A reservation of rights can create an unusual settlement dynamic when a liability action is approaching trial. The insurer may be defending the claim while separately considering a coverage issue, the insured may have independent counsel, and different people inside the insurance company may be responsible for different parts of the potential settlement. What can become confusing is that those separate internal sources of authority don't necessarily translate into separate negotiations at the settlement table.
Claims counsel's client is the claims adjuster responsible for the underlying action. That adjuster assesses the litigation exposure, obtains the authority required to negotiate the claim and instructs counsel on what may be offered. Where a reservation of rights remains outstanding, however, some of the money ultimately available to settle the litigation may come from authority provided by the coverage side of the insurer rather than from the ordinary claims reserve alone.
That doesn't mean claims counsel suddenly has two clients or two sets of instructions. The coverage adjuster may authorize a particular contribution and communicate that authority internally to the claims adjuster. The claims adjuster can then take that contribution into account when determining the total settlement authority available and instruct claims counsel accordingly. From counsel's perspective, the instruction remains straightforward: the client has authorized a particular amount to resolve the lawsuit, and counsel may negotiate within that authority.
The distinction becomes harder to explain when the insured has independent counsel because of the reservation of rights. From the insured's perspective, the money is all coming from the same insurance company. In a purely economic sense, that's true. If $300,000 is being made available through the ordinary claims process and another $200,000 has been authorized by the coverage side, the insurer may ultimately have $500,000 available to contribute toward a resolution. But the fact that the same corporation is supplying both amounts doesn't mean they arrived through the same decision-making process.
The claims adjuster may have obtained one amount based on the liability and damages exposure presented by the lawsuit and another amount from the coverage adjuster because of the insurer's separate assessment of its coverage position. Those decisions can involve different considerations and different internal authority even though, once the process is complete, the claims adjuster may instruct defence counsel to negotiate using the combined amount.
That distinction matters because independent counsel can misunderstand what claims counsel actually controls. Claims counsel isn't deciding how much the coverage side should contribute and doesn't have an independent ability to reach into a coverage reserve because additional money would help settle the case. Nor does claims counsel necessarily have any role in deciding whether the insurer should change its coverage position. Counsel acts on the settlement instructions received from the claims adjuster.
This can become particularly important as trial approaches, when negotiations often accelerate and everyone becomes focused on the total amount required to resolve the litigation. The insured's lawyer may know that the coverage side has been discussing a contribution and assume that claims counsel can simply add that amount to whatever has already been authorized on the liability side. But until the coverage authority has moved through the insurer's internal process and the claims adjuster has incorporated it into counsel's settlement instructions, it isn't necessarily money claims counsel is authorized to offer.
There is nothing unusual about an organization having different decision makers contribute to a single settlement position. What makes insurance different is that a reservation of rights can make the distinction consequential for the insured as well. The insured may have independent counsel precisely because coverage and liability aren't the same issue, yet those issues eventually have to coexist when everyone is trying to settle the underlying action.
The cleanest structure is therefore one in which the internal complexity stays internal. The coverage adjuster determines what authority is available from the coverage side and communicates it to the claims adjuster. The claims adjuster determines the settlement authority available for the litigation and instructs claims counsel. Claims counsel then negotiates the case using the authority actually provided by the client.
The plaintiff may never need to know that the insurer assembled its settlement authority from more than one internal source. The insured's independent lawyer may need to understand it, particularly if expectations about the coverage contribution are affecting settlement discussions. But at the negotiating table, the important question for claims counsel remains the same as it is in any other case: what has my client authorized me to offer?