Reservation of Rights
A legal notice from an insurance company stating they will investigate and potentially defend a claim while reserving the right to later deny coverage if the claim falls outside policy terms. This allows the insurer to avoid waiving their right to deny coverage while still providing initial protection to the insured.
Example
“After receiving a lawsuit against their client, the insurance company sent a reservation of rights letter stating they would provide legal defense but reserved the right to deny coverage if the incident was found to be intentional rather than accidental.”
Memory Tip
Think 'Reserve the Right to Refuse' - the insurer reserves their right to refuse coverage later while helping now.
Why It Matters
Understanding reservation of rights protects you from assuming you have full coverage when the insurer is still investigating. It alerts you to potential coverage gaps and allows you time to secure independent legal counsel or additional protection if needed.
Common Misconception
Many policyholders believe that if their insurer provides a defense or pays initial costs after sending a reservation of rights letter, they're guaranteed full coverage. In reality, the insurer can still deny coverage and stop payments if their investigation reveals policy exclusions apply.
In Practice
ABC Company faced a $500,000 lawsuit after a customer slip-and-fall incident. Their insurer immediately hired defense attorneys costing $15,000 but sent a reservation of rights letter because the incident might involve intentional misconduct (excluded from coverage). After investigation revealed an employee had deliberately ignored a spill, the insurer denied coverage. ABC Company had to repay the $15,000 in defense costs and handle the remaining $485,000 exposure themselves.
Etymology
From the Latin 'reservare' meaning to keep back or save, combined with 'rights' from Old English 'riht' meaning just or proper claim.
Common Misspellings
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See Also
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