Reservation of Rights

The legal concept that allows the insurance carrier to provide defense but deny payment of judgment. How?

Reservation of Rights terms are not spelled out in the policy, but this legal concept is borrowed from contract law as well. This concept makes an appearance up when an insurance company is unsure whether there is coverage or not.

There are certain claims where facts are so confusing that it would be difficult to determine whether coverage exists. For example, your policy excludes coverage if the loss can be covered under worker compensation insurance.

To determine whether worker compensation coverage applies, the accident must have occurred in the performance of an activity that is within the scope of employment. Many times this can become hard to determine, so it will be left to a jury to decide.

When there are questions for a jury that can bind or exclude coverage, the insurance carrier can choose to protect their client (the insured) in litigation and issue a Reservation of Rights to exclude coverage for the judgment.

This means that if the jury determines that the accident happened within the scope of employment (excluding coverage), then insurance company could pay for the legal defense up that point and deny any payments for damages or judgments if the insured is found responsible.

Even if there is no coverage, the cost for the legal defense paid by carrier will not be reimbursed; they have chosen to provide the defense by their own free will.

You would be put on notice about the insurance companies intentions! They will send you a letter explaining the reservation of rights language. However, by the time this concept comes up, an attorney probably is already representing you (hopefully).

Reservation of Rights is no very widely used. Probably the clause that insurance carriers use against you is the Reasonable and Necessary Clause. This is what I call the �I will nickel and dime you clause�. Learn Why!