What does the term, ‘reservation of rights letter’ mean?


If a person is sued, the legal complaint that is filed against that person would contain various different claims. Some of the claims might be covered by the liability insurance and some of them might not be covered. The insurance company is legally bound to provide a defense to the policyholder if the claims are covered by the policy. However, the insurance company would not be obligated to pay the damages or losses for the claims that are not covered by the policy. When the insurance company proceeds to handle the claim of the policyholder, the insurance company might exclude certain losses or damages as not covered by the policy. In such a circumstance, the insurance company would issue a ‘reservation of rights letter’ to the policyholder. Through such a notice, the insurance company would preserve or reserve its right to deny any coverage at a later date. To cite an example liability policies would not provide cover for damages or losses that are intentionally caused by the policyholder. If the insurance company believes that the injury caused to another person by the policyholder could be intentional or accidental, the complaint might allege that the action of the policyholder was ‘negligent’ and that the action was indeed ‘intentional’. In the court, the party suing the policyholder should prove that it was not intentional. In such a situation, the insurance company might issue a letter stating that it would provide the policyholder a defense but would not pay the damages if the court determines that the injury was caused intentionally. This letter would be ‘reservation of rights’ letter.