What is a reservation of rights letter from a malpractice carrier?

A reservation of rights letter is a formal communication from your malpractice carrier that is commonly misunderstood. The letter means the carrier has identified potential coverage issues with your claim but is electing to provide a defense while continuing to investigate those issues. It is not a coverage denial. Instead, it preserves the carrier's right to deny coverage later if the facts establish that the claim falls within a policy exclusion or outside the scope of coverage.

Carriers issue reservation of rights letters for various reasons. The claim may allege conduct that could be either negligent, which is covered, or intentional, which is excluded. The timing of the alleged wrongful act may raise questions about whether it falls within the policy's retroactive date. The claim may involve activities that are arguably outside the definition of professional legal services. The carrier issues the letter to avoid waiving its right to deny coverage by providing an unconditional defense.

When you receive a reservation of rights letter, read it carefully and consider consulting independent coverage counsel. The letter should specify which policy provisions or exclusions are at issue, the factual questions the carrier is investigating, and a statement that the carrier will continue providing a defense pending resolution of the coverage questions. You are entitled to understand exactly what coverage issues are being raised and to respond with additional facts or legal arguments supporting coverage.

In some jurisdictions, when a carrier defends under a reservation of rights, the insured has the right to select independent defense counsel at the carrier's expense because the carrier-appointed attorney faces a potential conflict between the carrier's coverage interests and your defense interests. This right, known as Cumis counsel in California or independent counsel in other states, ensures that your defense attorney's loyalty is not divided between defending the claim and developing facts that may support the carrier's coverage position.