When an insurer is providing a defense under a reservation of rights, is the insurer required to hire separate counsel?
Where coverage is potentially an issue, an insurer must decide whether to (1) assume its insured’s defense without reservation, despite the dispute; (2) obtain a non-waiver agreement after full disclosure of the coverage defenses it seeks to preserve; or (3) send a reservation of rights letter and appoint mutually agreeable defense counsel. See Fla. Stat. § 627.426(2)(b) (emphasis added); Colony Insurance Co. v. G&E Tires & Service, Inc., 777 So. 2d 1034 (Fla. 1st DCA 2000).
Coverage issues can arise in many ways including when “1) some of the allegations in the complaint do not fall within the scope of the policy’s coverage, 2) there is an applicable policy exclusion, 3) some of the damages are not covered by the policy, 4) the damages alleged exceed the policy limits, 5) the coverage has been exhausted under an ‘aggregate’ limit of liability, and 6) the policyholder breached a condition of the policy.” Defending Under a Reservation of Rights: A Potential Minefield of Conflicts, Jonathan Judd, Defense Association of New York (Spring 2010).
Under any of these situations—and many other circumstances that sometimes arise in the investigation of a claim—a reservation of rights can be a powerful weapon in the insurance company’s arsenal to maintain its duty to defend the insured, while also protecting its own interests in the event of a coverage dispute. However, a reservation of rights does not rid the insurer of its obligation to provide separate counsel for its insured. In fact, Florida law requires the insurer to appoint mutually agreeable defense counsel.
It is important to note that a reservation of rights must be provided within 30 days after the insurer knew or should have known of the potential coverage defense, and written notice must be provided by registered or certified mail to the insured. See Fla. Stat. § 627.426(a). Additionally, various conflicts of interest may arise when providing counsel under a reservation of rights. Only an attorney can provide specific insight in addressing these conflicts and answering the specific factual questions that an insurer may have with respect to a reservation of rights in a given claim.