§17.3 - Reservations of Rights and Nonwaiver Agreements

• Jurisdiction: Washington

§17.3 Reservations of Rights and NonWaiver Agreements

In the context of a policyholder who has purchased a liability insurance policy, a reservation of rights is a unilateral declaration by the insurer informing the policyholder that a claim against the policyholder may be subject to certain policy defenses and that all or portions of the claim may not be covered. A nonwaiver agreement has a similar effect to a properly drafted reservation of rights letter and is subject to the same limitations. This discussion will focus on the reservation of rights letter, but the same principles apply to nonwaiver agreements.

The purpose of a reservation of rights letter is twofold. First, the reservation of rights letter informs the policyholder of the insurers coverage position so that the policyholder may, if necessary, take steps to protect itself. Second, the reservation of rights is designed to protect the insurer so that coverage is not extended beyond that intended by the policy. The reservation of rights letter should be drafted with these purposes in mind.

(1) When is a reservation of rights necessary?

No reservation of rights letter is necessary when it is clear that the claim or claims made against the policyholder fall within the scope of coverage provided by the policy, and no policy defenses exist. There may be other circumstances when an insurer elects not to issue a reservation of rights. In such a case, when there is no reservation the insurer must provide the policyholder with a defense, if the policy provides for a duty to defend, and must pay any settlement or judgment against the policyholder, up to the policy limit.

Likewise, a reservation of rights is not necessary when it is clear that none of the claims filed against the policyholder are covered. A denial is then appropriate. The duty of an insurer to defend an action brought against its policyholder arises from the complaint filed in that action, specifically, when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policys coverage. Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 760, 58 P.3d 276 (2002). A significant burden is placed on insurers to investigate and consider all facts relating to allegations in a complaint in an effort to provide coverage. Woo v. Firemans Fund Ins. Co., 161 Wn.2d 43, 54, 164 P.3d 454 (2007). The Washington Supreme Court has described this obligation as follows:

[I]f the allegations in the complaint conflict with facts known to or readily ascertainable by the insurer, or if the allegations are ambiguous or inadequate, facts outside the complaint may be considered. The insurer may not rely on facts extrinsic to the complaint to deny the duty to defendit may do so only to trigger the duty.

Id. at 52 (quotations and citations omitted). The Washington Supreme Court has stated that [t]he duty to defend is triggered if the insurance policy conceivably covers allegations in the complaint. Am. Best Food Inc. v. Alea London, Ltd., 168 Wn.2d 398, 404, 229 P.3d 693 (2010) (emphasis in original). An insurance company must look beyond the allegations of the complaint if (1) the allegations are in conflict with facts known to or readily ascertainable by the insurer or (2) the allegations of the complaint are ambiguous or inadequate. R. A. Hanson Co. v. Aetna Ins. Co., 26 Wn.App. 290, 294-95, 612 P.2d 456 (1980).

The insurer may defend under a reservation of rights while seeking a declaratory judgment that it has no duty to defend, but it must avoid seeking adjudication of factual matters disputed in the underlying litigation if doing so requires advocating a position adverse to its insureds interests in a manner that could constitute bad faith on its part. Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn.2d 903, 914-15, 169 P.3d 1 (2007) (quoting 8-12 Allan D. Windt, Insurance Claims and Disputes: Representation of Insurance Companies and Insureds §8:3 (5th ed. 2007)).

A reservation of rights, typically, is appropriate in these four basic situations:

(1)	the allegations of the complaint conceivably fall within the scope of coverage: the insurer must defend if the policy so provides, but the insurer reserves its rights to deny its duty to indemnify after further factual development;
(2)	the insurer has doubts about both the duty to defend and to indemnify and agrees to defend subject to its right to seek a judicial determination that it does or does not have a duty to defend;
(3)	the insurer recognizes a duty to defend and indemnify some, but not all, of the claims alleged in the complaint; or
(4)	the insurer disputes the insureds reasonable interpretation of the law (based, for example, upon law from another jurisdiction on a legal ssue not squarely addressed by Washington law) that could result in coverage: the insurer must defend if the policy so provides, given the existence of such an insureds reasonable position, until their coverage dispute is resolved in a declaratory action.

In all of these situations, the insurer has identified a coverage limitation. At the same time, it recognizes that there is some conceivable factual or legal basis that at least the potential exists that a claim or claims may be covered. A reservation of rights is appropriate, and often a good practice, in each situation.

(2) The insurers duties under a reservation of rights defense

The presence of a potential policy defense in connection with a claim can impact the insurer in a variety of ways, depending on the type of defense or limitation. Two types of policy defenses are discussed here. First, the insurer may be aware of a policy defense that is related to the policyholders liability defense in the lawsuit against it. In other words, the insurers policy defense creates a conflict of interest with regard to the conduct of the...