INSURANCE POLICY DOESN’T ALWAYS COVER AGAINSTLAWSUITSometimes when a lawsuit is filed against you, your insurancecompany will provide you with an attorney to represent you butindicate that this is an “excess claim” and that it isdefending you under a “reservation of rights”.An excessclaim is one in which the amount sought exceeds the policylimits.In such a situation, you are responsible for any amountawarded in excess of your policy limits.A reservation of rights means that your insurance carrier isreserving its right to deny coverage and to withdraw its defense inthe matter.This may be because it believes you are insured for oneof the claims against you but not for others.For example, if you sell and install a built-in oven that laterexplodes and injures someone, you may be sued for negligentinstallation and a breach of warranty.Your insurance carrier maybelieve you have coverage for the negligence claim but not for thewarranty claim and thus will defend under a reservation ofrights.If you win on the negligence claim and lose on the warrantyclaim, your insurance company may deny coverage.If a claim for punitive damages is included in the lawsuit, yourinsurance company will usually indicate it is not responsible forthat portion of the claim.Another reason your insurance company may reserve its rights todeny coverage is if it thinks you may have provided false ormisleading information on your application for insurance, such asfailing to inform them that you install the ovens you sell.Sometimes it is unclear whether your policy covers the type ofclaim being made against you.Your insurance carrier may choose todefend you because if it fails to do so and you lose, it would beresponsible for the judgment if a court subsequently rules that thepolicy did provide coverage in this area.When your insurance company indicates that you have less thanfull coverage and/or it is defending under a reservation of rights,your interests may be diametrically opposed to your insurancecompany’s.While both of you hope that you win the caseoutright, your insurance company wants the matter to be settled orresolved outside of your coverage.You, of course, want it to besettled or resolved within your coverage.While the attorney provided by your insurance company representsyou on the claims against you, he or she cannot get involved in thecoverage issues raised by your insurance carrier.It is wise to consult your own attorney at the outset torepresent you on the coverage issues.Your attorney can negotiatewith your insurance carrier to settle the claim within your policylimits so that you do not run the risk of being liable for anyaward in excess of your policy limits.If you insurance company actsin bad faith and fails to settle the matter within your policylimits, it may become responsible for the excess amount, aswell.Your own attorney may also suggest that you reject thereservation of rights and force your insurance company to eitherdefend without any limitations or to deny coverage.If the insurer denies coverage and refrains from providing youwith an attorney, it runs the risk of being responsible for thejudgment if another court ultimately rules that your policy coveredyou against the claim.If either you or your carrier do not likethis element of risk a separate suit on the policy (a declaratoryjudgment action) may be immediately filed by either of you seekinga judicial determination as to whether there is coverage and if so,where the coverage lies.When you receive a letter from your insurance company indicatingthat the claim is in excess of your coverage or that it isdefending under a reservation of rights, you should contact yourown attorney immediately so that crucial strategic decisions can bemade early on.If you wait until the case againstyou is ultimately resolved, it may be too late.December 22, 2008
