Reservation of Rights
An insurer must defend its insured where the allegations in the underlying complaint fall within, or potentially fall within, its insurance policy’s coverage provisions. Thus, when an insured tenders its defense to its insurer, the insurer must respond either by accepting the tender (with or without a reservation of rights), denying the tender, or filing a complaint for declaratory relief. Insurers often offer to provide a defense under a reservation of rights; that is, they provide a defense together with notice to their policyholder that the tendered claim ultimately may be determined by the insurer not to be covered. Such notification may offer the insurer additional time to continue its investigation of a claim so the insurer can determine whether and how coverage applies.
Larger policyholders, as well as insureds whose interests conflict with their insurers, may retain the right to control their own defense but have coverage for the defense costs they incur. Insurers are likewise required to timely provide these insureds with any reservations of rights when they are put on notice of the insured’s claim.
Although a reservation of rights may potentially preserve an insurer’s right to later assert certain defenses to coverage, it is primarily (if not exclusively) intended to protect policyholders by informing them of an insurer’s potential coverage and policy defenses. A coverage defense is one by which an insurer contends that a particular claim is or may not be covered by its policy. A policy defense is one by which an insurer asserts that its policy is not enforceable or is void due to the insured’s breach of a policy term or condition. Policyholders should be mindful of their rights and insurers should be aware of, and comply with, their obligations when it comes to reservations of rights.