Tuesday, November 20, 2018

What is a Reservation of Rights Letter?

A reservation of rights is a way in which an insurer agrees to defend an insured against the claim or suit while also retaining its ability to evaluate, or even deny, coverage for some or all of the claims alleged.

Common examples where insurers may issue are reservation of rights letters include: 1. When there is a policy exclusion; 2. Some of the damages are not covered by the policy; 3. The damages may exceed the policy limits; 4. The insured breached the condition of the policy.

Reservations of rights letters typically have a long list of reasons of why the insurer could deny coverage for the claim. The insurer has an obligation to notify the insured, its client, that a particular claim may not be covered. Obviously, receiving a long list of reasons why your insurer may not cover the claim scares many policyholders since you purchase the insurance to cover such incidents.

Often, coverage cannot be determined until after an investigation is conducted. The issuance of a reservation of rights letter gives the insurer the flexibility to fulfill its obligation under the policy to defend their client while protecting itself by carrying on an investigation which could eventually allow it to deny coverage.  The letter must explain to the policy order why the policy, as applied to the facts of the claim, could result in denial of coverage and should quote the particular policy provision and or language that would be the basis of the denial. 

However, a reservation of rights letter does not necessarily mean that coverage will be denied. An insurance company is required under North Carolina law to pay claims in a timely fashion after reasonable investigation. Once the investigation is completed the insurance company must pay the claim if it should’ve been covered under the policy.

If you’ve had a claim wrongly denied call Hemmings and Stevens today for a free no obligation consultation.

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