Page 24 - Reservation of Rights - Special Edition

(Ill. 2005).
The Illinois Supreme Court held that the insurer could not unilaterally modify its contract, through a reservation of rights, to allow for reimbursement of defense costs. Id.
Conflicts of Interest and Independent Counsel
As described above (“Content”), when an insurer reserves
its rights, the reservation often creates a conflict between the interests of the insurer and the interests of the insured. A conflict of interest exists if the interests of the insurer would be furthered by providing a less than vigorous defense to certain allegations against the insured, Mobil Oil Corp. v. Maryland. Cas. Co., 681 N.E.2d 552, 561 (Ill. App. 1997), or if “proof of certain facts would move liability from the insurer to the insured.” Pekin Ins. Co. v. Home Ins. Co., 479 N.E.2d 1078, 1082 (Ill. App. 1985).
If a conflict of interest exists, a defense attorney chosen
by the insurance company cannot properly represent the insured, unless and until the insured has been fully informed of the conflict and knowingly consents to representation by the attorney. Mobil Oil, 681 N.E.2d at 561. This requires “full and frank disclosure” on the part of the insurer. Preferred Am. Ins. v. Dulceak, 706 N.E.2d 529, 533 (Ill. App. 1999). When a conflict of interest arises, the insured is entitled
to retain independent counsel to be paid for by the in-
surer. Maryland Cas. Co. v. Peppers, 355 N.E.2d 24, 31 (Ill. 1976).
A related situation occurs where two insureds have conflict- ing defense positions, such as principal and agent, where vicarious liability is alleged against the principal. In that cir- cumstance, it would be in the best interests of both insureds for the agent to be found not liable. However, if the agent were found liable, it would be in the agent’s interest for the principal to also be found liable, so as to spread the poten- tial loss. In that case, the insurer will be required to pay for defense counsel selected by at least one of the insureds, if not both.
Time for Providing Insured with Coverage Position/ Reservation of Rights
• For third-party claims, the insurer must also provide the third party with a reasonable written explanation of the basis of a denial within 30 days after the initial determi- nation of liability. Ill. Admin. Code tit. 50, § 919.50(a).
• The speed with which an insurer responds or provides its coverage position to the insured is a “factor” to be considered when evaluating the insurer’s conduct,
and a lengthy delay in responding is normally not enough to constitute an estoppel or waiver of a cover- age defense. Twin City Fire Ins. Co. v. Old World Trading Co., 639 N.E.2d 584 (Ill. App. 1994), appeal denied, 645 N.E.2d 1369 (assertion of defense within four months of receiving notice of claim was reasonable).
• Illinois permits an insured to seek extra contractual damages and attorneys’ fees for an insurer’s vexatious and unreasonable delays in claims handling. 215 ILCS 5/155(1).
INDIANA
Notice
The principal purpose of a reservation of rights letter is
to inform the insured regarding the insurance company’s concerns so that the insured can determine what action to take, if any, because of the existence of a conflict of interest between the insured and the insurance company. Cf., Ashby v. Bar Plan Mut. Ins. Co., 949 N.E.2d 307, 313 (Ind. 2011) The reservation of rights letter is to allow the insurer to fulfill the broad duty to defend while at the same time investigat- ing and pursuing the narrower issue of whether indemnifica- tion will result. Gallant Ins. Co. v. Oswalt, 762 N.E.2d 1254, 1261 (Ind. Ct. App. 2002).
A reservation of rights is generally considered to be a matter only between the insurer and insured. Gallant, 762 N.E.2d at 1267. The insurer is required to give notice of a reserva- tion of rights only to the insured. Snodgrass v. Baize, 405 N.E.2d 48, 53 (Ind. Ct. App. 1980). In a proceeding for the collection of a judgment against the insured, however, the person seeking recovery is also entitled to notice of the cov- erage dispute. Motorists Mut. Ins. Co. v. Johnson, 218 N.E.2d 712, 715 (Ind. Ct. App. 1966).
Content
The reservation-of-rights letter should set forth the reasons why the insurance company believes the insured might
not ultimately be entitled to coverage. Failure on the part
of the insurance company to specify the known reasons upon which the insurance company reserves its rights may preclude the insurance company from later asserting policy defenses that have not been identified. The Claim Adjuster’s Automobile Liability Handbook § 2:9.
• Failing to “adopt and implement reasonable standards for the prompt investigations and settlements of claims” and failing to “affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed” constitute improper claims practices. 215 ILCS 5/154.6(c) and (i).
• An insurer is required to affirm or deny liability on claims within a reasonable time and shall pay covered claims or provide a written explanation to the insured for a denial within 30 days of affirmation or determina- tion of liability. Ill. Admin. Code tit. 50, § 919.50(a).
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