Is that Covered? Reservation of Rights Letter

McNees Wallace & Nurick LLC

If your client is sued, one immediate task is to determine if there is insurance coverage for the claim(s).  If you submit the claim to an insurance company, Pennsylvania law requires that it acknowledge receipt of the claim promptly, and that the insurer either accept or deny coverage within 30 days of acknowledging the claim.


One exception to the above rule is the reservation of rights letter.  Insurance companies frequently use the reservation of rights letter to avoid making a hard decision on coverage at the initial stage of a lawsuit.  But, what is a reservation of rights letter?  If your client receives one, is there coverage for the claim or not?  What about defense costs?   Are your client's assets at risk?   Should the insured retain its own counsel separate from the lawyer hired by the insurance company?


What is a Reservation of Rights letter?

An insurance company usually sends a reservation of rights letter when it concludes that a claim may not be covered, but the facts alleged in a demand letter or complaint are insufficient for it to deny coverage outright.  If the insurer has a duty to defend under the policy, the company must hire and pay an attorney to defend the lawsuit even while it has reserved its rights.   


If you receive a reservation of rights letter, are you covered?

The answer is maybe!  The reservation of rights means that the insurance company has not yet made up its mind about coverage and needs more facts to make the decision.


Are defense costs covered?

If your policy requires a duty to defend, the insurance company must pay for your lawyer and all litigation costs while the reservation is in effect. If the insurer discovers facts during the lawsuit that support denial of coverage, the insurer may then advise you that coverage is denied and that it will cease paying for your insurance defense lawyer.  Some insurers will even demand that you pay it back for the defense costs that it paid during the reservation of rights.  Pennsylvania law has generally sided with insureds on this issue and does not require such a payback.


Are assets at risk?

Yes, an insured's assets are at risk if the insurer has issued a reservation of rights letter.  The reservation means that it could deny coverage at any time and refuse to pay a settlement or judgment.  In such a case, Plaintiff could look to personal or business assets to pay a settlement or judgment.


Should you obtain your own counsel?

The decision to retain your own counsel, separate from insurance defense counsel, is one that depends on the circumstances.  Factors include the validity of the reasons for the reservation of rights, the amount at issue in the case, whether the amount at issue exceeds the policy coverage, and your satisfaction level with insurance defense counsel.  Generally, the greater the amount at stake, the more critical it is to retain your own counsel.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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