Welcome to the “Course Brief” for the Insurance Claims Reservation of Rights and Excess Ad Damnum Communication From/By an Insurer to an Insured in the Insurance Claims Reservation of Rights and Excess Ad Damnum Communication From/By an Insurer to an Insured continuing education course. The purpose of this course is to arm you with the knowledge necessary to improve how insurance companies investigate and defend claims in order to determine whether coverage applies in whole or in part)without waiving its right to deny subsequent coverage based on the information uncovered during the investigation.

If you are a Claims Adjuster, this course will assist you in evaluating how insurance companies conduct investigations, using well-decided cases as examples. This course makes several assumptions about you, the student, including the following:

  • You hold a valid Florida General Lines Agent, Personal Lines Agent, or 4-40 Customer Representative license.
  • You are a General Lines Adjuster with a 6-20 rating or a Public Adjuster with a 3-20 rating.
  • You are interested in obtaining additional information and processes to assist you in educating and presenting to current and prospective customers.
  • You require additional information in order to train your office staff.

This course is intended to serve as an introduction to the law of bad faith in insurance claims. Certain legal concepts governing premises liability claims must be understood by those involved in the sale and administration of liability insurance:-

  • What does the term “reserved rights” mean?
  • How are insurers’ investigations conducted?
  • What are some of the rights of insurers?
  • What are reserves for claims?
  • What happens if the case proceeds to trial?
  • Which case laws have established precedents in the area of insurance claims reservation of rights?

This course analyzes a sizable body of law, the majority of which consists of well-decided case law from superior courts that has become precedent in the area of Insurance Claim Reservation of Rights.

Content of the Course

  • What is a right reservation?
  • When is it appropriate to reserve an insurer’s rights?
  • Dispute a reservation of rights
  • Reservation of Rights Pursuant to the Insuring Agreement’s Disclaimer of Terms
  • Obligation to Defend
  • Common Law with Reservations
  • Acceptance of a Defense Pursuant to a Rights Reservation
  • Defense’s Rejection
  • Reserve for Claims
  • Letter of Reservation of Rights
  • What to do if you receive a Letters Reservation of Rights
  • Caselaw

Individuals purchase insurance to safeguard themselves against financial loss. The company providing the service charges its customers’ insurance premiums in exchange for taking on this risk. An insurance premium is the amount of money paid by an individual or business for an insurance policy; insurance premiums may be paid in monthly or semi-annual installments or in one lump sum prior to the start of coverage.

When an insurance company enters into a contract with a customer, it accepts all liability if an adverse event occurs that damages the property it agreed to insure. Accepting liability entails compensating the insured party for a legitimate claim.

Each year, insurance companies handle claims against the policies they sell. For instance, an auto insurance policyholder who is involved in an accident will file a claim with their insurance provider in order to be reimbursed for any damage to their vehicle.

Certain types of claims, such as property losses caused by fire, are easily quantifiable and quickly resolved. Others, such as product liability, are more complicated and may require resolution years after the policy has expired.

A claims reserve is money set aside for claims that have been reported but not settled (RBNS) or for claims that have been incurred but not reported (IBNR). Each file that meets those criteria will be assigned a claims reserve, which reflects the insurance company’s best estimate of the eventual settlement amount. The reserve for unpaid claims is an actuarial estimate, as the amounts owed on any given claim are unknown until the claim is settled. A claims adjuster is in charge of estimating the amount payable. The claims reserve’s monetary value can be determined subjectively, based on the claims handler’s judgment, or statistically, by evaluating historical data to forecast future losses.

Money for the claims reserve is deducted from a portion of policyholders’ premium payments over the course of their insurance contracts. In general, claims reserves are funds set aside by insurance companies to compensate policyholders who have filed or are expected to file legitimate claims under their policies. The fund is used by insurers to pay out unresolved claims.

A Letter of Reservation of Rights

A letter of reservation of rights is sent by an insurance company to an insured party to indicate that a claim may be denied under the terms of the policy. Letters reserving rights do not constitute a denial of a claim. The letter, however, implies that the insurer is investigating the claim and reserves the right to deny it once the investigation is complete.

What should one do if they receive a letter containing a “Reservation of Rights” clause?

When an insurer sends you a letter of reservation of rights, it indicates that it has reservations about whether your policy covers some or all of the claims. Frequently, the plaintiff will assert multiple claims in a liability lawsuit. Some may be covered by the policy, while others are not. When a claim is initially filed, the insurer may be unaware of whether the facts at hand fall within the scope of coverage.

When you purchase a liability policy, your insurer agrees to cover the costs of your legal defense in addition to any damages you may be legally required to pay. Most states recognize this “duty to defend” under a commercial general liability policy as fairly broad. If there is a possibility that coverage would apply, the insurer is required to provide legal representation.

When an insurer receives a claim that may be covered only partially or not at all by its policy, it has several options:

  1. Refuse to defend. If the insurer does this, and the court later determines that coverage was applicable, the insurer is responsible for your defense costs, as well as any settlement costs over which the insurer had no control.
  2. Conduct an investigation into the claim and initiate your legal defense. Insurance companies prefer to avoid this due to the estoppel principle, which prohibits an individual from “denying or alleging a certain fact…based on that individual’s prior conduct, allegation, or denial” to the detriment of another. In other words, if your insurer begins investigating or defending your claim, this may lead you to believe it will be covered.
  3. Submit a declaratory action in which the insurer asks the court to determine whether it is required to defend the claim. When an insurer first receives notice of a claim, it is uncommon for it to do so.
  4. Send a reservation of rights letter to the insured via certified mail and continue with the investigation. This enables the insurer to collect additional information before deciding whether to deny coverage while still retaining its right. Thus, if your insurer successfully defends your liability claim, it may later deny indemnification (or payment of settlements or judgments).

In many jurisdictions, a reservation of rights may enable the insurer to withdraw from the defense if the policy does not provide coverage. ROR letters empower insurers to deny indemnification for any portion of a judgment that is not covered by the policy. Additionally, the liability policy requires you to cooperate with the insurer in conducting your defense, either explicitly or implicitly. This gives the insurer the authority to direct your legal defense, including the option to settle. However, investigations can provide it with the facts necessary to deny you coverage. For these reasons, a letter reserving rights indicates a disagreement between you and your insurer.

If you receive a letter of reservation of rights, you should take the following steps to protect your coverage rights:

  1. Carefully read the letter of reservation of rights and the policy to which it refers.
  2. Respond to your insurer, expressing your disagreement, and requesting that the insurer commits to coverage prior to initiating its investigation.
  3. Arrange for your representation. Certain reservation of rights letters will state that the insurer reserves the right to recoup defense costs if it is not obligated to defend. Depending on the facts of the case and the applicable jurisdiction, you may be required to reimburse your insurer for defense costs if coverage was later determined not to apply. You have no reason to be concerned with a straightforward claim. A reputable insurance company will provide excellent defense. Conflicts arise in the gray areas where coverage may or may not apply. As a result, we recommend conducting a thorough review of your liability coverage on a regular basis. A review can identify coverage gaps, out-of-date forms and language, and other issues.


Insurance companies are contractually prohibited from reserving their rights in the event of a covered claim. Nonetheless, reservation of rights has become a common practice in order to protect the insurer from liability associated with the need to investigate a claim. However, reservations of rights are frequently abused as a sword to coerce policyholders into accepting less than full coverage and delaying claim resolution.

Additionally, they are abused as a shield to shield the insurer from its bad faith claims handling practices. To mitigate the effectiveness of such misconduct, policyholders must be aware of the insurer’s tactics and prepared to respond swiftly and forcefully.

What the policyholder may do varies according to the circumstances surrounding the right reservation. This article discusses some of the more common scenarios in which this issue occurs.


Notification by an insurer to an insured that coverage for a claim may be void. Such notification enables an insurer to investigate (or even defend) a claim in order to determine whether coverage applies (in whole or in part) without waiving its right to deny coverage later based on the findings of the investigation.

Insurers use a reservation of rights letter because, in many claim situations, the insurer has only a few unsubstantiated allegations and, at best, a few confirmed facts at the time of the claim’s inception. By reserving the right to deny coverage in the future, the insurer is merely communicating to the insured its concern that the claim, in whole or in part, may not be covered by the policy pending further investigation.

While a reservation of rights safeguards an insurer’s interests, it also alerts an insured that certain aspects of a claim may be uninsured, allowing the insured to take necessary precautions to protect its potentially uninsured interests.

Due to the requirement for an unequivocal representation, silence and inaction do not suffice to establish waiver or estoppel – they are by definition ambiguous (at least in the absence of a ‘duty to speak’ – which I will discuss in a moment).

Thus, the two concepts are similar – but with one critical distinction: in the case of estoppel, the insured must also establish that it relied on the unambiguous representation to the extent that it would be inequitable for the insurer to reverse the representation. This is sometimes referred to as ‘disadvantage’ or ‘disadvantageous reliance.’ This is not a requirement for affirmation or waiver – only for estoppel.

That concludes a brief overview of the fundamental legal principles underlying reservation of rights. I believe that the best way to approach this subject is to recall what Rix LJ stated in the Kosmar Villa Holidays case:

‘What a reservation of rights accomplishes is to expressly preserve a situation in which it might otherwise be held that something unambiguous occurred.’

I also like the phrase used by Leggatt J in Involnert Management Inc v Aprilgrange Ltd – that a reservation of rights is an impediment to obtaining an unequivocal communication of a decision – in that case, insurers affirming a policy when they could have avoided it due to non-disclosure.

If I had written this piece prior to the Court of Appeal’s decision in Ted Baker v AXA in 2017, I would have ended here and moved on to discuss the practical implications of reservation of rights. I’ll get to that in a moment – but first, I’d like to address Ted Baker v AXA.

In that case, the Court of Appeal recognized the possibility of estoppel based on a ‘duty to speak.’

‘… whether an estoppel exists is not entirely dependent on whether the person seeking to be estopped made an express or implied representation. It may exist if, in light of the circumstances known to the parties, a reasonable person in the position of the party seeking to establish the estoppel (in this case, TB) would reasonably expect the other party (in this case, the insurers) to take steps to make his position clear.’

As I previously stated, the conventional view is that an unambiguous representation is required for estoppel. As a result, silence and inaction are insufficient.

Obviously, this must be qualified in light of the Ted Baker ruling. However, questions remain. Ted Baker made a reservation of rights. Christopher Clarke LJ made a passing reference to this in setting out the facts of the case. He made no reference to it in his analysis of the duty to speak. As a former Commercial Court judge with extensive experience in insurance law, it appears highly improbable that Christopher Clarke LJ would have overlooked the significance of a reservation of rights. The implication is that he did not believe the reservation of rights was significant. This is logical if, as he stated in the quotation above, representation is not necessary for estoppel based on a duty to speak to exist.

However, the Court of Appeal did not expressly address the effect of the reservation of rights on duty to speak, and the Ted Baker decision leaves open the possibility that a reservation of rights might be relevant in some circumstances; that it might somehow neutralize a duty to speak, perhaps by preventing it from arising in the first place.

When is it appropriate to reserve an insurer’s rights?

When it comes to the reservation of an insurer’s rights, the following situations come to mind:-

Many people believe that an insurer should not reserve its rights until it becomes aware of a potential defense to the claim; a good example is the right to avoid or proportionately reduce a claim for breach of the duty of fair presentation or for a policyholder’s late notification and potential breach of a condition precedent.

If nothing has occurred, this implies that the insurer may be entitled to exercise certain rights; the optimal approach would be that no reservation of rights is necessary. Insurance companies are required by regulation to treat their customers fairly.

Second, some believe that an insurer should reserve its rights immediately upon receipt of a claim and initiate an investigation immediately.

The case of Kosmar Villa Holidays substantiates both positions. Rix LJ stated that even when an insurer is aware of a potential late notification of an occurrence. It is still grappling with a new claim arising from the occurrence, has raised questions and awaits responses, the situation is ‘ambiguous’ – and that there is no need for a reservation of rights in such a situation, even if such a reservation may be practical and wise’. He then proceeded to say;

“It would not be prudent for insurers to rush to deny a claim due to late notification or to destabilize their relationship with their insured by immediately reserving their position – at a time when they were, in any case, raising pertinent questions about a claim arising from an occurrence about which they had long been ignored in the absence of prompt notification.’

Additionally, Rix LJ stated:

‘Legal doctrine should not compulsorily rely on insurers’ procedural rights.’

Rix LJ then qualified his statement, which, in my opinion, puts the matter squarely in the prudent-to-reserve-at-the-outset-of-any-investigation camp, by saying:

‘Having said that, I would not want to give the impression that insurers can equivocate for an extended period while maintaining the clear impression that they are treating a claim as covered by their policy, particularly at a time when a decision may be required, without running the risk of being deemed to have waived some contractual requirement or right to avoid it. Furthermore, insurers may be granted express options under their policy, the unguarded exercise of which is simply incompatible with the right to decline coverage.’

After investigations are completed, insurers face two significant challenges in terms of waiting to see what the investigations uncover.

One is that the insurer or its agents must ensure that they retain insurers’ rights immediately upon discovery of something or risk being held to have forfeited those rights.

The insurer wishes to avoid a situation in which the parties argue about waiver and estoppel, as occurred in the case of Kosmar Villa Holidays.

As a result, insurers’ rights are frequently reserved in complex claims, and this is done at the outset of the claim’s investigation.

Practical considerations when reserving rights

Certain issues are critical when it comes to the insurer’s reservation of rights. I’d now like to discuss some of the practical issues that can arise when rights are reserved.

To begin, what are the appropriate criteria for insurers to use when reserving rights?

The first point to make is that a reservation of rights can be effective without the phrase reservation of rights’ if the effect of the words used is clear.

As an illustration, see Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep 523.

Woolf J determined that the phrase ‘without prejudice’ used by a loss adjuster was, in fact, a reservation of rights.

And in a case involving Brit UW Ltd v F & B Trenchless Solutions Ltd [2015] EWHC 2237 (Comm), [2016] Lloyd’s Rep IR 69 Carr J determined that despite the absence of the term ‘reservation of rights,’ the insured’s representatives were clearly informed at the relevant meeting that insurers might decline to provide cover due to material non-disclosure.

This is similar to how insurance policy terms such as conditions precedent are construed – the phrase itself is meaningless; what matters is the substance.

However, why take the risk of not using well-known, conventional terms?

It is prudent to employ the phrase ‘reservation of rights’ or a variant thereof. Here, less is more; the most straightforward language may be the most effective – for example, ‘Insurers’ rights are fully reserved.’

Why is this the case? Consider the following examples. Frequently, a straightforward reservation of rights is embellished or expanded.

Thus, an insurer’s or their attorney’s letter might read as follows:

‘The policy expressly reserves insurers’ rights, including the right to refuse to pay a claim entirely.’

The additional words are superfluous. However, they imply a question: what about the right to opt-out of the policy? The reservation is made in reference to the policy – could this be an unambiguous indication that the insurers do not intend to invoke their right to avoid the policy?

What if the letter-writer adds additional words to address this, transforming the reservation into:

‘Insurers retain all rights, including the right to deny a claim entirely or to avoid the policy.’

While this new language may have resolved one issue, has it created another? What about the right to avoid the policy but have the payment reduced proportionately as a result of a breach of the duty of fair presentation?

And so forth.

In each case, the effectiveness of the reservation of rights is determined by the facts. While it would be difficult to elucidate an unequivocal representation from these wordings, no one wants their wording to be challenged in court.

The point is that, in general, embellishing a straightforward reservation of rights does not make it more robust and introduces an element of risk.

Second, is it necessary to repeat a reservation of rights in order for it to remain effective? There are no applicable time limits because the applicable principles are waiver and estoppel. Additionally, there is no requirement that the reservation of rights is repeated in each communication from the insurer to be effective.

However, whether a reservation of rights remains effective if it is not repeated is highly factually dependent.

If the circumstances surrounding the claim have changed, or if the insurer and insured communicate frequently, and the insurer has not repeated the reservation of rights, the reservation’s effectiveness as an ‘obstacle’ to establishing an unequivocal representation may diminish, particularly over time.

Contesting a right reservation

The first point is that there is no direct mechanism for contesting a right reservation. Thus, we should consider indirect means by which an insured can exert pressure on insurers to expedite the conclusion of their investigations and the lifting of a reservation of rights.

Commercial pressure is one way to accomplish this. This could be directed at the insurer’s claims department by a large broker or, alternatively, to the insurer’s underwriter if the client is a long-standing and valuable source of premium. This is more likely to be a factor in a soft market than in a strong market. Additionally, it is unlikely to be effective if serious doubts about the validity of a large claim exist.

In some cases, pressure may be applied through a complaint to the insurer’s complaints department, and if that is unsuccessful, through a complaint to the Financial Ombudsman Service (FOS), alleging that the insurer is not treating its customer insured fairly and is violating ICOBS by failing to complete its investigations and make a decision about cover within a reasonable period.

However, many commercial policyholders fall outside the FOS’s jurisdiction, and the time required to resolve a complaint may render this ineffective as well.

The possibility of a claim for consequential loss is likely to put insurers and their agents under pressure to expedite the conclusion of investigations and the lifting of reservation of rights. Thus, the risk of a claim for damages for late payment of a claim is now probably the most powerful of these indirect means of contesting a reservation of rights.

Reservation of Rights Pursuant to the Insuring Agreement’s Disclaimer of Terms

Insurance companies frequently provide notice that defense will be provided pursuant to a Reservation of Rights, despite the fact that there is no correlation between the assertion of a “coverage defense” under the Claims Administration Statute and the reservation. In such cases, the Reservation of Rights does not fall within the Claims Administration Statute and, by its express terms, should not affect the insured’s statutory right to “mutually agreeable counsel.” Rather, the Reservation of Rights serves as a reminder to the insured that the duty to defend is honored but subject to the policy’s terms, conditions, and exclusions. However, insurers should exercise caution, as this approach may still bind the parties to the insuring agreement to previously unconceived rights and obligations.

Ins. of Colonies G & E Tires & Service, Inc. v. Co.

For instance, in Colony Insights. In Co. v. G & E Tires & Service, Inc., the insured sought defense on multiple occasions but was denied due to the applicability of policy exclusions. Although the insurer did not assert a coverage defense and was not required by statute to issue a Reservation of Rights or assign mutually agreeable counsel, the insurer nonetheless tendered a Reservation of Rights stating the following:

This letter serves as a reservation of Colony’s rights to deny coverage and/or defense under the Policy and/or applicable law and, further, to be reimbursed and/or obtain an allocation of attorney’s fees and expenses incurred or to be incurred in the future, if it is determined that there is no coverage.

Under this express Reservation of Rights, the insured accepted the defense. However, the lower court ultimately determined that the substance of the suit was categorically excluded from the policy’s coverage.

Following that, the First District determined that the insured had accepted the tendered performance and therefore could not materially alter the terms of its agreement to accept the defense on a Reservation of Rights. Under those circumstances, the Reservation of Rights imposed independent contractual obligations on the insured, and once the lower court determined that the policy did not provide coverage for the underlying claims, the insured was required to reimburse Colony for attorney’s fees and expenses incurred in the defense.

In such circumstances, a Reservation of Rights is not required by statute or policy. As a result, a new contractual relationship with entirely new obligations may arise, and the insured’s right to mutually agreeable counsel may eventually be based on these new contractual terms. Thus, the insurer must take care that all terms in the Reservation of Rights are clearly stated and that both the insured and the insurer understand all terms.

Even if there is no statutory requirement to issue a Reservation of Rights, if the insurer has any doubt about whether coverage exists for the damages claimed, it may wish to provide this notice to the insured out of an abundance of caution once the duty to defend is triggered. Although waiver and estoppel do not create coverage where none existed initially, “when an insurance company assumes the defense of an action with actual or presumed knowledge of facts that would have permitted it to deny coverage, it may be estopped from raising the defense of non-coverage in the future.”

When a duty to defend is triggered, an insured does not have the right under a standard CG 00 01 insuring agreement to select counsel of its choice or to otherwise insist on the selection of “mutually agreeable counsel.” Rather, the Legislature created the insured’s right to select counsel under the strict and limited circumstances provided by Florida’s Claims Administration Statute.

However, Florida courts continue to create an ever-growing minefield of ambiguity and uncertainty when insurers tender Reservations of Rights outside the scope of their statutory obligations. It is critical, therefore, that adjusters, attorneys, and insurers understand and properly consider the possible consequences of electing to provide a Reservation of Rights to the insured as a “reminder” of the policy’s terms, conditions, and exclusions, or of opting out of providing the insured with a Reservation of Rights notice.


The Florida Legislature recently established a right of contribution for defense costs among liability insurers. Prior to the enactment of this legislation, it was long the law in Florida that co-primary insurers had no right to contribute. Without a contribution right, some insurers were enticed to delay accepting responsibility for their policyholders’ defense in the hope that another insurer would pick up the tab. By establishing this contribution right for liability insurers, the Florida Legislature advanced policyholder protection and leveled the playing field for insurers that follow the rules.

This contribution right is particularly significant in Florida due to the state’s thriving construction industry and the resulting flood of construction-defect litigation. In cases involving construction defects or progressive injuries, it is frequently difficult to determine which insurance policies are triggered and when.

Carithers v. Mid-Continent Cas. In Carithers v. Mid-Continent Cas. The Eleventh Circuit, in Co., applied an injury-in-fact trigger to a claim for a construction defect. When the injury-in-fact trigger is applied, “the only question is when the property was damaged,” regardless of “when the damage is discovered or discoverable.”

Argonaut Insurance Co., The seminal case on contribution in Florida Maryland Cas. v. Co. Co., stated:

If an insurance company refuses to defend or provide contractual coverage to an insured, it may expose its policy limits to a third party and may be subject to a breach of contract suit with additional statutory remedies (e.g., Section 627.421(1), Florida Statutes) by the insured. When an insurer breaches its contract, the insured is adequately protected. Additionally, third parties are protected from required liability coverage under established law by public policy. To enforce all necessary rights, all necessary remedies and protection for the proper parties are available.

The Legislature has not deemed it appropriate to allow insurance companies to share costs or attorney’s fees. Allowing insurance companies to share costs would result in a flood of claims and lawsuits. Insurance companies would have no incentive to settle and protect the insured’s interest, as another lawsuit would be filed to resolve the insurance companies’ coverage dispute. This is contrary to public policy, all the more so given that the insured has received legal representation and has not been required to pay any attorney’s fees personally.

The Florida Legislature took Argonaut’s suggestion into consideration and passed H.B. 301. The law creates Florida Statutes Section 624.1055, which contains the following provisions:

Section 624.1055 Contribution to defense costs by liability insurers. — A liability insurer that owes an insured a duty to defend and defends the insured against a claim, suit, or other action has a right of contribution for defense costs against any other liability insurer that owes an insured a duty to defend against the same claim, suit, or other action, provided that contribution cannot be sought from any liability insurer for defense costs incurred prior to the liability insurer receiving notice of the claim, suit, or other action.

Section 624.1055 provides that when multiple liability insurers have a duty to defend an insured, the insurer(s) that defend the insured is entitled to reimbursement for defense costs from the insurer(s) that do not defend the insured. The contribution may be sought only for defense costs incurred after the insurer is notified of the claim or lawsuit — the law is directed at insurers who breach their contractual obligations, not at insurers who may provide coverage but are unaware of the claim or lawsuit.

This section applies to liability insurance policies issued for delivery in this state, as well as liability insurance policies that require an insurer to defend an insured against claims asserted or suits or actions brought in this state. Among these liability insurance policies are surplus lines policies authorized by the Surplus Lines Law, ss. 626.913-626.937.

Contribution is available regardless of whether an insurance policy was delivered in Florida or has any other ties to the state. Section 624.1055 applies to liability insurers in Florida, including surplus lines insurers.

As a result, foreign insurers who do not defend their insureds in Florida may face a contribution action. By enacting Section 624.1055, Florida took a bold step to protect not only its own residents but also any individual or organization that may be forced to defend a lawsuit brought in the state.

Section 624.1055 establishes an insurer’s right to “file an action for contribution in a court of competent jurisdiction” to enforce contribution rights. Section 624.1055 applies to any claim, suit, or other action initiated on or after January 1, 2020. However, section 624.1055 does not apply to motor vehicle or medical professional liability insurance.

When more than one liability insurer has a duty to defend an insured in Florida, Florida law now prohibits insurers from playing the “waiting game” and ignoring their contractual obligations in the hope that another insurer will defend and relieve them of the expense. There is now a reasonable mechanism in place for insurers that defend their policyholders in these circumstances to recover costs that should have been borne by another insurer.

Florida courts have addressed the insurer’s and insured’s mutual rights and responsibilities in situations where the insurer offers a defense in exchange for a reservation of the right to deny coverage. The courts have ruled on issues such as litigation control, the effect of conflicts on the insured’s right to mutually agreeable counsel or co-counsel paid for by the carrier, the recovery of defense costs by both the carrier and the insured, and the nature and effect of the insured’s rejection of a defense pursuant to a reservation of rights.

Along with the broad common law principles applicable to a defense based on a reservation of rights, a statutory subcategory has developed under the provisions of F.S. 627.426, the Florida statute governing claims administration (CAS). Unlike a general defense under a reservation of rights, a reservation of rights and defense under the CAS is limited to a specific category of cases and is governed by its own set of rules and regulations.


The duty to defend is a condition precedent to the purchase of a liability insurance policy. The primary advantage to the policyholder is that the insurer is required to defend the insured against any potentially covered claims. When the insurer unconditionally accepts its duty to defend, the insured’s interests are protected. When an insurer casts doubt on its obligation to defend, whether through the reservation of rights or denial of the duty to defend, the insured loses the benefit of the bargain.

In general, an insurer is obligated to defend if the claim or suit is potentially covered by the policy, based on the complaint’s allegations and, in some instances, other admissible facts or pleadings.

Crum & Forster Specialty Ins. v. Altman Contractors, Inc. Co

Altman Contractors, Inc. v. Crum & Forster Specialty Insurance, United States District Court for the Southern District of Florida Co. recently discussed the duty to defend in the context of a standard CG 00 01 insurance policy. The court specifically considered what constitutes a “suit” under a standard CG 00 01 policy, thus triggering the insurer’s right and obligation to defend.

To determine whether a Notice of Claim served pursuant to Chapter 558, Florida Statutes, constituted a “suit,” the court relied on the Black’s Law Dictionary definition of the term “civil proceeding” found in the policy’s definition. The court also considered the Florida Supreme Court’s “reasoned analysis” in determining that the collective meaning of “civil action” and “proceeding” includes “[a] procedural means for seeking redress from a tribunal or agglomeration of tribunals.”

Finally, the court declined to broaden the definition of “suit” to include a Notice of Claim served in accordance with Chapter 558, Florida Statutes. Due to the policy’s unambiguous definition of “suit,” the Southern District determined that the “right and duty to defend” under a CG 00 01 insuring agreement arise when the insured is confronted with a “suit.”

Common Law with Rights Reservations

The vast majority of cases involve situations in which the insurance carrier asserts a coverage defense based on the scope of the policy’s insuring agreement, an express exclusion in the policy, or a violation of a policy condition precedent that would not fall within the CAS. It is in this arena that it is important to know the case law regarding the respective rights and responsibilities of the two parties where the insured accepts the defense under a reservation of rights and where the insured rejects the defense under a reservation of rights.

Acceptance of a Defense Under a Reservation of Rights

Safeco Insurance v. Taylor. 361 So. 743, 745 2d (Fla. 1st DCA 1978).

The leading case in the development of the law regarding a defense under a reservation of rights is Taylor v. Safeco Insurance. 361 So. 743, 745 2d (Fla. 1st DCA 1978). Safeco initially informed Earl Taylor, the driver of the automobile involved in this accident, that it would offer a defense but with a reservation of rights. Apparently, there was some confusion regarding Taylor’s status as an insured under the policy. As noted by the court:

Safeco was within its rights to take that position, as the law distinguishes between the insurer’s obligations to defend and pay (citation omitted) and does not preclude an agreement between an insurer and a putative insured that resolves the urgent issue of who shall defend and defers resolution of the contingent issue of who shall pay any judgment.

By asserting a defense based on a reservation of rights, Safeco could avoid any implication that it consented to the assertion that it should pay any resulting judgment, thereby avoiding any claim of estoppel. The court, however, emphasized the contractual nature of the offer of a defense made pursuant to a reservation of rights. It read as follows:

Similarly, Earl Taylor was not obligated to relinquish control of his personal defense to an insurer that disclaimed responsibility for any judgment within the policy limits resulting from the litigation. Without affecting Safeco’s obligation to pay any judgment within its limits, Earl was privileged from the start to deny Safeco control of his defense, as demonstrated by Safeco’s selection and payment of an attorney to represent Earl.

Thus, the court’s opinion sparked a “dance of the porcupines” over the terms and conditions of the agreement between the insurer and the putative insured regarding whether the carrier will defend it under a reservation of rights and any conditions attached to that defense or whether the insured will reject the defense under the reservation of rights and the effect on the insured’s policy rights. If the carrier goes too far, it will be struck by the insured’s quills in the form of losing control over the defense. Similarly, if the insured goes too far, it will be stuck by the carrier’s quills in the form of losing a defense paid for by the carrier.

This issue was highlighted in the Taylor case, when the carrier withdrew the defense on the eve of trial, first under a reservation of rights accepted by the insured, and then attempted to reinstate it. This time, the putative insured declined the offer and agreed to defend himself at trial, albeit without the assistance of an attorney. Given the parties’ positions at the time, the court determined that Safeco had not erroneously denied Taylor a defense but also that Taylor had not violated the insured’s duty “to cooperate,” because that duty did not require Taylor to relinquish control of his defense to an insurer that, while willing to defend, disclaimed responsibility for any resulting judgment within the policy limits.

Citing Three Sons, Inc. v. Phoenix Insurance Co., 257 N.E.2d 774, 777 (Mass. 1970), the court stated: “[T]he defendant [insurer] owed the Plaintiff a duty of defense.” . . without a reservation of rights or claim of nonwaiver, so long as it insisted on retaining control of the defense.” Then, the court poignantly commented: “The circumstances of this case vividly illustrate the tensions that afflict agreements between the insurer and putative insured that the insurer shall provide a defense without conceding liability for any judgment.”

This was especially true in Taylor, where the defense was particularly devious. According to the court, the defense counsel was required to argue that the plaintiff, the defendant’s brother, was intoxicated alongside the defendant, that the defendant was aware of this, that the car was defective, and that the defendant insisted his brother drive.

The Fourth District Court of Appeal upheld the Taylor principles in Nationwide Mutual Fire Insurance. Beville v. Co., 825 So. 2d 999 (Fla. 4th DCA 2002), and were reaffirmed with even greater vigour:

As Taylor v. Safeco demonstrates, a carrier’s unilateral defense under a reservation of rights has the same effect on the insured as a carrier’s refusal to provide any defense at all. In either case, the carrier has breached its obligation under the policy to defend and indemnify the insured unconditionally within specified limits. As a result of this violation, the carrier has delegated to the insured the authority to defend the claim against its insured.

Although the Beville court’s statement has been criticized in subsequent decisions, particularly for implying an entitlement to defense costs in these circumstances, the Third District Court of Appeal has upheld it. The criticism is justified, as the statement in Beville above equating a reservation of rights to a breach of contract appears to directly contradict the statement in the Taylor decision that the carrier was within its rights in offering a defense based on a reservation of rights. More importantly, the Taylor court limited the carrier’s liability to the policy limits, even when the insured rejects the defense pursuant to a reservation of rights, contrary to what Beville implies.

Approval of the Defense

As the preceding cases demonstrate, accepting a defense pursuant to a reservation of rights is in the nature of an agreement between the carrier and the insured and should be viewed as such.

Travelers Indemnity Company of Illinois v. Royal Oak Enterprises, Inc., 344 F. Supp. (M.D. Fla. 2004), 2d 1358, 1371 (where the author represented Travelers). One of the first propositions discussed was that the insured must actually reject the defense; otherwise, if it accepts the benefits of a defense with a reservation of rights, it can no longer act as if it rejected the defense. That court began by stating that it was “well settled” that an insurer did not breach its duty to defend by offering to defend only with a reservation of rights.

While the insured in Royal Oak did not reject the defense on the basis of a reservation of rights, it sought reimbursement for the cost of co-counsel after the carrier refused to engage them as primary defense counsel (they were the insured’s coverage counsel) and the insured, in turn, had rejected the carrier’s offer of three other law firms to handle their defense.

The insured advanced three arguments for why they should be reimbursed for the cost of hiring personal counsel to represent them in the litigation. One was the reservation of rights itself. Certainly, under Florida law, the insured is entitled to retain personal counsel at his or her own expense to protect his or her interests when the carrier defends under a reservation of rights. However, the court determined that under Florida law, the carrier was not entitled to pay for personal counsel.

It did so by characterizing Beville’s implication that an insured could recover defense costs without rejecting a reservation of rights as a departure from Florida law and, at best, limited to the CAS.

The insured then contended that because there were covered and uncovered counts, there was an inherent conflict of interest that entitled them to attorneys’ fees to protect their interests in the uncovered claims. The court concentrated on the duty of assigned defense counsel in this regard. It noted: “[T]he primary duty of loyalty owed by appointed defense counsel is to the insured, not to the insurer, and ‘[t]o suggest that human nature prevents the harnessing of action motivated by self-interest is to contend that fiduciary relationships are unworkable.’”

In its view, the rules of attorney conduct, coupled with the threat of malpractice liability, provided sufficient assurance that appointed counsel would continue to represent the insured, even where a conflict of interest could theoretically interfere with his ability to perform in conformance with the professional standards. Not only did Travelers have a duty to defend, but it also had a right to control the defense, and that right is valuable because it gives the insurer the ability to protect itself against unwarranted liability claims, which is critical for protecting its financial interests regardless of the outcome of the litigation.

Therefore, it concluded that, absent some evidence to suggest that the potential conflict between the insurer and the insured actually affected counsel’s representation, so it could be said that counsel elevated the interests of the insurer over the client, there would be no such presumption. The court stated its conclusion: “The [c]ourt is unwilling to ‘indulge the conclusive presumption that counsel is unable to fully represent its client, the insured, without consciously or unconsciously compromising the insured’s interests.’

The third ground the insured in Royal Oak argued for the right to recover attorneys’ fees was the inadequacy of the defense. Citing Protected National Insurance Co. v. Aetna Casualty and Surety Co., 631 So. Carousel Concessions, Inc. v. Florida Insurance Guaranty Association, 483 So. 2d 305 (Fla. 3d DCA 1993), and Carousel Concessions, Inc. v. Florida Insurance Guaranty Association, 483 So. 2d 513, 516 (Fla. 3d DCA 1986), the court in Royal Oak noted an apparent inconsistency in Florida law regarding a carrier’s liability for the acts of appointed defense counsel. However, it noted that because there was no evidence to support Royal Oak’s theory of an insufficient defense in the case, it never addressed the ramifications of such a finding or whether it would entitle the insured to reimbursement of the costs and fees of their personally retained counsel.

These conclusions were subsequently affirmed by the 11th Circuit Court of Appeal in Travelers Indemnity Co. of Ill. v. Royal Oak Enterprises, Inc., 171 F. App’x. 831, 832 (11th Cir. 2006), in which the court quickly dismissed Royal Oak’s position, stating: “We conclude that none of Royal Oak’s arguments on appeal have merit.”

The Travelers decision was cited by the court in Zurich American Insurance. Frankel Enterprises, Inc. v. Co., 509 F. Supp. 2d 1303, 1311 (S.D. Fla. 2007), again noting that an insurer does not breach its duty to defend by offering to defend only under a reservation of rights. Where the insured accepts the defense, the insurer’s valuable right to control the defense continues.

This concept was also discussed in Continental Casualty Co. v. City of Jacksonville, 2008 WL 1793259 (11th Cir. Apr. 22, 2008), where the court observed: “Because a defense subject to a reservation of rights does not constitute a wrongful refusal to defend, an insurer retains its right to control the defense.” In its Continental Casualty opinion, the 11th Circuit attacked the city’s behavior in accepting a defense under a reservation of rights and then acting with “duplicity” throughout the settlement process and failing to cooperate with the insurance carrier. The court concluded that having accepted the defense under a reservation of rights, the city was bound by it.

Prior to accepting a defense based on a reservation of rights, counsel for the insured must carefully review the reservation of rights letter. A dispute may arise regarding reimbursement for defense costs, in particular if the carrier establishes that there was no duty to defend. Florida courts have held that provisions reserving the carrier’s right to be reimbursed for defense costs incurred in defending the insured are enforceable if the carrier ultimately establishes that there was no duty to defend are enforceable.

Again, as the courts have emphasized, accepting a reservation of rights is a negotiation process, and thus any terms or conditions in the reservation of rights that are of particular concern to the insured should be raised in an attempt to resolve them prior to accepting the defense under a reservation of rights.

Defense Rejection

As the Taylor court made clear, the rejection of a defense under a reservation of rights by an insured does not violate the cooperation clause in the policy. Once the insured has rejected the defense under a reservation of rights, it is free to provide its own defense without affecting any liability the carrier might have for the ultimate judgment, subject to the policy limits. However, the insured must actually reject the defense under a reservation of rights. The determination of whether an insured has rejected a reservation of rights can be a factual determination.

Aguero v. First American Insurance Co., 927 So. 894, 898; 2d 894, 898 (Fla. 3d DCA 2006). In Aguero, the insured took control of the case and settled it without the carrier’s consent following a unilateral offer of defense subject to a reservation of rights. The insured asserted that it had an absolute right to do so, citing Beville. However, the Aguero court, relying on the Royal Oak opinion, held that the insured could only assume the defense of the case if the carrier’s defense was actually rejected.

It remanded the case to determine whether Ryder’s letter to the carrier constituted an effective rejection of the defense based on a reservation of rights. If that is the case, it would be free to act independently. “When an insurer offers to defend an insured under a reservation of rights, the insured may…reject the defense and retain its own counsel.” It is thus not insignificant that the insured, if it elects this option, must expressly and clearly, preferably in writing, reject the defense under a reservation of rights. Otherwise, the insured has breached its contract and right to indemnification by assuming its own defense and control of the case after the carrier has offered a defense pursuant to a reservation of rights.

Additionally, the Continental Casualty case presents an intriguing factual scenario that could have addressed, but did not, a question that appears to remain unresolved under Florida law. That is whether, even at that late date, the insured could have rejected the defense under a reservation of rights and then settled the case unilaterally and obtained indemnification for the settlement costs. Continental Casualty accepted the defense on a reservation of rights basis through mutually agreeable counsel, and the carrier funded the litigation, which cost well over a million dollars prior to settlement. Because the carrier refused to agree to the insured’s preferred settlement, the insured settled without the carrier’s consent.

The court made it abundantly clear that the insured could not do so and still recover the settlement amount. According to the discussion and facts in the Continental Casualty case, it appears improbable that a court would have accepted a late rejection of the defense under a reservation of rights after the carrier had already expended substantial sums of money on that defense. Certainly, an insured should not follow that procedure and assume they have protected their right to indemnification if the policy provides coverage.

When an insured waives a defense pursuant to a reservation of rights, the insured clearly retains the right to control the litigation, appoint defense counsel, and settle the case. Where the insured has entered into a settlement agreement, after a proper rejection of the defense under a reservation of rights, to the extent the insured is correct about coverage, the insured would be entitled to indemnification, limited to the amount of a reasonable settlement and up to a maximum of the policy limits. Based on Beville v. Church & Tower of Florida, Inc., 930 So. 2d 668 (Fla. 3d DCA 2006), it follows that defense costs and fees should also be recoverable.


Under Florida law, a defense based on a reservation of rights should be viewed as a dance of the porcupines. Whether the CAS’s narrow statutory requirements or more general common law requirements apply, both the insurer and the insured have rights and responsibilities. Each is well-advised to be aware of and strictly adhere to them, or else severe consequences may ensue. As a result, it is critical that when coverage issues arise that may require the carrier to assert a reservation of rights, the carrier considers the implications of doing so in terms of litigation control and exposure to costs in excess of what it might otherwise face. Similarly, the insured must carefully consider the terms of the reservation of rights before accepting it, as well as the implications and risks associated with rejecting it. Most importantly, each side must act in a manner consistent with the election they intend to hold and take the necessary steps to make that election a reality.

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