Dear Engineer: Has your insurer issued a “Reservation of Rights” letter? (law note)

In my previous post, I made reference to getting a  “Reservation of Rights” letter.   I noted that the carrier may decide to defend you under a Reservation of Rights (i.e., hire your lawyer) but may not, necessarily, accept the responsibility for paying the claim.  Does this mean that the insurance company has denied your claim, or will never pay?  No.

Reservation of Rights (ROR) letters are sent for a variety of reasons- most notably, when some portion of the construction lawsuit against you is not covered under your E&O policy.  The letter must state the reason(s) that the ROR is being issued.

With the ROR, the insurance company is telling you that it reserves the right to withdraw from your defense and/or deny payment of damages at a later date, depending upon how facts in the case develop.  The notice is intended to let you know that there *may* be issues later, and to put you notice that  you have the right to hire your own lawyer (at your own expense) to protect yourself from that future potential risk.

How should you react to getting a ROR letter?  You should review it with your own lawyer, and consider retaining your lawyer to work with the lawyer the insurance carrier retains to protect your rights.

Is this required?  No.  Your insurance-retained lawyer still owes you the duty to protect your interests.  If the insurance company decides to later withdraw from defense, or seek a court ruling that they do not owe you a defense, your insurance-provided lawyer cannot represent the insurance company against you.  The insurance company would need to hire a different lawyer/law firm to make that argument.

It is never pleasant to get a ROR letter, but it is not unusual, depending on the particular facts in your case.  And it doesn’t mean that you won’t have a vigorous defense, or that the insurance-retained lawyer is not working for you.  They are, and they will.  However, it is never bad advise to have your own personal lawyer weigh in on the ROR letter and its ramifications for your Firm.

Have you ever gotten a ROR letter from your insurance carrier?  If so, share in the comment section, below.  And, be sure to get your White Paper on 7 Critical Mistakes that Architects & Engineers make, by filling out the form on the right hand side of the blog page. 

“Professional Best Efforts” part 2– Reservation of Rights for Engineers who agree to “best” efforts? (law note)

reservedRecently, a reader reached out to me to ask about case examples of an engineer losing his insurance coverage because he agreed to a “heightened” or “best” standard of care. The reader stated that he was an insurance adviser who handled various construction professional coverages, and that in his experience it was very unusual to deny or limit damages because of a heightened standard of care.

This comment led me to an informal survey of several insurance brokers that I deal with, and the general consensus is that instead of outright denying a claim, most E&O insurers will issue a “reservation of rights” letter. What that means is that the insurance company will defend the claim (i.e., pay for your lawyer to defend you and your Firm), but with the understanding that they are (potentially) denying any liability for any adverse money judgment against you.

Inevitably, most such cases settle, but if they do not, the question then is whether the heightened duty created part of the damages. The insurer may ask to intervene in the lawsuit to ask the jury that question, in an effort to limit its share of the damages.

The reader commented that he could see two related insurance limitations: (1) where the professional agreed to be liable, and (2) where the professional refused to consent to settle a claim. In such cases, many policies contain a “hammer clause” which limits the insurer’s liability and defense costs to that which would have resulted had the insured accepted the settlement.

While these are interesting fact situations to the insurance and/or law geeks among us, for those of you who would rather spend your days designing and engineering instead of in court,  the best practice still remains the same:  avoid agreeing to the highest professional standards. Being the “test case” for a novel legal issue is not in your best interest.

Thoughts? Comments? Experiences in such situations? Share in the comment section or drop me an email.

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