What is a reservation of rights letter?

Most people purchase home, automobile, and other types of liability insurance with the belief that if they are ever sued, their insurance company will represent them and pay on the claim. Unfortunately, many people do not quite grasp the limitations contained in the fine print of their insurance agreement until they receive a reservation of rights letter from their insurance company. The reservation of rights letter usually serves as a notice that your insurance company has reserved its right to deny coverage at a later date based on the terms of your policy.

• The receiver could disregard it thinking it’s not relevant now
• The receiver could panic thinking their insurer was denying a claim based on coverage issues now

As you might expect, the truth is somewhere in between.

What Is The Purpose of A Reservations of Rights Letter?

Generally speaking, an insurance company is obligated to meet the terms of your insurance policy by paying eligible claims. However, the company may not be obligated to pay the damages for certain types of claims. A reservation of rights letter from your insurer is a notice that even though the company is proceeding to handle your claim, certain losses may not be covered by the terms of your insurance coverage. In other words, it’s not a denial of coverage right now.

For example, a majority of insurance policies cover negligent, but not intentional acts. If you ran a stop sign and hit another car by accident, then you acted negligently and not intentionally. Many insurance policies contain provisions that exclude or deny coverage for gross negligence or intentional acts. Insurers are taking steps to clarify up front that they may need to investigate certain aspects before paying the full claim.

The circumstances of the claim against you will influence what is considered negligent or intentional conduct. Continuing with the example above, if after running the stop sign, you were so frustrated that you lost your temper and punched the driver of the other car, the assault would be considered an intentional act. Under these circumstances, your insurance company would pay for the damages to the other driver’s car, but could also reserve the right to deny coverage on your behalf for the bodily injuries resulting from your intentional assault. They would also deny any legal defense costs associated with the incident.

How Should an Insured Handle A Reservation of Rights Letter?

An insurance carrier may send reservation of rights letters because their failure to send it can be considered a waiver of their rights at a later time. Most of the time, reservation of rights letters appear as generic form letters. Despite their generic appearance, they should not be taken lightly. At the very least, you should contact your insurance company to see why they think the claim may not be covered. Often they will tell you that they are just covering their bases.

Sometimes they will give their interpretation of the law and why they are not going to cover the property damage claim. A reservation of rights letter and their interpretation of the law does not mean that you are automatically required to accept their denial of the claim. If your insurance company is heading in that direction, consult with an attorney that routinely handles insurance or personal injury claims. Don’t wait for the formal denial letter.

Many insurance attorneys will offer free or minimal fee consultations for reviewing the facts of your case and your policy limits. Depending on the nature of your case, you may be able to force your insurance company to pay for a separate attorney to represent you.

Keep in mind, the free consultation you get up front is a high level overview. Many attorneys cannot do a deep dive into all the policy exclusions of your liability insurance policies. So they may be relying partly on the most common exclusions and other terms they’ve dealt with in the past to evaluate your potential for coverage. If you have an unusual policy provision, it may only come up once you’re in the middle of a case.

The most important thing to remember is to follow-up on the reservation of rights letter. Denial factors like bad faith can be pretty straightforward. But you should never assume that the exceptions don’t apply to you.

Ignoring the letter and failing to invoke your own protections by seeking your own legal representation can significantly hinder your ability to defend your legal rights.

How Do You Find a Lawyer Who Can Handle Coverage Defenses?

The state bar keeps records on different attorneys and any actions taken against them. You can also check online for review and other information to help you find an insurance lawyer who can take care of your case.

A good lawyer can evaluate your insurance policy and make sure insurers are meeting their obligations. They can present additional coverage defenses and much more.

Case Studies: Understanding Reservation of Rights Letters

Case Study 1: Denied Coverage Due to Intentional Acts

John, a homeowner, accidentally causes damage to his neighbor’s property when his car rolls downhill and crashes into it. John has liability insurance to cover such accidents. After filing a claim with his insurance company, John receives a reservation of rights letter stating that the company is proceeding with the claim but may not cover damages resulting from intentional acts.

Upon investigation, the company discovers that John intentionally released the handbrake, causing the accident. As a result, they reserve the right to deny coverage for the damages.

Case Study 2: Reservation of Rights for Gross Negligence

Mary owns a small business and has liability insurance for potential accidents in her store. A customer slips on a wet floor and sustains injuries. After Mary files an insurance claim, she receives a reservation of rights letter stating that the company will handle the claim but may not cover damages if gross negligence is proven.

The insurer investigates and finds that Mary was aware of the wet floor but didn’t take appropriate precautions to warn customers. Consequently, they may deny coverage for the customer’s injuries, citing gross negligence.

Case Study 3: The Importance of Seeking Legal Advice

Tom’s house suffers extensive damage due to a storm, and he submits a claim to his homeowner’s insurance. The insurance company sends Tom a reservation of rights letter mentioning that certain types of damage may not be covered, as specified in the policy.

Tom is unsure about his rights and decides to consult an attorney who specializes in insurance claims. The attorney reviews the policy and advises Tom on how to negotiate with the insurance company for proper coverage.