JACOBSON, Chief Judge.
This litigation developed in the wake of Pruitt v. Pavelin, 141 Ariz. 195, 685 P.2d 1347 (App.1984). As noted in Pruitt, Carole Pavelin was a real estate salesperson employed by C & A Realty Co., Inc. (C & [517]*517A). C & A carried a Professional Liability Insurance Policy issued by Equity General Insurance Company. As a result of the fraudulent acts of Pavelin, Pruitt brought suit against C & A. That litigation ultimately resulted in a judgment against C & A Realty for $158,698.33 in compensatory damages and $25,000 in punitive damages. That judgment was affirmed on appeal on the theory that C & A was negligent in hiring Pavelin. This appeal questions Equity General’s liability for that judgment.
After C & A was sued by Pruitt, Equity General retained C & A’s private counsel, John Lyons of the law firm of Udall, Shumway, Blackhurst, Allen, Lyons & Davis to represent C & A in that litigation.
After Lyons had been retained, Equity General sent a “reservation of rights” letter to C & A. The pertinent portion1 of that letter provided:
Certain allegations of the complaint assert a right on the part of the plaintiff to recovery of damages known as punitive or exemplary damages. It is the position of the insurer that such damages are not an insured liability____
Therefore, while Equity General Insurance Company intends to protect your interest, they do so with the following reservations and qualifications:
1. The defense or investigation of this claim shall be without waiver of or prejudice to the right of the insurer to contend that any ... loss or damage associated with the above captioned claim is not within the terms, conditions, and provisions of the insurance coverage afforded by the subject insurance certificate.
A copy of the reservation of rights letter was not sent to the Udall law firm. The representative of C & A who did receive the letter stated he did not understand the letter, assumed that a copy had been sent to C & A’s attorneys (the original shows no such copy designation) and simply filed the letter away. It is undisputed that C & A’s counsel did not know of the reservation letter during the course of the Pruitt litigation. Equally undisputed is that punitive damages are specifically excluded from coverage under the policy and that attorney Lyons had a copy of the policy.
According to the affidavit of Lyons, during the course of the Pruitt litigation, Pruitt’s attorney approached Lyons as to settlement, in the $50,000 to $60,000 range. Lyons approached Jim Baxter, the Equity General employee in charge of the Pruitt claim, seeking authorization to settle the claim for $40,000. Baxter would not authorize settlement for more than defense costs, which he thought should not exceed $7,500. Based upon this refusal, no further settlement negotiations occurred. During this time, Baxter did not mention to Lyons that coverage was being disputed.
Lyons filed an affidavit which stated: If this possible denial of coverage had been mentioned, I would have .then gone to C & A Realty and explained the potential for a large judgment existed, that Equity General was going to deny coverage and that C & A Realty should authorize me to settle the case and pay the settlement from C & A Realty’s own monies, and then sue Equity General to recover the sums paid.
Equity General subsequently brought this declaratory judgment action seeking a determination that it owed nothing under the terms of the policy. The trial court, on motion for summary judgment, held that Equity General was estopped to deny coverage and held it liable for all claims against C & A Realty, including punitive damages. As previously indicated, the sole issue now on appeal is the propriety of the punitive damage award.
C & A, while conceding that providing a defense under a valid reservation of rights does not constitute an estoppel, see, [518]*518Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), nevertheless contends that the reservation letter utilized here was ineffective, primarily on the basis that it was “sugar coated.” We reject this contention. In our opinion, the letter, in a straightforward manner, informed a reader of average intelligence that while the insurer was providing a defense, it was doing so without waiving any rights to contest liability under the policy. The language as to punitive damages is especially clear. We hold that the notice of reservation of rights fairly informed the insured of the insurer’s position and did so in a timely fashion. See, 14 Couch, Cyclopedia of Insurance Law, § 51.82 (2d ed. 1982).
C & A argues, however, that during the course of the litigation, Equity General took a position that was inconsistent with its reservation of rights letter, that is, it solely controlled settlement negotiations and thus deprived C & A, to its detriment, of making its own settlement. In essence, C & A is arguing, and the dissent agrees, that Equity General is estopped to deny coverage for punitive damages, due to its failure to apprise the Udall firm of the existence of the reservation of rights letter.
Estoppel is created, where one party, by its conduct, induces another to believe in certain material facts, which inducement results in justifiable reliance thereon resulting in injury to the person thus relying. State Farm Auto Ins. Co. v. Robison, 11 Ariz.App. 41, 461 P.2d 520 (1970). This principle of law gives rise to the necessity of a reservation of rights letter in the first instance.
The normal liability policy imposes upon an insurer several distinct and separate duties, one of which is the duty to defend. State Farm Auto Ins. Co. v. Civil Service Emp. Ins. Co., 19 Ariz.App. 594, 509 P.2d 725 (1973). An insured is entitled to know early in the litigation process whether the insurer intends to honor that duty in order that the insured may take steps to defend himself. Ebert, v. Balter, 83 N.J.Super. 545, 200 A.2d 532 (1965). If in fact the insurer undertakes that defense the insured may reasonably rely upon the non-existence of policy defenses. To hold otherwise would allow the insurer to conduct the defense of the action without the knowledge of the insured that a conflict of interest exists between itself and the insurer. The conflict is that the insurer retains a policy defense which would relieve the insurer of all liability while simultaneously depriving the insured of the right to conduct his own defense. See 7C Appleman, Insurance Law & Practice (Berdal ed.) § 4694 at 352 (1979); Lockhart v. Allstate Ins. Co., 119 Ariz. 150, 579 P.2d 1120 (App. 1978). It is the reliance of the insured upon the insurer’s handling of the defense and the subsequent prejudice which gives rise to an estoppel in the first instance against the insurer from raising policy defenses. Hoyt v. St. Paul Fire & Marine Ins. Co.,
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JACOBSON, Chief Judge.
This litigation developed in the wake of Pruitt v. Pavelin, 141 Ariz. 195, 685 P.2d 1347 (App.1984). As noted in Pruitt, Carole Pavelin was a real estate salesperson employed by C & A Realty Co., Inc. (C & [517]*517A). C & A carried a Professional Liability Insurance Policy issued by Equity General Insurance Company. As a result of the fraudulent acts of Pavelin, Pruitt brought suit against C & A. That litigation ultimately resulted in a judgment against C & A Realty for $158,698.33 in compensatory damages and $25,000 in punitive damages. That judgment was affirmed on appeal on the theory that C & A was negligent in hiring Pavelin. This appeal questions Equity General’s liability for that judgment.
After C & A was sued by Pruitt, Equity General retained C & A’s private counsel, John Lyons of the law firm of Udall, Shumway, Blackhurst, Allen, Lyons & Davis to represent C & A in that litigation.
After Lyons had been retained, Equity General sent a “reservation of rights” letter to C & A. The pertinent portion1 of that letter provided:
Certain allegations of the complaint assert a right on the part of the plaintiff to recovery of damages known as punitive or exemplary damages. It is the position of the insurer that such damages are not an insured liability____
Therefore, while Equity General Insurance Company intends to protect your interest, they do so with the following reservations and qualifications:
1. The defense or investigation of this claim shall be without waiver of or prejudice to the right of the insurer to contend that any ... loss or damage associated with the above captioned claim is not within the terms, conditions, and provisions of the insurance coverage afforded by the subject insurance certificate.
A copy of the reservation of rights letter was not sent to the Udall law firm. The representative of C & A who did receive the letter stated he did not understand the letter, assumed that a copy had been sent to C & A’s attorneys (the original shows no such copy designation) and simply filed the letter away. It is undisputed that C & A’s counsel did not know of the reservation letter during the course of the Pruitt litigation. Equally undisputed is that punitive damages are specifically excluded from coverage under the policy and that attorney Lyons had a copy of the policy.
According to the affidavit of Lyons, during the course of the Pruitt litigation, Pruitt’s attorney approached Lyons as to settlement, in the $50,000 to $60,000 range. Lyons approached Jim Baxter, the Equity General employee in charge of the Pruitt claim, seeking authorization to settle the claim for $40,000. Baxter would not authorize settlement for more than defense costs, which he thought should not exceed $7,500. Based upon this refusal, no further settlement negotiations occurred. During this time, Baxter did not mention to Lyons that coverage was being disputed.
Lyons filed an affidavit which stated: If this possible denial of coverage had been mentioned, I would have .then gone to C & A Realty and explained the potential for a large judgment existed, that Equity General was going to deny coverage and that C & A Realty should authorize me to settle the case and pay the settlement from C & A Realty’s own monies, and then sue Equity General to recover the sums paid.
Equity General subsequently brought this declaratory judgment action seeking a determination that it owed nothing under the terms of the policy. The trial court, on motion for summary judgment, held that Equity General was estopped to deny coverage and held it liable for all claims against C & A Realty, including punitive damages. As previously indicated, the sole issue now on appeal is the propriety of the punitive damage award.
C & A, while conceding that providing a defense under a valid reservation of rights does not constitute an estoppel, see, [518]*518Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), nevertheless contends that the reservation letter utilized here was ineffective, primarily on the basis that it was “sugar coated.” We reject this contention. In our opinion, the letter, in a straightforward manner, informed a reader of average intelligence that while the insurer was providing a defense, it was doing so without waiving any rights to contest liability under the policy. The language as to punitive damages is especially clear. We hold that the notice of reservation of rights fairly informed the insured of the insurer’s position and did so in a timely fashion. See, 14 Couch, Cyclopedia of Insurance Law, § 51.82 (2d ed. 1982).
C & A argues, however, that during the course of the litigation, Equity General took a position that was inconsistent with its reservation of rights letter, that is, it solely controlled settlement negotiations and thus deprived C & A, to its detriment, of making its own settlement. In essence, C & A is arguing, and the dissent agrees, that Equity General is estopped to deny coverage for punitive damages, due to its failure to apprise the Udall firm of the existence of the reservation of rights letter.
Estoppel is created, where one party, by its conduct, induces another to believe in certain material facts, which inducement results in justifiable reliance thereon resulting in injury to the person thus relying. State Farm Auto Ins. Co. v. Robison, 11 Ariz.App. 41, 461 P.2d 520 (1970). This principle of law gives rise to the necessity of a reservation of rights letter in the first instance.
The normal liability policy imposes upon an insurer several distinct and separate duties, one of which is the duty to defend. State Farm Auto Ins. Co. v. Civil Service Emp. Ins. Co., 19 Ariz.App. 594, 509 P.2d 725 (1973). An insured is entitled to know early in the litigation process whether the insurer intends to honor that duty in order that the insured may take steps to defend himself. Ebert, v. Balter, 83 N.J.Super. 545, 200 A.2d 532 (1965). If in fact the insurer undertakes that defense the insured may reasonably rely upon the non-existence of policy defenses. To hold otherwise would allow the insurer to conduct the defense of the action without the knowledge of the insured that a conflict of interest exists between itself and the insurer. The conflict is that the insurer retains a policy defense which would relieve the insurer of all liability while simultaneously depriving the insured of the right to conduct his own defense. See 7C Appleman, Insurance Law & Practice (Berdal ed.) § 4694 at 352 (1979); Lockhart v. Allstate Ins. Co., 119 Ariz. 150, 579 P.2d 1120 (App. 1978). It is the reliance of the insured upon the insurer’s handling of the defense and the subsequent prejudice which gives rise to an estoppel in the first instance against the insurer from raising policy defenses. Hoyt v. St. Paul Fire & Marine Ins. Co., 607 F.2d 864 (9th Cir.1979) (applying Arizona law). On the other hand, the insurer should not be faced with the dilemma of either refusing to defend and running the risk that the refusal may later prove to have been wrongful or defending and thus being estopped to deny coverage. The answer to this problem is the reservation of rights letter. As stated in Damron v. Sledge, supra:
Where the carrier sends its insured a notice that it is reserving its rights to contest liability for any judgment, and then goes ahead and defends the action, it is almost uniformly held that by this notice the company may defend and use its best efforts to prevent an excessive verdict, without thereby waiving its rights to raise the question of liability under the terms of the policy at a later date.
105 Ariz. at 155, 460 P.2d at 1001.
While it is clear that the reservation of rights principle has its genesis in the policy provisions giving rise to the duty to defend, it is equally clear that the duty to consider offers of settlement arises out of the insurer’s obligation to give equal consideration to its own and the insured’s comparative hazards. Farmers Ins. Exch. v. Henderson, 82 Ariz. 335, 313 P.2d 404 [519]*519(1957); General Accident Fire & Life Assurance Corp. v. Little, 103 Ariz. 435, 443 P.2d 690 (1968).
Moreover, this duty to give equal consideration to offers of settlement exists separate and apart from the duty to defend. State Farm Auto Ins. Co. v. Civil Service Emp. Ins. Co., supra. It therefore follows that an insurer which wrongfully refuses to consider valid offers of settlement is liable to its insured, even though it has dutifully honored its obligation to defend. In this context, it then becomes completely immaterial what attorney Lyons would have done in connection with offers of settlement had he known of the reservation of rights letter. If Equity General had liability under its policy and it wrongfully refused to consider valid offers of settlement, it is guilty of bad faith and is liable therefor, regardless of Lyon’s knowledge. This would be true not on the basis of any estoppel against Equity General, but rather because it breached its duty to give equal consideration to offers of settlement. C & A has not suggested, however, that Equity General was guilty of bad faith in refusing to consider offers of settlement.
What is suggested is that if the position Equity General took in its reservation of rights letter.was valid (that it did possess valid policy defenses to this action), then counsel for the insured would have conducted the defense of the action differently had he known of these defenses. However, the failure to possess this knowledge is not the fault of Equity General, but rather the failure of C & A, counsel’s principal, to relay this information to its agent.
We have previously held that the reservation of rights letter was clear and unambiguous and adequately informed anyone of average intelligence that Equity General was claiming policy defenses to the Pruitt litigation. C & A was completely informed as to its options in view of that position. It cannot now take the position that by ignoring the information received and the option set forth, liability can be imposed on Equity General for damage coverage not provided in the policy and for which C & A did not contract or pay premiums.
For the foregoing reasons, the judgment of the trial court imposing liability against Equity General for payment of punitive damages is reversed. In all other respects the judgment is affirmed.
GREER, J., concurs.