On the Impact of Reservation of Rights Letters

I have written before on a number of occasions about the tripartite relationship that comes into play when an insurer retains defense counsel to represent an insured against a covered lawsuit. In particular, I have discussed my views that the relationship is nowhere near as complicated as many people make it out to be, and that the proper scope of the dealings among all the players in that three sided transaction can be summed up in three handy rules of thumb, which, conveniently enough, you can find right here.

However, what is more complicated and what many people seem to have less understanding of is what are the insured’s rights when the insurer - whether it or instead the insured has selected and is paying the defense lawyers - is limiting its coverage by means of a reservation of rights, which is in essence a letter stating that the insurer will cover only parts, but not all, of any possible loss in a particular case. In many jurisdictions, these circumstance gives rise to a number of substantive powers and subtle leverages on the part of the insured, and likewise to many express duties and subtle pressure points on the part of the insurer. Those, much more than the much simpler dynamics of the tripartite relationship, are worth knowing about, and if you think so too, you may want to attend this teleconference on the subject, scheduled for tomorrow.