Reservation of Rights Letter

Often an insured presents a claim or a lawsuit to an insurance company and asks the insurance company to pay the loss or defend the lawsuit. Insurance contracts cover a vast range of things that happen in life, but they do not cover everything. There are many events that are clearly covered by insurance contracts and many matters that are clearly not covered. For instance, if a person becomes upset at his neighbors sprinkler system and goes over and deliberately destroys the control panel (an actual incident), that is an intentional act. It is not a fortuitous event or accidental event. When the neighbor with the damaged box claims against the vandalizing neighbor, and the vandalizing neighbor asks his insurance company to cover the claim, he will receive a polite, “no, we do not provide coverage for intentional acts.” However, there are many instances when a claim falls into a gray zone (between clearly covered and clearly not covered). In those instances, the insurance company cannot form an immediate answer regarding whether the situation presented to them is covered under the insurance contract. This is the situation when a reservation of rights letter may be appropriate.

For example, a claim might be made wherein the same two neighbors were having an animated discussion when the neighbor owning the sprinkler system ended up somehow falling down and breaking his jaw. This injury could have been a simple accident during the discussion; or the neighbor breaking the control panel may have intentionally struck his neighbor. If one only has the simple facts that, while having a discussion, the one neighbor fell and broke his jaw, further investigation by the insurance company may be necessary. When the neighbor who damaged the panel turns in the claims made against him, he might be told, “no, we are not going to cover the damage you did to your neighbor’s panel because it was a deliberate act.” Regarding the injury to the neighbor, he might receive what is called a “reservation or rights” letter that sets out various provisions of the insurance policy upon which the insurance carrier “reserves” its’ rights to investigate the claim and to later make a decision regarding whether the claim is covered. The insurance company will look into the allegations and investigate the situation to make a determination as to whether the particular incident is covered. The letter typically consists of various provisions of the insurance policy. Probably the first and foremost issue is whether there was, what is termed under the insurance policy an “occurrence”. An “occurrence” boils down to whether or not there was an accident or a fortuitous event or whether there was a deliberate act that took place. There are a variety of other provisions of the insurance policy that would also be set out in the letter.

A reservation of rights letter is written to do several things:

1. Inform the policy holder that there is a question regarding whether or not the event will be covered by insurance;

2. Inform the policy holder regarding the portions of the policy and the portions of the claim that bring up the questions regarding coverage under the policy;

3. Protect the insurance company if the claim is truly not covered under the policy so that they will not be put into a position of having to cover a claim that is ultimately determined not to be covered by the policy. For the insurance carrier, the letter reserves a right at law to make a decision after an investigation, including the decision to simply deny the claim.

The ultimate effect of a reservation of rights letter is simply to define the questions regarding coverage, inform the policy holder of those questions, and prevent the insurance carrier from waiving its right to deny a non- covered claim if it is diligent in investigating the coverage issue. The letters are common in many areas, and allow the carrier to continue to provide coverage including a defense to a lawsuit to the insured, while it continues to investigate whether the claim will be ultimately covered.

This matter could certainly be discussed at greater length and has numerous potential complexities; however, this is a basic presentation of what a reservation of rights consists of in fact and at law.