“Reservation of Rights”: What the Notice Means
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The general concept
A reservation-of-rights letter is an insurer’s notice that it will provide a defense while preserving specified policy defenses, or that it is investigating whether a defense or payment is owed. It may identify language the insurer believes could limit or exclude coverage and explain that the insurer has not yet agreed to pay a settlement or judgment. The notice is not a final court ruling, does not by itself prove that an exclusion applies, and does not necessarily end the insurer’s duty to defend. It also does not change the policy’s terms. The practical effect depends on the policy, the insurer’s conduct, the timing and clarity of the notice, and the facts ultimately established. A reservation can create a conflict if the defense strategy could affect whether coverage is available; the existence of a letter alone does not automatically establish that every insured is entitled to separate counsel.
How Maryland applies it
Maryland distinguishes the insurer’s duty to defend from its duty to indemnify. An insurer may defend while reserving coverage arguments, but the reservation does not answer whether those arguments will succeed. In Brohawn v. Transamerica, the Supreme Court of Maryland held that an insurer generally may not obtain a pretrial declaration on a coverage issue that is also the ultimate factual issue in the pending tort case; a separate coverage question may be decided when it is distinct from the tort issues. Maryland decisions also recognize that an actual conflict between insurer and insured in the conduct of a defense requires disclosure and an informed choice about counsel. A reservation based on whether conduct was negligent or intentional can present that concern when the defense could shape the facts relevant to coverage. A reservation of rights does not automatically entitle an insured to select any lawyer at the insurer’s expense in every case; the nature of the conflict and the governing policy and law matter. An insured who receives such a letter should note response deadlines, cooperate as required by the policy, preserve relevant documents, and obtain advice about the specific reservations before making decisions that could affect the defense or coverage.
Related Maryland Cases and Authorities
Brohawn v. Transamerica Insurance Co., 276 Md. 396, 347 A.2d 842 (1975).; St. Paul Fire & Marine Insurance Co. v. Pryseski, 292 Md. 187, 438 A.2d 282 (1981).; Allstate Insurance Co. v. Atwood, 319 Md. 247, 572 A.2d 154 (1990).; Wolfe v. Anne Arundel County, 129 Md. App. 568, 743 A.2d 719 (2000).