1. Reasonable or Questionable?
Generally, to establish bad faith, the insured must show that the insurer’s breach of the insurance contract was “unreasonable, frivolous or unfounded.”  Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 561, 951 P.2d 1124 (1998).  However, under Washington law, an insurer that fails to defend based on “a questionable interpretation of law” may be found to have acted in bad faith as a matter of law.  Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 405, 229 P.3d 693, 696 (2010).
2. The Magic Words:  “At Any Time” 

Under Oregon law, once an insurer “has commenced its representation of the client it cannot withdraw if such withdrawal would prejudice the client.  Where, however, the company expressly reserves the right to withdraw from the defense, the client cannot legitimately claim prejudice when the company exercises that right.”  United Pacific Ins. Co. v. Pacific Northwest Research Foundation, 39 Or. App. 873, 877 (1979) (internal citations omitted).  
To be potentially effective, the letter must state that the insurer reserves the right to withdraw “at any time.”  If other language is included, such as “at any time there is a determination that there is no duty to defend,” then the insurer may be held to an objective standard in that determination, meaning that a declaratory judgment action may be required before an insurer can withdraw.
3. Fiduciary Duty Even If No Coverage?
Under Oregon law, an insurer’s acceptance of a tender of defense creates a fiduciary obligation to make reasonable efforts to settle a case even if no coverage actually exists under the policy.  Safeco v. Barnes, 133 Or. App. 390, 395-97 (1995).  In Barnes, the insurer obtained a declaration there was no indemnity owed under the policy, but the Court of Appeals nonetheless reversed dismissal of the insured’s counterclaim for breach of fiduciary duty.  
Because the insurer accepted defense of its insured, it retained a fiduciary obligation to attempt a reasonable settlement, even in the absence of any coverage obligation.  The court held that there was a question of fact whether the insurer breached its fiduciary duty when it rejected defense counsel’s recommendations to settle before and during trial.