If you are sued, the legal complaint filed against you may state several different claims, some of which may be covered by your liability insurance policy and some of which may not be covered. The insurance company is obligated to provide a defense for you if any of the claims could be covered, but 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, depending on what happens, certain losses might not be covered by the terms of the policy. By such a letter, the company preserves or "reserves" its right to deny coverage at a later date based on the terms of the policy.
Liability policies, for instance, typically do not provide coverage for damages which you cause intentionally. If you injure someone under circumstances where the injury could have been accidental or could have been intentional, the legal complaint might allege both that your action was "negligent" and that your action was "intentional." In court, the party suing you will have to prove it was one or the other. In such a case, your insurance company may write a letter saying it will provide you a defense but it will not pay damages if the court finds you caused the injury intentionally. This is an example of a "Reservation of Rights" letter.
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