Reservation of Rights Explained
Someone has filed a lawsuit against you or your business. You have a liability policy, so you notified your insurance company. You received a letter from your insurance company. It states that they will pay a Lawyer to defend you but that the company is “reserving its rights.” What does reservation of rights mean?
The insurance company’s duty to defend and indemnify
In Mississippi, an insurance company selling liability insurance owes the insured two distinct duties. Those are:
- The duty to defend
- The duty to indemnify
The “duty to defend” means the insurance company must hire a Lawyer to defend you in court. In most instances, it is up to the insurance company to decide which Lawyer to hire.
The duty to indemnify means that if a judgment is entered against you, the insurance company must pay that judgment up to the limits of insurance coverage.
Of course, just because you have been named in a lawsuit does not automatically mean you have insurance coverage for that particular claim. If the lawsuit is about something not covered by your policy, the insurance company does not owe you a duty to defend or indemnify.
So why is the insurance company reserving its rights?
In Mississippi, the duty to defend it is broader than the duty to indemnify. If it is possible basis that the claim might be covered by the policy, the insurance company must defend.
Later, after more facts come out, it may be that the claim was not covered by the policy after all. Therefore, the insurance company would have no duty to indemnify.
Here is an example. Assume somebody sues you for causing an accident. The plaintiff alleges in the complaint that you either negligently or intentionally caused the accident.
Also, assume your policy covers you for negligent acts but not intentional acts. The insurance company must defend you because it is possible you were not at fault or were only negligent.
But if, at the end of the case, you have been found to have acted intentionally, the insurance company will deny any obligation to pay the judgment.
So, in a reservation of rights letter, the insurance company is reserving the right at the end of the case to declare that the judgment is not covered.
There is some good news here.
In Mississippi, when an insured receives a reservation of rights letter, the insured may be able to hire its own independent Lawyer. Also, the insurance company may have to pay for the second Lawyer as well.
This second Lawyer is known as “Moeller counsel.” That Lawyer’s job is to look out specifically for your interest without regard to the interest of the insurance company.
If you received a reservation of rights letter from your insurance company, contact one of our insurance Lawyers for advice as to whether you are entitled to Moeller counsel.
Pepper & Odom Law Firm
Ridgeland, MS 39157
Original Content by: Attorney Craig Panter of The Panter Law Firm