What Is a Reservation of Rights Letter and How Does It Work?

Reservation of Rights Letter

Investopedia / Madelyn Goodnight

What Is a Reservation Of Rights Letter?

A reservation of rights letter is provided by an insurance company to an insured party indicating that a claim may not be covered under a policy. Reservation of rights letters do not deny a claim. However, the letter indicates that the insurer is investigating the claim and reserves the right to deny the claim after it completes its investigation.

Key Takeaways

  • Insurance companies will issue a reservation of rights letter to the insured party to serve as a notice that they are conducting an investigation into the claim
  • Reservation of rights letters can appear generic but are a formal indicator that while the insurance company is moving forward with a claim, some losses may not be covered.
  • Insurers cannot maintain their reservation of rights indefinitely, an insured can push for their decision to provide or deny coverage.

How a Reservation Of Rights Letter Works

Reservation of rights by an insurance company is a statement of intention that they are reserving their full legal rights. This serves as a notice that they are not waiving their legal rights to take action at a later date. A letter is sent as a notice that an insurer is reserving its rights, and if it decides to deny coverage later on it can cite its original reservation of rights letter as a warning.  

Insurers that issue a reservation of rights letter may ultimately deny a claim, or they may decide to defend the insured against a claim made against it. In order to get a better understanding of what happened, the insurer must conduct its own investigation. The notice that it intends on conducting an investigation is the reservation of rights letter. These letters are required because when an insurer receives a claims notice, it contains only a small amount of information as to what happened, what caused the damages, and who was responsible.

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.

Insurance companies send a reservation of rights letters because not doing so could be considered a waiver of their rights at a later time. Most of the time, reservation of rights letters appear as generic form letters. However, they should not be taken lightly. At the very minimum, anyone who receives one should contact their 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.

Under a liability insurance policy, your insurer may have a broader obligation to defend the insured than to actually secure against losses.

Requirements for a Reservation of Rights Letter

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.

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.