What does an insurer mean in claiming ‘reservation of rights’?

On Behalf of | Oct 18, 2014 | Uncategorized

Risk mitigation is big business. It doesn’t matter if you are a huge corporation or a private individual, there can be situations that could result in you having to face significant financial obligations. To avoid that, we take out insurance policies — contracts that bind a third party to help us in the event of a claim that could result in our suffering a loss.

Of course, insurance companies have their own incentives for mitigating the risk of having to make pay outs. Among the tactics they may use is the sending of a letter that expresses their “reservation of rights” after a claim has been made, but before it commits to approving it for coverage. 

The reason the letters are employed, as many with experience in business litigation know, is to delay. If the claim is approved the company is obligated to pay any settlements or judgments that might arise from the claim. The theory is that by issuing a reservation of rights letter, or several, the company buys time that can be used to investigate or just see how things play out without incurring beneficiary claims of bad faith or failure to defend.

But as a recent article in The National Law Review observed, the validity of such letters depends on the detail of their contents. The item focuses on a Missouri appeals court decision that found that two reservation of rights letters sent by an insurer to a construction firm that had been sued for defective work were lacking under state law.

The court said they failed to make clear why the insurer was holding off on deciding whether to cover the claim. The insurer had eventually denied the claim, but under the ruling that was reversed.

This firm had no role in this particular case, but we find it hard to disagree with the reviewer’s conclusion. As he put it, “Calling a letter a “reservation of rights” does not make it one.” 


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