What is a reservation of rights letter?
UPDATED: December 15, 2019
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Most people purchase home, automobile, and other types of liability insurance with the belief that if they are ever sued, their insurance company will represent them and pay on the claim, if needed. Unfortunately, many people do not quite grasp the limitations contained in the fine print of their insurance agreement until they receive a reservation of rights letter from their insurance company. The reservation of rights letter usually serves as a notice that your insurance company has reserved its right to deny coverage at a later date based on the terms of your policy.
Purpose of a Reservation of Rights Letter
Generally speaking, an insurance company is obligated to help you if any of your claims are covered by your insurance policy. However, 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, certain losses may not be covered by the terms of your insurance policy. For example, a majority of insurance policies cover negligent, but not intentional acts: If you ran a stop sign and hit another car by accident, then you acted negligently and not intentionally. Many insurance policies contain provisions that exclude or deny coverage for gross negligence or intentional acts. These exclusion provisions mean that your company will pay the part of damages that is associated with your negligent conduct, but not the part that's associated with intentional conduct.
The circumstances of the claim against you will influence what is considered negligent or intentional conduct. Continuing with the example above, if after you ran the stop sign, you were so frustrated that you lost your temper and punched the driver of the other car, the assault would be considered an intentional act. Under these circumstances, your insurance company would pay for the damages to the other driver's car, but could also reserve the right to deny coverage on your behalf for the bodily injuries resulting from your intentional assault.
Receiving a Reservation of Rights Letter
Insurance companies send reservation of rights letters because their failure to send it can be considered a waiver of their rights at a later time. Most of the time, reservation of rights letters appear as generic form letters. Despite their generic appearance, they should not be taken lightly. At the very minimum, you should contact your 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.
Sometimes they will give their interpretation of the law and why they are not going to cover the claim. A reservation of rights letter and their interpretation of the law does not mean that you are automatically required to accept their denial of the claim. If your insurance company is heading in the denial direction, you should consult with an attorney that routinely handles insurance or personal injury claims. Many will offer free or minimal fee consultations for reviewing the facts of your case and your policy limits. Depending on the nature of your case, you may be able to force your insurance company to pay for a separate attorney to represent you.
The most important thing to remember is to follow-up on the reservation of rights letter. Ignoring the letter and failing to invoke your own protections by seeking your own legal representation can significantly hinder your ability to defend your legal rights. If you receive a reservation of rights letter, contact an experienced insurance attorney with your questions.