Reservation of Rights
Although an insurer has an obligation to pay for a loss, it depends upon agreeing that the loss qualifies for coverage. Insurers face a considerable risk. Once it is notified of a claim, an insurer must respond. However, when there is a dispute over a claim, the fact that a company begins to handle a request can, during litigation, be interpreted as admitting a loss is covered. In order to protect itself, an insurance company may use a special document called a Reservation of Rights (ROR) letter.
The ROR may be a form letter or it could be a personal letter to a policyholder. Regardless of its length or amount of personalization, a ROR has a single purpose: to inform that, while the insurance company is active in investigating a loss or is addressing issues related to a lawsuit, it still has not decided about whether the loss or suit is eligible for coverage. Therefore, the fact that it has opened a claim file should not be interpreted as an agreement that coverage exists.
Taking proper time to handle liability claims is particularly important. Policyholders are protected separately by a right to be defended against allegations that they caused injury or damage. Responding to lawsuits requires time to assess circumstances and RORs provide a way to allow assessments without an insurer waiving its rights.
RORs, even when used, still cause confusion with policyholders. However, the alternative is not a good one. A request to handle a loss could be handled very decisively by an insurer immediately issuing a denial or by just automatically agreeing to cover any loss that is submitted. However, being this simplistic is neither fair nor is it good business.
Both policyholders and insurers are served best when all claims are handled in the right manner. ROR letters are a way to make sure that losses are properly evaluated and then a decision is made on whether they qualify for coverage.
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