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Reservation of Rights Letters

A claim is made and you dutifully submit the particulars to your insurance company. In reply, your insurance company responds with a letter stating that they are reserving their rights to deny coverage. This is the insurer’s way of stating they are not sure the claim is covered and informing you of your options.
10/02/2015
A claim is made and you dutifully submit the particulars to your insurance company. In reply, your insurance company responds with a letter stating that they are reserving their rights to deny coverage. This is the insurer’s way of stating they are not sure the claim is covered and informing you of your options.

Many policyholders have received one of these “Reservation of Rights” letters from their insurer in response to a filed property or liability claim. These letters often cite policy language supporting the carrier’s argument to preserve their right to ultimately deny all of or part of the claim. Not all reservation of rights letters result in the denial of the claim, but that can be small comfort to the letter’s recipient.

Experience demonstrates that reservation of rights letters often include errors, misstatements and incomplete information. It is important to read the document very carefully and formally craft a rebuttal if appropriate. If you are not up to the task, have an insurance professional analyze it, and verify the policy language and references cited to determine the letter’s accuracy and relevance to the claim.

I have seen reservation of rights letters cite policy language that has no applicability to the claim at hand, cite parts of an exclusion while omitting other parts of the same exclusion (that would have affirmed coverage) and other oversights. Without a thorough analysis of the letter and the cited policy language, improper declination of the claim and costly litigation could ensue.

Should the reservation of rights letter state that there is no coverage and the insurer is withholding defense of the claim, review the summons and complaint (if there is one). Determine if any aspect of the allegations might be covered – even if the covered portion represents a minor part of the overall claim against you. The insurer’s duty to defend is broader than its duty to cover the claim. If the possibility of coverage can be established, the insurer may not be able to deny defense expenses.

Insurance policies are long and complex documents that have many interrelated parts. It can be a challenge for policyholders to ascertain whether the reservation of rights letter is inaccurate, incorrect, or misleading. They should not be taken at face value and often do not stand up to a challenge.

Recent litigation indicates that a reservation of rights letter must include certain elements to be considered valid. This includes identifying the policy, citing relevant policy language, identifying what part of the claim might not be covered, and contain the words “reservation of rights.” The letter must also be issued in a timely manner. Just as you have an obligation to report claims in a timely manner, a reservation of rights letter that is sent by an insurer too long after the claim is made could be deemed invalid for that reason alone (Western Heritage Insurance Company v. Asphalt Wizards June 2014).

Once you receive a reservation of rights letter review and question it. Compose a detailed letter that cites the language in the policy that affirms coverage for the claim. Have a qualified insurance professional compare the policy terms stated in the letter against your actual policy language. If a discrepancy or disagreement is established, you (or your insurance professional) should respond as soon as possible. A well-reasoned counter argument may cause an insurer to with-draw a reservation of rights letter, successfully re-establishing coverage.