What is a reservation of rights letter?
In some cases a liability insurer (for eg. homeowner’s insurance, boatowner’s insurance) is faced with a situation whereby an insured who has been sued may or may not be covered by the policy issued by the insurance company. The answer to this question may be complicated depending on the policy and the facts of the suit, so it’s possible the insurer does not know for certain prior to the answer having to be filed in response to a lawsuit if the insured is in fact covered.
In that event, the insurer will typically go ahead and defend the insured against the claim, but simultaneously send the insured a “Reservation of Rights” letter. This letter explains to the insured that since there is or may be a question of coverage, the insurer retains the right to withdraw from the defense of the insured if it is later determined that the claim is not covered under the existing policy. An example typically given in this regard is that negligent acts are likely covered, while intentional acts are not. This will, in effect, leave the insured with the obligation to personally fund any further legal representation on his or her own behalf.
Please see related article~~ The Tilley Rule: Who is the client of the attorney hired by the insurance company to defend the insured?
Full disclosure: I work as a paralegal in insurance defense.
LegallyBlog® by Sami K. Hartsfield, ACP 