Reservation of Rights Explained

This is a hard subject to explain to a lot of people.

Let me start by saying that you need to understand what is in this article before you blow your top at some insurance adjuster.  There are ways around a reservation of rights defense, but you have to be stealthy and, above all, you have to remain calm. 

I’m going to speak on Texas and specifically on auto insurance as Texas is my home State and auto insurance is where I have the most experience, although the reservation of rights or its equivalent exists in almost every State in the U.S. and can come about on claims that are not automobile claims.

If you have found this article, you are either an insurance adjuster doing some research or you are involved in a claim and being advised that your claim is not being paid at this time and that they are putting the claim on a “reservation of rights”.

Additionally, the damages you have sustained were most likely caused in a very clearly negligent manner and it is escaping you as to why the insurance company would not pay for the damages (sorta like you have been rear-ended, right?).

On top of that, it is also clear that the person who hit you has a good insurance policy, right?

So what is the dang deal?

Why isn’t the insurance company paying you? Don’t they know you could win a suit hands down?

Relax! Why are you so mad at the insurance company?

Is it your insurance company?  I don’t think so!

The reservation of rights defense is best described with an example outside of insurance.

Think of it like this:

Imagine you have agreed with your friend Sam (in writing, too) that you will buy one apple at ShopMart every time he buys one stick of gum from ShopMart.

Also, as part of the deal, ShopMart can call you directly every time Sam buys gum from them, and, provided that they have a receipt showing the gum purchase, you have to buy the apples.

Now for the reservation of rights part…

As an additional part of the agreement you have with Sam, he agreed to confirm with you that he indeed bought gum every time ShopMart asks you to buy apples.  The problem is that Sam won’t return your calls, he’s not responding to mail, and he works all day so you are having a hard time getting in touch with him for confirmation.

In order to keep from being hounded or sued by ShopMart, you will be forced to send them a letter saying that Sam hasn’t kept his end of the deal and you can’t keep buying apples from them if Sam won’t confirm he has bought gum. So, unless you trust that ShopMart is completely honest and is not buying their own gum to produce a receipt, you’ll send that letter. 

That letter is the same as a reservation of rights letter.

So if you are ShopMart and Sam has bought 1000 sticks of gum from you, how do you get your apple purchases?

The answer is simple: find Sam!

The other exceptions to the reservation of rights are when there is irrefutable evidence that Sam indeed purchased gum sticks (like ShopMart has a video of him or they have a signed statement from Sam saying he bought the gum). If there is no question as to whether Sam bought the gum, then the reservation of rights letter shouldn’t be used.

In an auto accident, it is normally not a valid defense to use a reservation of rights if there is a police report showing the driver of the at fault vehicle is the same as the named insured on the policy of insurance and the police report shows a clear fault scenario like a rear-ender.

I hope you now understand the reservation of rights. It’s the insurance company’s claim that their policyholder has failed to live up to their end of the insuring agreement, and they can legally hold off on payment until they have all the information they need to complete a coverage and liability investigation – they will not assume anything.

The more you know……

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