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A reservation of rights is a facet of insurance law that allows an insurance company to enter into a defense of an asserted policy claim on a tentative basis. Many insurance policies include a clause stipulating that the insurance company will provide the policyholder a defense should the policyholder ever be sued based on a covered claim. This is common in medical malpractice insurance claims, for instance, as well as general indemnity claims. Most lawsuits have uncertain outcomes, however, and it is rarely clear at the outset whether a case actually centers on something that is covered by an insurance policy. Insurance companies will nonetheless mount a defense for their policyholder, but they do so subject to a reservation of rights.
The reservation of rights typically comes as a letter to the policyholder. Its wording varies based on the claim and the jurisdiction, but the main point is that the insurance company is launching a defense, but that defense should not be viewed as an acceptance of the case if it turns out the case is not covered. In other words, the insurance company will defend the case if the case ultimately does pertain to something covered in the policy, but if not, the defense will end and the policyholder will have to secure other representation. The reservation of rights stems from the exact wording of the original policy, and relies on a close interpretation and application of contract law.
Most reservation of rights letters also specify that the insurance company is only assuming defense obligations and potential liability for claims that are directly related to the policy. It is rare for a lawsuit to allege only one claim. Usually only one or two of the alleged claims are actually related to the coverage, and an insurance company is only responsible for defending those that are.
In a medical malpractice lawsuit, for example, a plaintiff might allege that a doctor acted negligently in the provision of care, acted willfully in that same provision of care, erred in billing, and engaged in fraudulent financial practices. If the doctor’s malpractice insurance policy only covers him against general negligence, the insurance company will mount a defense, but only with respect to the negligence claim. The insurance provider is not responsible for billing or financial fraud claims, and if the court ultimately finds that the doctor’s actions were willful rather than negligent, the insurance company is not responsible for that claim, either. The insurance company explains this to the doctor through a reservation of rights letter.
Without such a letter, an insurance company can be liable for defending all claims, even those that have nothing to do with the policy, or those that are adjudicated to be outside of the policy’s scope. In most jurisdictions, beginning a defense is a tacit acceptance of all claims unless otherwise stipulated. The reservation of rights is that stipulation.
A reservation of rights is not the same as a statement that all rights are reserved. An “all rights reserved” warning, as seen on many multimedia products and in legal disclaimers, is an element of copyright law. By its very nature, a copyright grants the owner the exclusive and full legal rights to distribute, market, and perform any copyrighted work. Appending “all rights reserved” serves as a reminder of these rights, particularly to the consumers of copyrighted material such as films, television shows, and music recordings.
@Vincenzo -- That is exactly how it works in medical malpractice and personal injury cases (i.e., car wreck cases), but things get murky otherwise. In those instances, a reservation of rights letter is a must for an insurance company.
Here is what I mean. An auto shop might have a liability with an insurance company in case one of its mechanics messes up a job. A mechanic does mess up a job and the person with the damaged car contacts an attorney.
The chances are good that attorney does not know about the existence of a liability and chooses to do what lawyer do by filing suit. The insurance company doesn't have a lot of time to investigate because
answers must be filed to lawsuits to avoid default judgments. The insurance company may file an answer, buy some time to investigate and then decide it must back out of the case because it has no duty to defend.
Without a reservation of rights letter, the insurance company would be on the hook.
Isn't it somewhat rare for an insurance company to have to fall back on its reservation of rights? Take your medical malpractice example. It is common for the potential plaintiff to get in touch with an attorney and then try to negotiate a settlement through the company that writes the malpractice insurance for the doctor in question.
The insurance company, then, has the luxury of investigating before a suit is filed and then determining if it must defend the claim.
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