11
Dec
2006

Beware of an Insurer's Reservation of Rights

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PUBLISHED ON: December 11, 2006

This article originally appeared in Anderson Kill's Policyholder Advisor (January/February 2006).

Insurance companies have no contractual entitlement to reserve their rights when presented with a coverage claim. Nonetheless, the reservation of rights has become an accepted practice in order to shield the insurer from liability resulting from the need to investigate a claim. Reservations of rights are frequently used improperly, though, as a sword to pressure policyholders into accepting less than full coverage and to delay the resolution of claims. They are also improperly used as a shield to protect the insurer from its bad faith claims handling tactics. To limit the effectiveness of such misconduct, policyholders must be alert to the insurance company's tactics, and prepared to respond quickly and forcefully. What the policyholder can do varies depending upon the circumstances surrounding the reservation of rights. This article addresses some common scenarios in which this problem arises.