What Is a Reservation of Rights Letter?

You've done the responsible thing and obtained liability insurance. It's an important tool for risk management. You believe your insurance coverage will protect you if you have insurance claims. You've even made all of your premium payments required under the insurance contract. So, you expect your insurance company to come through if you're sued in a related liability action.

What does it mean if your insurance carrier sends you a reservation of rights letter outlining reasons why they might not pay for things related to your policy? Read on to learn more about the reservation of rights letters and how to protect your rights.

What Does a Reservation of Rights Letter Do?

An insurance company provides a reservation of rights letter (ROR letter) to provide notice to the insured that a claim may not be covered under the policy. Under your liability insurance policy, the insurance company must defend you in a lawsuit. Your insurer must provide defense counsel. For example, someone injures themselves on your property and sues you to cover medical costs. The insurer will provide your legal defense. It's included under the terms of your homeowner's policy.

However, the duty to defend is generally broader than the duty to indemnify. This means that an insurance company will investigate a claim. It may defend you in a liability action. However, it can deny coverage later. The company can argue that the coverage issues involve noncovered claims.

It may be a waiver if your insurer fails to send the reservation of rights letter. For example, your general liability policy likely only covers acts of negligence. Therefore, if the lawsuit reveals that you injured someone intentionally, the insurance company will refuse to pay for those damages. Similarly, if you don't abide by the terms of your policy, the insurance company may claim you've breached your contract. They may deny coverage on those grounds.

How a Reservation of Rights Letter Can Affect the Policyholder

A reservation of rights letter can affect you as the policyholder. If the insurance company later refuses to cover particular claims made in the lawsuit, you would then be on the hook for those damages if found liable. A denial of coverage can be costly.

Even before the damages phase of a lawsuit, a reservation of rights letter can indicate a potential conflict of interest between you and your insurance company. In that case, it may be necessary to hire your own counsel. Your interest may no longer align with that of the insurance company.

The insurance company must provide and pay for your defense as long as your liability policy potentially covers the underlying claim. However, the insurer could try to have you sign an agreement allowing them to recoup their defense costs if they later decide that the underlying claim isn't covered. The insurance company may require reimbursement. Or, they might try to recoup those defense costs at a later date. The laws of your jurisdiction may prohibit such practices.

Requirements for a Reservation of Rights Letter

Each state has laws governing the insurance industry operating within its borders. These insurance laws cover what's required of a reservation of rights letter to be effective against a policyholder. For example, many jurisdictions outline what may not be covered.

Courts have sometimes sided with an insured against an insurance company. Courts have found that a reservation of rights letter didn't provide the policyholder with enough justification as to why, according to the facts of the case, the insurer might deny coverage under the facts of the case.

The reservation of rights letter must also be timely. Your insurance company must act quickly. Waiting until the middle or end of the lawsuit to discuss options could constitute waiving rights to deny coverage. Some jurisdictions require the insurer to send a letter within a reasonable time. Others mandate a specific timeline to give notice.

Steps To Take After Receiving a Reservation of Rights Letter

An insurance company might use a general form letter. It may contain no specifics about your particular case. In such cases, it's wise to follow up with the insurance company or insurance adjuster. Ask why they think your policy may not cover your claim. Inquire about their coverage defenses. This can help you determine the strength of their case.

If your insurance company is not forthcoming or indicates they will deny all or part of your claim, you should contact an outside insurance attorney. It's wise to get an initial independent evaluation of your case. If there is a conflict of interest between you and your insurance company, it's better to retain independent counsel early.

Protect Your Rights With Help From an Insurance Attorney

Whether you're dealing with an insurance company acting in bad faith or you're simply wanting independent counsel, contact an experienced insurance attorney. They can help you understand the implications of a reservation of rights letter and protect your legal rights.