What is a Reservation of Rights Letter

An Overview and What the Insured Can Do in Response

Aaron M. Dunn Edmonds Lawyer

Many Washingtonians have at least one insurance policy that provides liability insurance, whether it be auto insurance, homeowners insurance, renters insurance, commercial general liability insurance, and/or other types of insurance. In response to a claim or lawsuit against its insured, an insurance company may issue a letter to the insured stating that although the insurance company will retain an attorney to defend its insured, the insurance company is reserving its right to refuse to indemnify its insured for one or more reasons. The letter is called a “reservation of rights” letter.

If a person or entity makes a claim against you or your business, and your insurance company provides you with a reservation of rights letter, you may be wondering what the letter means and what, if anything, you can do. This article summarizes reservation of rights letters in the liability insurance context and what an insured can do after receiving such a letter.

A liability insurance policy only provides an insured with coverage for claims against an insured pursuant to the coverage outlined in the language of the policy. Nearly every liability insurance policy contains conditions, limitations, and exclusions that limit the insurance company’s obligations. Therefore, having liability insurance does not guarantee that a claim will be covered under the insurance policy.

Because an insurer’s duty to defend its insured is broader than the duty to indemnify its insured, insurance companies sometimes agree to defend their insureds under or subject to a “reservation of rights.” A defense under a reservation of rights means the insurance company will retain an attorney the insurance company chooses to defend the insured, but the insurance company reserves its right to refuse to indemnify its insured because the insurance company believes the insurance policy does not afford coverage for one or more claims against an insured. A reservation of rights letter typically quotes language from the insurance policy, summarizes the allegations against the insured, tells the insured that the policy does not afford coverage for one or more claims, and tells the insured that the insurer may seek a court order declaring that the insurance company’s position is correct.    

After receiving a reservation of rights letter, an insured may wonder what, if anything, they can do. One option is to hire personal counsel, meaning an attorney the insured directly hires. Personal counsel can work in coordination with the attorney retained by the insurance company to defend the insured to obtain a resolution that maximizes the insurance available under the specific policy. Personal counsel can also evaluate the reservation of rights letter to determine whether the insurance company’s position is correct and/or represent the insured in a separate lawsuit against the insurance company that issued the reservation of rights letter. Sometimes, personal counsel can assist insureds with asset protection in situations where the limit of liability insurance available under the policy is insufficient to cover the claim(s) against the insured. In short, retaining personal counsel after (or even before) receiving a reservation of rights letter can be very beneficial to an insured.   

If you have a claim asserted against you or your business, receive a reservation of rights letter, and have questions about what you should do, the lawyers at Beresford Booth have extensive experience and can be of assistance. Do not hesitate to contact us at info@beresfordlaw.com or by phone (425) 776-4100.  

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