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Sometimes when a lawsuits is filed against you, your insurance company will provide you with an attorney to represent you but indicate that this is an “excess claim” and that it is defending you under a “reservation of rights”. An excess claim is one in which the amount sought exceeds the policy limits. In such a situation, you are responsible for any amount awarded in excess of your policy limits.
A reservation of rights means that your insurance carrier is reserving its right to deny coverage and to withdraw its defense in the matter. This may be because it believes you are insured for one of the claims against you but not for others.
For example, if you sell and install a built-in oven that later explodes and injures someone, you may be sued for negligent installation and a breach of warranty. Your insurance carrier may believe you have coverage for the negligence claim but not for the warranty claim and thus will defend under a reservation of rights. If you win on the negligence claim and lose on the warranty claim, your insurance company may deny coverage.
If a claim for punitive damages is included in the lawsuits, your insurance company will usually indicate it is not responsible for that portion of the claim.
Another reason your insurance company may reserve its rights to deny coverage is if it thinks you may have provided false or misleading information on your application for insurance, such as failing to inform them that you install the ovens you sell.
Sometimes it is unclear whether your policy covers the type of claim being made against you. Your insurance carrier may choose to defend you because if it fails to do so and you lose, it would be responsible for the judgment if a court subsequently rules that the policy did provide coverage in this area.
When your insurance company indicates that you have less than full coverage and/or it is defending under a reservation of rights, your interests may be diametrically opposed to your insurance company’s. While both of you hope that you win the case outright, your insurance company wants the matter to be settled or resolved outside of your coverage. You, of course, want it to be settled or resolved within your coverage.
While the attorney provided by your insurance company represents you on the claims against you, he or she cannot get involved in the coverage issues raised by your insurance carrier.
It is wise to consult your own attorney at the outset to represent you on the coverage issues. Your attorney can negotiate with your insurance carrier to settle the claim within your policy limits so that you do not run the risk of being liable for any award in excess of your policy limits. If you insurance company acts in bad faith and fails to settle the matter within your policy limits, it may become responsible for the excess amount, as well.
Your own attorney may also suggest that you reject the reservation of rights and force your insurance company to either defend without any limitations or to deny coverage.
If the insurer denies coverage and refrains from providing you with an attorney, it runs the risk of being responsible for the judgment if another court ultimately rules that your policy covered you against the claim. If either you or your carrier do not like this element of risk a separate suit on the policy (a declaratory judgment action) may be immediately filed by either of you seeking a judicial determination as to whether there is coverage and if so, where the coverage lies.
When you receive a letter from your insurance company indicating that the claim is in excess of your coverage or that it is defending under a reservation of rights, you should contact your own attorney immediately so that crucial strategic decisions can be made early on. If you wait until the case against you is ultimately resolved, it may be too late.