Insurance companies have a duty to defend and replace an insured according to a typical liability policy. When a company is notified of the claim or expense, the company should commence the performance of the contractual obligation that would include speaking with the insured, investigating, collecting facts, protecting evidence, hiring counsel for insured and claiming the claim. Sometimes the insurance under the insurance language may have an exclusion under which the company has no obligation to defend and replace the insured. This is a problem for the insured, but insurers do not have to keep promises they do not. Unfortunately, companies do not always have a fair picture of facts or policies and will not defend and replace the insured even when they should.
Many companies simply use a reservation of rights as the default operating procedure. This practice has become commonplace and insurance companies often respond by sending letters that reserve the right to deny coverage for as many reasons as possible and for some reason that they can think of or discover in the future. During a reservation of rights as the insurance company says, we will defend for now but we can still sue you in another trial to get a court to decide that we do not need to defend or replace you. Many insurance companies also fail to fulfill their obligations to justify settlement when a reservation of rights has been issued. Unfortunately, for the insured, it means massive uncertainty, possible loss of opportunity to resolve, financial risk and further litigation. If the insured loses both liability and liability insurance, they are responsible for the judgment in the first law and will also have to pay the insurance company for insurance companies legal fees and expenses. This can lead to devastating financial consequences and bankruptcy for most.
The sharp practice of issuing a reservation of rights also happens when an insurer receives coverage statements that are favorable to insured persons. To get leverage insurance companies try to squeeze the insured by including languages that extend the reservation of rights not only for the reasons stated in the letter, but reserves the right to extend the reason for rejection for any reason. The insured also reminds them that they have a duty to cooperate and if they do not cooperate they will lose their coverage. This means that the insured does not know whats next.
Insurance companies will also often use favorable dates in such letters so that the conditional obligation they assume during the reservation of rights is not the date they first became aware of the claim but a date that best positions the company for future litigation. This is especially true if the insurance company has failed to settle before the insured posed a formal demand for defense and compensation. In Missouri, many of the bad things that can happen when a reservation of rights is issued can be avoided by rejecting the reservations. Missouri laws prevent insurance companies from using threats and leverage to mobile insured to accept a reservation of rights. According to Missouri, law and policyholders are entitled to treat a reservation of rights as a crime because a reservation of rights is a predictable rejection of the contract. Although the insurance company still has overall due to its economic strength and competence, the insured gives the insured the opportunity to go away and check the proceedings without the insurance companys involvement. This also provides the insured opportunity to settle the claim by negotiating with the company on equal terms, or the insured can defend or resolve the underlying trial by itself and then sue the company for breach of the contract. The insured can also settle the claim so that the plaintiff is obliged to conduct the insurance company so that the insured can settle can come out without further risk.
The decision to accept or decline a reservation of rights depends on many factors and may or may not be a good decision depending on the situation. These decisions can be particularly complex for businesses, as the rights can have consequences that are not immediately apparent and must be met with great care. The person who has received a reservation of rights from his insurance company should consult a private lawyer who is knowledgeable in this area of the law.