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.