insurance

Reservation of Rights

A legal notice sent by an insurance company to a policyholder stating that while the insurer will investigate or defend a claim, it reserves the right to later deny coverage if the claim falls outside policy terms. This allows the insurer to protect its interests while still providing initial support to the insured.

Example

“After the auto accident, the insurance company sent a reservation of rights letter stating they would defend the lawsuit but reserved the right to deny coverage if it was determined the driver was intoxicated, which would violate the policy terms.”

Memory Tip

Think 'RESERVE the right to say NO later' - the insurance company is reserving (keeping) their right to potentially deny the claim after investigation.

Why It Matters

A reservation of rights letter protects both you and your insurer by allowing investigation and defense to proceed while preserving everyone's legal options. It ensures you receive immediate support during a claim while allowing the insurer to avoid waiving its rights to contest coverage based on policy terms or exclusions.

Common Misconception

Many people panic when receiving a reservation of rights letter, thinking it means their claim will definitely be denied or that the insurance company is acting in bad faith. However, these letters are standard risk management tools that often result in full coverage, and they actually demonstrate the insurer's good faith effort to investigate thoroughly while protecting all parties' interests.

In Practice

Tom's business faces a lawsuit alleging discrimination. His liability insurer sends a reservation of rights letter because discrimination may be excluded under his policy. The insurer hires attorneys costing $50,000 to defend Tom and ultimately wins the case. Even though coverage was uncertain initially, Tom received full defense benefits. If the insurer had lost and paid $200,000 in damages, they could have later sought reimbursement from Tom if the exclusion applied.

Etymology

From Latin 'reservare' meaning 'to keep back' or 'to save,' combined with 'rights' from Old English 'riht' meaning 'just' or 'proper.' This legal concept developed in insurance law during the early 20th century as policies became more complex.

Common Misspellings

reservation of rigthsreservaton of rightsreservation of rightesresevation of rights

Related Terms

Duty to Defend

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