DEFINITION OF ‘RESERVATION OF RIGHTS LETTER’
A notification provided to the insured party indicating that a claim may not be covered under the policy. Reservations of rights letters do not deny a claim; instead, the letter indicates that the insurer is investigating the claim and reserves the right to deny the claim after it completes its investigation.
INVESTOPEDIA EXPLAINS ‘RESERVATION OF RIGHTS LETTER’
When an insurer receives a claims notice it has only a small amount of information as to what happened, what caused the damages, and who was responsible. In order to get a better understanding of what happened the insurer must conduct its own investigation, and the notice that it intends on conducting an investigation is the reservation of rights letter.
Insurers that issue a reservation of rights letter may ultimately deny a claim, or may decide to defend the insured against a claim made against it. Receiving the letter serves as an indicator to the insured that the claim may be denied, or that the information provided in the original claim triggered questions that need further evaluation. For example, the claim may be incomplete, or may contain contradictory information.
Even though an insurer may send a reservation of rights letter, it is still responsible for replying to lawsuits associated with a claim while it conducts its investigation. Insurers send the letter in order to indicate that they are reserving their rights, since failing to send the letter can be considered a waiving of rights.
The reservation of rights letter contains specific information about the claim, including the policy in question, the claim made against the policy, and the part of the claim that may not be covered. Insured parties that receive a reservation of rights letter should contact their insurer to find out more information about the claim and the investigation process. The insurer may provide some initial information as to what aspects of the claim it is investigating. The insured party may consider contacting an attorney if it seems like the insurer intends on denying the claim.