reservation of rights letter."
A letter from the insurance company to the insured purporting to deny coverage and defense, or purporting to reserve the insurance company's rights, should be both timely and specific. Otherwise, it may be open to possible attack in an action concerning coverage between the insured and his insurer. If the delay or lack of specificity has resulted in prejudice to the insured, the insurance company may be deemed to have waived its coverage defenses or will be estopped from asserting such coverage defenses.(fn8) The fact that the insured has surrendered the right to control the defense of the action to the insurance company, by virtue of its providing a defense, can support a finding of prejudice. The Tenth Circuit has held: "Indeed, by the weight of authority, it is not necessary for the insured to show prejudice in such a situation, because he is presumed to have been prejudiced by virtue of the insurer's assumption of the defense."(fn9)
A disclaimer or reservation of rights should be timely. An unreasonable delay constitutes a fact question. A delay of approximately nine months has been held to be grounds for a waiver and a delay of two months in giving notice of disclaimer has been held to be unreasonable. In fact, in the case of Hartford Insurance Company v. County of Nassau, a two-month delay without explanation was held unreasonable as a matter of law, notwithstanding the fact that the insured waited almost four years before notifying the insurer of the accident.(fn10)
The U.S. District Court for the District of Colorado has held that if a disclaimer is not timely, a presumption of prejudice arises. However, where there is a timely reservation or disclaimer, there is no such presumption.
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