Legal Definitions - reservation-of-rights letter

A reservation-of-rights letter is a formal notice sent by an insurance company to its policyholder. This letter informs the policyholder that while the insurer is investigating a claim, or even providing a defense for a lawsuit, it is not giving up its right to later deny coverage for that claim. Essentially, the insurer is reserving its contractual rights to dispute whether the policy actually covers the incident, or if an exclusion within the policy applies, even as it proceeds with initial steps like investigation or providing legal defense. This letter is crucial because it prevents the insurer's actions from being interpreted as an admission of liability or an agreement to pay the claim.

• Example 1: Auto Accident with Potential Policy Violation

  Imagine a policyholder gets into a car accident and reports it to their auto insurance company. However, the police report suggests the policyholder might have been driving under the influence, which is typically excluded from coverage in most auto insurance policies. The insurer sends a reservation-of-rights letter. This letter states that while they will begin investigating the accident and perhaps even cover initial towing or medical assessments, they are reserving the right to deny the claim entirely if it is later confirmed that the policyholder was indeed driving under the influence, as this would fall under a policy exclusion.

• Example 2: Business Liability Claim with Ambiguous Coverage

  A small business is sued by a customer for an incident that occurred on its premises. The business has a general liability insurance policy. The insurer reviews the lawsuit and isn't immediately certain if the specific nature of the claim (e.g., a unique type of cyber incident versus a traditional slip-and-fall) is covered under the policy's terms, or if there's an exclusion that might apply. The insurer sends a reservation-of-rights letter. They agree to appoint and pay for a defense lawyer for the business to respond to the lawsuit, but the letter explicitly states that this defense is being provided under a reservation of rights. This means that if it's later determined that the policy does not cover this specific type of incident, the insurer might withdraw the defense and refuse to pay any judgment or settlement.

• Example 3: Homeowner's Claim with Suspicious Circumstances

  A homeowner files a claim for extensive fire damage to their property. While processing the claim, the insurance company discovers some suspicious circumstances, such as inconsistencies in the homeowner's account of how the fire started or evidence suggesting potential arson. The homeowner's policy contains an exclusion for intentionally caused damage. The insurer sends a reservation-of-rights letter. They will proceed with sending an adjuster to assess the damages and might even authorize some initial emergency repairs, but the letter clearly states that they are investigating the cause of the fire and reserve the right to deny the claim if their investigation concludes that the fire was intentionally set, as this would trigger a policy exclusion.