Policyholder Checklist: Responding to Reservation of Rights Letters and Non-Waiver
Insurance companies are obligated to respond quickly to claims for coverage submitted
by financial institutions and other policyholders to avoid waiving their rights later to
assert policy defenses. Therefore, an insurance company may reply to a policyholder's
notice of claim by sending a "reservation of rights." An insurance company's
reservation of rights lists the possible defenses that the insurance company believes it
may have to the policyholder's claim for coverage. Alternatively, insurance companies may
propose that policyholders sign so-called non-waiver agreements.
Set forth below is a checklist of points for financial institutions and other
policyholders to consider when they receive reservations of rights or requests to enter
non-waiver agreements from their insurance companies.
Breadth of the Duty to Defend
- The duty to defend is very broad and applies from the time the policyholder is sued.
- Under the law in most states, an insurance company is precluded from asserting any
defense that it did not specifically set forth in its reservation of rights letters.
- Unless there is no conceivable basis under the insurance policy for coverage of the
claim against the policyholder, the insurance company is obligated to defend the
policyholder notwithstanding the reservation of rights. The insurance company has the
burden to show that there is no possible basis for coverage of the claim against the
- An insurance company refuses to defend its policyholder at its peril. If the insurance
company believes it has a legitimate defense to coverage, it should seek a judicial
declaration that there is no coverage.
Conflicts of Interest: A Policyholder's Right to Independent Coverage Counsel
- A reservation of rights letter indicates that there is a conflict of interest between
the insurance company and the policyholder.
- If a conflict exists, the policyholder may hire an independent law firm, rather than
relying on an attorney appointed by the insurance company, to provide a defense to the
- Any delay by the insurance company in accepting the policyholder's defense prejudices
the policyholder because it usually affects the policyholder's decision about whether to
use the insurance company's counsel or to hire its own independent attorneys.
Cooperation with Insurance Company
- The insurance company cannot require the policyholder to act contrary to the
- Duties under the so-called cooperation clause in an insurance policy are conditioned
upon the insurance company's performance of its policy obligations.
- A reservation of rights may be considered a denial of coverage.
- At the very least, a reservation of rights shows a divergence of interests between the
insurance company and its policyholder, diluting or abrogating any duty by the
policyholder to "cooperate."
Preserving the Policyholder's Privileges
- If the insurance company requests information concerning the underlying claim, a
policyholder should not turn over privileged materials. Otherwise, the policyholder may
face an argument that it waived its right to assert privileges against the insurance
company, or against third parties.
- If the insurance company refuses to defend, then the policyholder may have to consider
coverage litigation. The good news here for policyholders is that an insurance company
refuses to defend at its own peril.
- If the insurance company is defending the policyholder without a reservation of rights,
a policyholder may freely disclose otherwise-privileged information to the insurance
- A non-waiver agreement is a bilateral agreement under which the insurance company agrees
to pay for the defense of the action against the policyholder while reserving all rights.
Policyholders almost always have nothing to gain by signing such an agreement.
- An insurance company might argue that a non-waiver agreement creates a new contract,
taking the place of the insurance policy.
- If the policyholder countersigns the insurance company's reservation of rights letter,
it runs a risk of having the reservations of rights letter treated as a non-waiver
The Policyholder's Response
- Most importantly, always create a paper trail.
- Generally, a policyholder should not agree to sign a non-waiver agreement, and should
respond to reservation of rights letters.
- The policyholder's response should acknowledge receipt and state that the policyholder
disagrees with the positions asserted by the insurance company.
- A policyholder should provide its insurance company with all non-privileged documents
that could help the insurance company to provide a defense, especially if the insurance
company is in fact taking an active role in the defense of the underlying claim.
- If you absolutely must sign a non-wavier agreement in order to, for example, finance
your defense, set forth your disagreement in writing and explain that you signed the
agreement under economic duress.
Very Bad News: Insurance Companies' Efforts to Recover Defense Costs
- Insurance companies often attempt to insert a provision, both in reservation of rights
letters and non-waiver agreements, seeking to allow them to recover the monies they spent
in defending the policyholder if it later turns out that there was no coverage under the
- This provision is often contrary to the parties' rights and duties under the insurance
policy. Do not agree to it.
Conclusion: Take Control
- The key is to take control of the defense of the claim against you, challenge the
insurance company's self-serving statements, and retain confidence in of your strong
rights as a policyholder.
1 The information in this checklist is drawn from an article
by Eugene R. Anderson and Mark Garbowski. Messrs. Anderson and
Garbowski are partners in Anderson Kill & Olick's New York office. Eugene R. Anderson
& Mark Garbowski, Responding to Reservation of Rights Letters and Non-Waiver
Agreements, N.Y.L.J. (Oct. 8, 1997) at 1.