Reservation of rights

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A reservation of rights, in American legal practice, is a statement that an individual, company, or other organization is intentionally retaining full legal rights to warn others of those rights. The notice avoids later claims that one waived legal rights that were held under a contract, copyright law, or any other applicable law.

The term is used in connection with copyright law. The term "reservation of rights" (particularly a "reservation of rights letter”) is often used in connection with insurance claims. The insurance company issues a reservation of rights letter stating that it may deny coverage for some or all of the claim even while the company is investigating the claim or beginning to treat the claim as if it were covered. [1] If the insurance company later decides to deny coverage, it cites the original reservation of rights as the warning that it might do so.

An insurer’s reservation of rights is an important legal step, particularly in the context of liability insurance. The insurer may provide a defense to the insured, seemingly protecting the insured from the serious liabilities that may result from a civil suit. The liability insurer is alerting the insured defendant that insurance may ultimately not cover the resulting liability, or a portion of the liability. [2]

A reservation of rights by a liability insurance company is an expression of the insurer’s agreement to defend its policyholder with the limiting condition [3] that it does not waive any right to later deny coverage under the terms of insurance contract. A reservation of rights permits an insurer to fulfill its broad duty to defend [4] while avoiding waiver, estoppel, or forfeiture of rights [5] or being bound by a judgment entered against its policyholder [6] and serves to warn the policyholder to take steps to protect oneself from the reserving insurer. [7] An insurer that reserves its rights may recover reimbursement from its own policyholder certain sums spent for the costs of defense [8] and the costs of settlement. [9] A right that does not already exist may not be created by reserving it. [10] A valid reservation of rights does not require the policyholder’s consent. [11]

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Accident insurance is a type of insurance where the policy holder is paid directly in the event of an accident resulting in injury of the insured. The insured can spend the benefit payment however they choose. Accident insurance is complementary to, not a replacement for, health insurance.

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A liability insurance company's duty to settle is defined as an implied obligation to by the insurer to a policyholder and to a claimant to attempt "in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear." To the surprise of many, a typical liability insurance policy makes no express contractual promise to settle. In California, "an insurer, who wrongfully refuses to accept a reasonable settlement within the policy limits is liable for the entire judgment against the insured even if it exceeds the policy limits." A rationale for this duty is that "[w]hen an offer is made to settle a claim in excess of policy limits for an amount within policy limits, a genuine and immediate conflict of interest arises between carrier and assured." "An insurer who denies coverage does so at its own risk. Such factors as a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one." "It is the duty of the insurer to keep the insured informed of settlement offers." "[A]n insurer potentially can be liable for unreasonably coercing an insured to contribute to a settlement fund."

References

  1. ↑ Glossary of Insurance Management Terms (9th ed.). International Risk Management Institute. 2004. p. 192. ISBN   978-1-886813-46-5. An insurer's notification to an insured that coverage for a claim may not apply. Such notification allows an insurer to investigate(or even defend) a claim to determine if coverage applies (in whole or in part) without waiving its rights to later deny coverage based on information revealed by the investigation.
  2. ↑ "Penn-America Ins Co. v. Sanchez". Central Analysis Bureau, Inc. Retrieved 2010-05-01. An insured is entitled to know early in the litigation process whether the insurer intends to honor [its] duty [to defend] in order that the insured may take steps to defend himself. If in fact the insurer undertakes that defense the insured may reasonably rely upon the nonexistence of policy defenses. To hold otherwise would wallow the insurer to conduct the defense of the action without the knowledge of the insured that a conflict of interest exists between itself and the insurer. The conflict is that the insurer retains a policy defense which would relieve the insurer of all liability while simultaneously depriving the insured of the right to conduct his own defense. It is the reliance of the insured upon the insurer's handling of the defense and the subsequent prejudice which gives rise to an estoppel in the first instance against the insurer from raising policy defenses.
  3. ↑ "Definition of RESERVATION". www.merriam-webster.com. Retrieved 2016-05-17.
  4. ↑ “If, after request, the [insurer] neglects to defend the [policyholder], a recovery against the [policyholder] suffered by him in good faith, is conclusive in his favor against the [insurer].” (Cal. Civ. Code § 2778(5).)
  5. ↑ “The general rule supported by the great weight of authority is that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insurer’s unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds.” (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754 (https://scholar.google.com/scholar_case?case=17753399438295695451&q=miller+elite&hl=en&as_sdt=4,5).)
  6. ↑ “[I]f the insurer adequately reserves its right to assert the noncoverage defense later, it will not be bound by the judgment. [T]he insurer can raise the noncoverage defense previously reserved.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 279 (ellipsis omitted) (https://scholar.google.com/scholar_case?case=16569039436173974074&q=gray+v+zuirich&hl=en&as_sdt=4,5).) A “judgment in the underlying action is conclusive as to the insurer’s liability if factual matters upon which the issue of coverage turns are expressly or impliedly determined in the prior action [and] such determinations bind the insurer in the subsequent suit to enforce the provisions of the policy.” (Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 565 (citations and ellipsis omitted) (https://scholar.google.com/scholar_case?case=4360508183067563660&q=hogan&hl=en&as_sdt=4,5).) An “insurer can avoid being bound by the judgment against the insured if it secures a nonwaiver agreement from the insured or makes an adequate reservation of rights. A nonwaiver agreement is a bilateral contract providing that the insurer will defend the tort suit while reserving its right to assert nonliability under the policy at a later date. A reservation of rights is very similar and the assured’s silence will usually be deemed acquiescence. In California, [t]here must be a showing that the insurer either intentionally relinquished a known right, or acted in such manner as to cause the insured reasonably to believe the insurer had relinquished such right, and that the insured relied upon such conduct to his detriment. (Val’s Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 586-87 (citations, quotation marks and ellipses omitted) (https://scholar.google.com/scholar_case?case=10783098633825210597&q=val%27s+painting&hl=en&as_sdt=4,5).)
  7. ↑ “Through reservation, the insurer gives the insured an opportunity to take any steps that it may deem reasonable or necessary in response.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61, fn. 27 (ellipsis omitted) (https://scholar.google.com/scholar_case?case=15406196361322702614&q=buss&hl=en&as_sdt=4,5).)
  8. ↑ “As to the claims that are at least potentially covered, the insurer may not seek reimbursement for defense costs. As to the claims that are not even potentially covered, however, the insurer may indeed seek reimbursement for defense costs.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 49-50 (ellipsis omitted).) [T]his right . . . must indeed be reserved.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61 fn.27.)
  9. ↑ “Under (certain) circumstances, an insurer may be reimbursed for a reasonable settlement payment made over the objection of its insureds. (Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 493) (https://scholar.google.com/scholar_case?case=6433644861128091584&q=blue+ridge&hl=en&as_sdt=4,5) [T]his right . . . must indeed be reserved.” (Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 501.)
  10. ↑ “[A]n insurer cannot unilaterally ‘reserve’ ‘rights’ it never had under the relevant insurance policy. Thus, the insurer cannot use a unilateral reservation of rights to create a ‘right’ of reimbursement of costs extended to defend claims that were potentially covered by the policy.” (Scottsdale Ins. Co. v. MV Transp. (2005) 36 Cal.4th 643, 659, fn.3 (citation omitted) (https://scholar.google.com/scholar_case?case=7781543369851129818&q=mv+transport&hl=en&as_sdt=4,5).) “It follows a fortiori that the insurer may not proceed by means of a ‘reservation’ of its ‘right’ of reimbursement. It simply has no such ‘right’ to ‘reserve.’” (Buss v. Superior Court (1997) 16 Cal.4th 35, 50.)
  11. ↑ “Because the right is the insurer’s alone, it may be reserved by it unilaterally.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61 fn.27.)
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