Upon receiving notice of a claim, an insurance company must determine whether it is covered by a policy. If a claim is clearly covered, the insurance company will begin the process of defending or indemnifying the insured. Alternatively, claims that are clearly not covered will be denied. A Reservation of Rights letter is used when the insurance company isn’t sure whether a claim is covered.
Assume a customer files a lawsuit after being injured by a falling box. If the box fell because it was carelessly placed on a high shelf, a general liability policy would likely cover the claim. Coverage would be unlikely, however, if the box was intentionally dropped on the customer.
Though it may take months to find out what happened, the insurance company may only have days to take action. Rather than risk denying a covered claim, the insurance company can send the insured a Reservation of Rights letter, which gives the insurance company time to investigate the claim, and defend it, if necessary, without waiving its right to deny all or part of a claim at a later time if the facts ultimately establish a lack of coverage.
A Reservation of Rights letter also puts the insured on notice that all or part of a claim may not be covered. According to the California Supreme Court, by providing a Reservation of Rights letter, “the insurer gives the insured notice of how it will, or at least may, proceed and thereby provides it an opportunity to take any steps that it may deem reasonable or necessary in response–including whether to accept defense at the insurer’s hands and under the insurer’s control or, instead, to defend itself as it chooses.”
Reservation of Rights letters are used when the facts or the policy language may justify denying coverage for a claim. For example, insurance companies may use a Reservation of Rights letter when:
- An exclusion in the policy does or may apply
- The allegations in a lawsuit may be beyond the scope of coverage under a policy
- Some or all of the damages are not covered by the policy
- The insured may have failed to satisfy their obligations under the policy
A Reservation of Rights letter will typically:
- Identify the specific policy covered by the letter
- Summarize relevant facts
- Quote relevant policy language
- Identify and explain coverage and policy defenses
Though a Reservation of Rights letter does not necessarily mean that a claim will be denied, it must still be taken seriously. Depending on the nature of the claim and the potential exposure, professional guidance may be necessary when responding to a Reservation of Rights letter. An experienced and reputable insurance agent can help identify concerns, evaluate options and prepare a response.
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