An insurer's notification to an insured that coverage for a claim may not apply. Such notification allows an insurer to investigate (or even defend) a claim to determine whether coverage applies (in whole or in part) without waiving its right to later deny coverage based on information revealed by the investigation.
Insurers use a reservation of rights letter because in many claim situations, all the insurer has at the inception of the claim are various unsubstantiated allegations and, at best, a few confirmed facts. In reserving its rights to later deny coverage, the insurer is merely telling the insured of its concerns that the claim, in whole or in part, may not be covered under the policy, pending further investigation.
Although a reservation of rights protects an insurer's interests, it also alerts an insured to the fact that some elements of a claim may not be covered, thereby allowing the insured to take necessary steps to protect its potentially uninsured interests.
Definition provided by the International Risk Management Institute (IRMI) Glossary of Insurance.
