A Letter From The Insurance Company: Reservation of Rights, Denial of Coverage & Non-Waiver Agreements
Dear policyholder,
Insurance companies send plenty of letters during an insurance claim. Much of this communication is required and regulated by state insurance laws, so letters may vary between states.
Three of the most common letters to receive during an insurance claim are:
- A reservation of rights letter
- A non-waiver agreement
- A denial of coverage letter
Each document can have a major impact on your claim. It’s crucial to understand how these letters work, what they mean – and how to respond after receiving a letter.
What is a Reservation of Rights Letter?
A reservation of rights letter is a document from your insurance company explaining various reasons the insurer may not cover a certain claim.
When you buy homeowners insurance, property insurance, or business owners insurance, you expect your insurer to cover certain situations. You pay your premiums, and your insurer covers you against unexpected damages.
Today, however, a growing number of insurers attempt to absolve themselves of that liability by sending a “reservation of rights” letter. This letter effectively allows the insurer to protect themselves if they decide not to cover your claim. The letter “reserves” the insurer’s “rights” to deny your claim in certain situations.
How can an insurance company do this? How is this letter legal?
An insurance company that acknowledges coverage today must pay an eventual settlement or judgment in the future. If the insurer admits or implies a claim is covered, they can be estopped from denying coverage in the future.
Here’s how it works:
- If the insurer sends a reservation of rights letter today, it can help them avoid making a huge payout in the future if they determine some or all coverage for the claim losses do not apply.
- If the insurer does not send a reservation of rights letter today, then they may be required to cover a wider range of situations, to include penalties and interest on claims payments that are delayed beyond the time for payment set forth by the State.
Honest insurers use reservation of rights letters to protect against fraud and other problematic claims. The insurer is simply reserving its right to deny your claim if they believe something is wrong with your claim.
Your insurer might agree to investigate your claim “subject to a reservation of rights.” The insurer sends a reservation of rights letter to outline the conditions they could use to deny your claim, including:
- Suspicion of fraud
- Negligence of the insured
- Failure to uphold duties of the policyholder
- Any other reasons the insurer may deny or reduce coverage
Insurers could send a reservation of rights letter immediately after receiving your claim. Or, they could send a reservation of rights letter after visiting your property for an initial claims inspection.
In many cases, the insurer first sends you a non-waiver agreement. If you don’t sign the non-waiver agreement, then the insurer sends a reservation of rights letter.
What is a Non-Waiver Agreement?
A non-waiver agreement is similar to a reservation of rights letter. However, it’s meant to be signed by the policyholder to acknowledge coverage may not apply in certain situations.
Insurers typically send a non-waiver agreement when the insurer suspects some or all coverage may not apply to your claim.
The policyholder is not required to sign a non-waiver agreement. If the insurance company presents a non-waiver agreement and the policyholder doesn’t sign it, then the insurer typically issues a reservation of rights letter.
What’s Included on a Reservation of Rights Letter?
A reservation of rights letter typically includes certain conditions that would cause your insurer to deny your claim.
The letter is typically filled with “legalese” and reads similar to an average terms and conditions document.
A basic reservation of rights letter might look something like this:
Omega Mutual Insurance Company will continue to handle your claim even though a coverage question exists. However, no act of any company representative while investigating or negotiating the settlement of this claim or defending a lawsuit shall be construed as waiving any of our rights. Omega Mutual Insurance Company reserves the right, per the terms of your insurance policy, to deny coverage to your or anyone claiming coverage under the policy. There may be other reasons why coverage does not apply. Omega Mutual Insurance Company does not waive its right to deny coverage for any other valid reason which may arise.
With this letter, Omega Mutual Insurance Company is “reserving” its “rights” to deny your claim, which is why it’s called a reservation of rights letter.
Don’t Panic When You Receive a Reservation of Rights Letter
Receiving a reservation of rights letter can be intimidating. You might feel like you’ve done something wrong.
In fact, insurers might often want you to panic when you receive a reservation of rights letter. They may want you to feel uncomfortable, or might want innocent policyholders to feel like they’re committing fraud. It can reduce the value of your claim, cause you to reveal more information than necessary, and ultimately reduce liability for the insurer.
Don’t panic! Instead of being intimidated by the letter of reservation, treat it as a standard notification.
In fact, some insurers attach reservation of rights letters to most insurance claims. It’s a standard communication from your insurer and an ordinary part of a legitimate claim. It’s a document stating the insurance company has the right to deny your claim. However, the insurer must still abide by the contract you signed.
Why Would Insurers Send a Reservation of Rights Letter?
Some insurers send a reservation of rights letter before processing virtually any claim. Other insurers only send reservation of rights letters for suspicious claims.
Generally, however, insurers send reservation of rights letters in the following situations:
- You Declined to Sign a Non-Waiver Agreement: Insurers may submit a non-waiver agreement to you after a claim. If you don’t sign this agreement, the insurer may issue a reservation of rights letter.
- You Failed to Report the Claim in a Timely Manner: Per state insurance law, you typically have 30 days to 2 years to submit an insurance claim. If you didn’t report the claim in a timely way, then the insurer could struggle to investigate the claim.
- You Failed to Uphold Policyholder Duties: As a policyholder, you have specific responsibilities for maintaining your property. If the insurer feels you failed those duties, you could receive a reservation of rights letter.
Essentially, if you have compromised the insurer’s ability to investigate your claim properly, then the insurer could send a reservation of rights letter to you.
Are Insurance Companies Legally Allowed to Send Reservation of Rights Letters?
How are reservation of rights letters legal? How can insurers legally reserve their right to deny a claim? What’s the point of home insurance if an insurer can deny your claim with a letter?
These are all valid questions – and they show why reservation of rights letters are controversial. In fact, some reservation of rights letter disputes have gone before courts. In many cases, courts side with policyholders.
In one landmark reservation of rights letter case, Advantage Buildings & Exteriors Inc. v. Mid-Continent Casualty Company, the insurer sent a reservation of rights letter outlining certain situations where they would not pay the company’s claim.
A court found the insurer, Mid-Continent Casualty Company, had sent an insufficient reservation of rights letter. That letter only vaguely explained the reasons the insurer would deny your claim.
The case established that a proper reservation of rights letter must provide the policyholder “with full knowledge of the position of the insurance company.” Because Mid-Continent’s letter didn’t meet the standard, they were unable to deny coverage to the policyholder.
Calling Something a “Reservation of Rights Letter” Doesn’t Make It One
Insurers may attempt to call a document a reservation of rights letter even if it doesn’t meet legal standards.
A proper reservation of rights letter must abide by state insurance laws. Each state has different laws covering the thoroughness, clarity, promptness, and wording of the reservation of rights letter.
As demonstrated in the court case above, an insurer doesn’t immediately absolve itself of responsibility when sending a reservation of rights letter; instead, the letter must meet certain requirements. Otherwise, it’s just a non-binding piece of paper.
Did your insurer send a reservation of rights letter without adequately explaining the situation? Consider talking to a public adjuster or attorney to ensure a smooth claims process.
What is a Denial of Coverage Letter?
Some insurers send a denial of coverage letter, which is different from a reservation of rights letter.
A denial of coverage letter informs the policyholder their claim is being denied.
Most letters of denial are short and to the point. Many letters boil down to a simple statement like, “You have no coverage for this loss.”
Sometimes, insurers attach a denial of coverage letter to a reservation of rights letter. The denial of coverage letter lists the denied claim, and the reservation of rights letter explains the insurer’s legal justification for denying the claim.
Other Letters from Your Insurance Company
Your insurer could send other letters throughout your claim, including:
- Reservation of Rights Letter
- Denial or Partial Denial Letter
- Failed Attempt to Contact Letter
- Investigation Continuing Letter
- Settlement Letter
Final Word: Reservation of Rights Letters Are an Ordinary Part of the Claims Process But Could Indicate a Problem
It’s easy to be intimidated by a reservation of rights letter. In most cases, however, a reservation of rights letter is an ordinary part of the claims process. The insurer is simply reserving the right to deny your claim if they find your claim is fraudulent or the damage is not covered under the policy.
If your insurer is honest, and your claim is genuine, your claim should proceed as normal.
In some cases, however, the reservation of rights letter does indicate a future problem with your claim. The insurer may have identified a potential issue with your claim.
In other cases, dishonest insurance companies use reservation of rights letters to intimidate policyholders, motivating them to accept a lower payout.
If you believe your insurer is acting in bad faith or failing to fulfill its duties under your insurance policy, then consider contacting an experienced public adjuster for professional insurance claim guidance. A public adjuster can help navigate your claim, negotiate with your insurer on your behalf, and ensure your claim proceeds smoothly.
Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.
