If a business is sued, it should immediately notify all of its potential liability carriers, primary and excess. It is better to err on the side of being over inclusive in notifying the various insurance carriers then end up having coverage denied later by a carrier that would have covered the loss but for its failure to receive prompt notice of the claim.
After receiving notice of a claim, the insurance claim will respond in one of three ways (typically). If your claim is accepted, the carrier will retain an attorney to defend the business in the suit and indemnify it should an adverse judgment be entered. This is the best result for the business, and as I have mentioned in prior posts, I am often hired by insurance carriers to defend businesses under this no conflict scenario.
On the opposite end of the spectrum, if your claim is denied, the business will have to hire its own attorney(s) to defend it in the liability suit and to analyze what rights you may have to pursue a first party claim against the carrier that denied coverage. It is important to retain an attorney that specializes in insurance coverage matters to determine whether the carrier was correct in its denial of coverage. A credible insurance coverage attorney will let you know up-front where the business stands and what financial impact the liability suit (cost of defense) and potential judgment (exposure) may have on the future business operations.
The middle of the road response from the carrier is for the carrier to retain an attorney to defend the business, but reserving certain rights to later withdraw its defense or refuse to indemnify the business should a judgment be entered against it. A reservation of rights letter is not an uncommon occurrence, and it is often a cordial response from the insurance carrier that coverage might not exist once additional information is gathered regarding the underlying liability suit. If your business is being defended in the underlying suit, that is probably enough to satisfy your immediate concern. It can in some respects create a sense of complacency by the business.
Although even with a reservation of rights letter the immediate concerning of the business (a defense) is satisfied, a reservation of rights letter is not something that a business should take lightly. At the end of the day, the business may end up "holding the bag" when it comes to defending itself through trial and satisfying any adverse judgment, and the earlier you can retain an attorney specializing in insurance coverage litigation, the better off you are. Information is key, and an insurance coverage specialist can guide the business along to make sure that the business does not inadvertently engage in some action that would convert the reservation of rights into an all out denial of coverage.
Over the years, I have represented a variety of businesses, ranging from the commercial contractor to the large petrochemical plant, in the resolution of insurance coverage and commercial disputes, as well as construction defect claims and general liability suits brought by contractors and employees. At my website, I write a business litigation blog, complete with movie and television references, and I also write an insurance coverage blog. I invite you to read my blogs and comment on any posts that interest you.
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