Policies of insurance may actually contain provisions for specific exclusions from coverage, including reservation of rights. Some of these exclusions may be, among others, for “Acts of God,” or “intentional acts,” of the insured. And, under the facts of any claim, where the insured is sued, if an exclusion clearly applies, the insurer may also deny coverage and may even refuse to provide any legal defense.
In the complex business chain and commerce, beginning with the basic raw materials supplier, and extending to the final sale to the end user, where the facts and evidence point to intentional, or negligent acts of the insured, resulting in loss, damage, or harm, the insurer may invoke specific exclusions to coverage. Where the insured is sued, and it is not readily apparent to the insurer whether or not one or more of the policy exclusions apply, the insurer may retain and provide legal defense counsel, but must do so with a “reservation of rights” notification letter, whereby the insurer may deny coverage and even discontinue the legal defense, after it becomes apparent that, under the policy terms, an exclusion from coverage applies, whereby the insurer has no duty to defend or pay the claim. The insured may be left with little recourse, and all of the liability!
Insurers may, by contract, agree to defend its insured, and may do so in good faith under the policy, without waiving its right to assert, even at a later date, the policy defenses it believes it has, provided that it gives its insured timely, written notice of any reservation of rights being asserted.
Without timely, written notification to its insured, the insurance company will have been deemed to have waived its right to deny coverage. The reservation of rights is a necessary action to avoiding a claim of waiver or estoppel, i.e., whereby the insured claims reliance upon the insurer’s defense and its failure to provide coverage, all to his detriment, by failing to timely advise of the right to retain his own legal counsel.
The failure of the insurer to reserve its right to deny coverage was clearly dealt with in Socony-Vacuum Oil Co. v. Continental Cas. Co. (App.1944), 45 Ohio Law Abs. 458, where the insurer, without reserving its rights, provided a defense to its insured for approximately one year before it denied liability and withdrew its defense. The insured hired an attorney, and the plaintiff subsequently dismissed its complaint. The insured then sued the insurer for its attorney fees. The Court of Appeals concluded that, by representing the insured for a year without a reservation of rights, the insurer had waived any right under the policy to challenge coverage. On appeal to the Ohio Supreme Court, the Court noted that estoppel could operate in proceedings to compel an insurer to pay a judgment recovered in a damage suit in which the insurer had provided a defense without a reservation of rights.
Purchasers of insurance coverage must ascertain that all reasonably foreseeable risks are covered under the terms of their insurance policy. Then, when a reservation of rights, or denial of coverage is received, the insured must be prepared to select and retain experienced legal counsel, to mount a good defense and an aggressive offense, including timely assertion of all potential claims against the insurer, for bad faith refusal of coverage and full indemnification of the insured under the policy terms and limits.