What happens when an insurance company ‘reserves rights’?
We often talk about the promises an insurer makes in exchange for a policyholder’s premiums. In the law, some of those promises are referred to as “duties,” with the most important being the duty to defend and the duty to indemnify. Generally, the duty to defend is seen as the more important of the two, and when you think about how the claims process works (or doesn’t work), it makes sense.
The duty to defend requires the insurance company to defend an insured when a claim is made against the insured. Defending a claim does not only mean providing legal counsel. It also includes the responsibility for investigating a claim. The duty to indemnify requires the insurance company to pay the claim once liability has been established.
Both the insurance company and the policyholder want to minimize liability. Remember, in their efforts to remain profitable or even just in business, insurance companies would much rather collect premiums than pay claims. There is a point in every claim, then, when the insurer’s interest and the insured’s interest diverge.
We have all received a claim denial at some point in our lives. There are few things more aggravating. What many of us may not have experienced is an insurance company’s uncertainty that a claim will be covered. The company may need more information, and that information may not be readily available. That is when the duty to defend kicks in while the duty to indemnify waits in the wings.
Where a claim denial can be frustrating, a reservation of rights letter can be downright confusing. An insurance company may need time to investigate the claim, but the policyholder may need legal representation right away. A reservation of rights letter informs the insured that the insurer will provide legal counsel to defend the claim but does not guarantee that it will indemnify the claim. You get the lawyer, but you may not get the coverage.
Florida has its own rules about reservation of rights letters. We’ll explain those in our next post. In the meantime, if you are interested in a more detailed discussion of reservation of rights, please see our article, Unraveling the Gordian Knot.
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