Representing Your Client Under a Reservation of Rights

January 01, 1999

Insurance defense—seems like good work, doesn’t it? Insureds definitely like the arrangement. Attorneys certainly enjoy being paid on time and in full for a change. Even insurers, who are ultimately stuck with the tab, tend to favor the idea of providing a defense. After all, the one with the money rules, right? Insurers retain a sense of control when they provide a defense and are, therefore, better able to accept the results. See Richmond, “Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel,” 73 Neb.L.Rev.  265, 269 (1994); Barker, “ALI Draft Questions Insurer’s Right to Control Defense,” 60 Def.Couns.J. 611 (1993).
This entire situation, however, goes somewhat askew when the insurer provides a defense subject to a reservation of rights. This one seemingly simple letter—sent by the insurer to notify the insured that the defense is being provided subject to its right to  deny coverage—throws a monkey wrench into the smooth workings of the tripartite relationship. The insured suddenly finds himself in the precarious situation where the defense may be pulled at any moment. The insurer finds itself paying for a defense it cannot control. Finally, defense counsel must switch her allegiances and address potential conflicts of interest.
Because of the ethical dilemmas inherent in the reservation of rights scenario, ethical grievances and malpractice claims have, unfortunately, become an occupational hazard for insurance defense counsel. Even more unfortunate is the fact that many defense counsel—even those who routinely practice insurance defense are not aware of the impact of such a letter on their ethical duties. This article attempts to address the issues facing defense counsel when they are called upon to represent an insured under a reservation of rights.

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