Unilateral Reservation Rule Gets Support from Industry

July 13, 2000

A dog bite has taken the question of unilateral reservations to the California Supreme Court. Insurance groups are urging the court to adopt a unilateral reservation rule for the reimbursement of settlement payments in cases where the company defended a policyholder when it was unclear whether coverage existed.

The National Association of Independent Insurers (NAII), the American Insurance Association (AIA) and Farmers Insurance Company filed a friend of the court brief on July 11 in the case of Blue Ridge Insurance Company v. Jacobsen.

The Jacobsens were the owners of a dog kennel who sold a dog to a client. After the dog bit the client, the Jacobsens found themselves the target of a lawsuit that they turned over to their homeowner’s insurer, Blue Ridge Insurance Company.

Believing that the claim was not covered under the policy, Blue Ridge defended the couple under a reservation of rights. After settling the suit within the policy limits (despite the Jacobsens’ objection), Blue Ridge determined that the facts of the lawsuit fell under business pursuits and professional services exclusions in the policy. Blue Ridge then went back to court to recover the amount of the settlement it paid on behalf of the Jacobsens.

Under the unilateral reservation rule, “when an insurance company accepts a policyholder’s defense, that policyholder must be made fully aware of the reservation of rights and the possibility that the insurance company may seek reimbursement for any costs associated with the defense of the policyholder, including settlement payments,” explained Sam Sorich, NAII vice president and western regional manager. The NAII believes this is a fair business practice.

“Encouraging insurance companies to defend and reasonably settle cases where insurance coverage is uncertain increases the number of injured parties that are compensated in a timely manner–and that is good public policy,” Sorich said.

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