Reservation of Rights

Although an insurer has an obligation to pay for a loss, payment depends upon agreeing that the loss qualifies for coverage. Insurers face a considerable risk. Once it is notified of a claim, an insurer must respond. However, when there is a dispute over a claim, the fact that a company begins to handle a request can, during litigation, be interpreted as admitting a loss is covered. An insurance company may use a special document called a Reservation of Rights (ROR) letter to protect itself.

The ROR may be a form letter, or it could be a personal letter to a policyholder. Regardless of its length or amount of personalization, a ROR has a single purpose: to inform that while the insurance company is actively investigating a loss or addressing issues related to a lawsuit, it still has not decided whether the loss or suit is eligible for coverage. Therefore, the fact that it has opened a claim file should not be interpreted as an agreement that coverage exists.

Taking proper time to handle liability claims is particularly important. Policyholders are protected separately by a right to be defended against allegations that they caused injury or damage. Responding to lawsuits requires time to assess circumstances, and RORs provide a way to allow assessments without an insurer waiving its rights.

RORs, even when used, still cause confusion with policyholders. However, the alternative is not a good one. A request to handle a loss could be conducted decisively by an insurer immediately issuing a denial or automatically agreeing to cover a submitted loss. However, being this simplistic is neither fair nor good business.

Both policyholders and insurers are served best when all claims are handled in the proper manner. ROR letters ensure losses are adequately evaluated, and then a decision is made on whether they qualify for coverage.