Insurance companies have an obligation to defend and indemnify an insured under a typical liability policy. When a company is notified of the claim or suit the company should start performance of the contractual obligation which would include speaking with the insured, investigating, gathering facts, protecting evidence, hiring counsel for the insured, and responding to the claim. Sometimes under the policy language the insurance may have an exclusion under which the company does not have an obligation to defend and indemnify the insured. This is a problem for the insured, but insurance companies don’t have to keep promises they don’t make. Unfortunately companies don’t always take a fair view of the facts or policy language and will not defend and indemnify the insured even when they should.
Many companies simply use a reservation of rights as standard operating procedure. This practice has become common and insurers often respond by sending letters reserving the right to deny coverage for as many reasons as possible and for any reason they can think of or discover in the future. Under a reservation of rights the insurance company is saying, we will defend for now but we can still sue you in another lawsuit to get a court to decide that we don’t have to defend or indemnify you. Many insurance companies also fail to honor their obligation to fairly consider settlement when a reservation of rights has been issued. Unfortunately for the insured this means massive uncertainty, possible loss of the opportunity to settle, financial risk and additional litigation. If the insured loses both the liability and coverage lawsuit they will be liable for the judgment from the first law suit and will also have to pay the insurance company for the legal fees and expenses of the insurance company. This can lead to ruinous financial consequences and bankruptcy for most people.
The sharp practice of issuing a reservation of rights is happening even when an insurance company receives coverage opinions favorable to the insured. To gain leverage insurance companies try to squeeze the insured by including language that expands the reservation of rights not only to the reasons stated in the letter, but reserves the right to expand the reason for denial for any reason. The insured is also reminded that they have a duty to cooperate and if they fail to cooperate they will lose their coverage. This means the insured doesn’t know what is coming next.
Insurance companies will often also use favorable dates ins such letters so that the conditional obligation that they assume under the reservation of rights is not the date they first became aware of the claim, but a date that positions the company best for future litigation. This is particularly true if the insurance company has failed in its duty to settle before the insured made a formal demand for defense and indemnity. In Missouri many of the bad things that can happen when a reservation of rights is issued can be avoided by rejecting the reservations. Missouri law prevents insurance companies from using threats and leverage to bully insured’s to accept a reservation of rights. Under Missouri law and insured is entitled to treat a reservation of rights as a breach because a reservation of rights is anticipatory repudiation of the contract. Although the insurance company still has the upper hand because of its financial strength and expertise, this gives the insured the option of walking away and controlling the litigation without the insurance company’s involvement. This also gives the insured a chance to resolve the claim by negotiating with the company on more equal footing, or the insured can defend or settle the underlying lawsuit on its own and then suing the company for breach of the contract. The insured can also settle the claim so that the plaintiff has the obligation to pursue the insurance company, so that the insured can settle can get out without any further risk.
The decision to accept or reject a reservation of rights depends on many factors, and may or may not be a good decision depending on the situation. These decisions can be particularly complex for businesses as the reservation of rights may have implications that are not immediately apparent and must be thought through with extreme care. Anyone who has received a reservation of rights from their insurance company should consult with a private attorney knowledgeable in this area of the law.