Condo Media - February 2018 - 48

The Region

MASSACHUSETTS

Insurer Reservation
of Rights Letter
When Issued, Insured
May Control Defense
[by Douglas A. Troyer, Esq.]

The association has been served
with a complaint or demand letter, and takes the most conservative
approach of having a notice of claim
served on all insurance carriers who
could potentially provide coverage for
the claims advanced in the complaint
or demand letter. Once a notice of claim
is served, the association then receives
a response from its insurance carrier
informing that it will provide a defense
subject to the terms and conditions
of the policy, but at the same time,
reserves its rights to deny indemnification coverage and withdraw defense
coverage. This is known as a reservation
of rights letter.
Once the association (i.e. "insured")
gives notice of a claim, an insurance carrier (i.e. "insurer") may agree to defend
under full indemnification, defend
under a reservation of rights, or deny
coverage. This article focuses on the
rights of an association in controlling
the defense and selection of counsel
who will represent the association in
the matter in a situation where the
insurance carrier issues a reservation of
rights determination.
THE RESERVATION
OF RIGHTS LETTER
An insurer issues a reservation of
rights letter normally when it is unsure
whether it is obligated under the policy
to provide coverage, such as where a
claim may be excluded from coverage
by the policy and the insurer needs to
investigate its coverage determination
further. In doing so, the insurer seeks

CONDOMEDIA

to protect itself from a subsequent
claim by the insured that it was never
informed of the insurer's position on
coverage, and affords the insurer the
ability to deny coverage or assert an
exclusion in the future once the investigation of the claim is conducted. In essence, by issuing a reservation of rights
letter, the insurer agrees to provide the
insured a defense of the matter while
the insurer continues to investigate the
claims to determine if its position on
coverage should be altered. Sometimes
the reservation of rights defense continues throughout the defense of the
matter. Other times, the investigation
reveals further information that causes
the insurer to change its coverage determination. Thus, an insurer may provide
a defense under a reservation of rights
without being prevented from later disclaiming liability, however, as discussed
below, an insurer may not insist upon
the right to control the defense under
a reservation of rights.
CHOICE OF COUNSEL AND
CONTROL OF DEFENSE
It is well settled in Massachusetts that
when an insurance carrier issues a
reservation of rights letter, the insured
may insist on selecting counsel and
controlling the defense, and the insurer
must then either waive its coverage defenses and retain control of the defense
or reserve its coverage defenses and
relinquish control of the defense to the
insured. Three Sons, Inc. v. Phoenix Ins.
Co., 357 Mass. 271, 275-76 (1970); Magoun v. Liberty Mut. Ins. Co., 346 Mass.

677, 685 (1964). The Supreme Judicial
Court has held that:
Control of the case by the insurer,
when it may later disclaim liability
under the policy, means that the insured's rights may be adversely affected. [The insured] has no opportunity
to control aspects of the case essential
to determination of liability or settlement. If liability is established, or a
settlement reached, and the insurer
has a valid ground for disclaimer, the
insured is left with a liability which,
had [it] been able to defend or settle on
other terms, might never have existed.
Three Sons, 357 Mass. at 276.
In some instances, the insurance
carrier's reservation of rights letter will
identify counsel that it has selected
to represent the Trust in the matter.
In other instances, the issue of who
will represent the Trust is left open.
Board members and property managers should be aware that they have a
choice as to who the association wishes
to represent it in the matter when an
insurance carrier issues a reservation
of rights determination.
Depending on the type of case and
expertise necessary to vigorously defend against the claims, only the board
members have the power to decide who
best should represent the association's
interest. Care should therefore be
taken in deciding who should ultimately represent the association in any

Condo Media - February 2018

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