Insureds, more often than not, may become confused when upon notification of an incident/or claim, the insurer informs them that they will be attending to a claim on a full reservation of rights basis.
Some insureds immediately perceive this to be an upfront rejection or exclusion of a claim from the insured’s policy, which is incorrect.
The insurer’s right to deny a claim
The action of reserving rights gives the insurer a chance to carefully investigate and consider the policy issues, before giving an undertaking that a claim has been accepted. This becomes of particular importance when dealing with those notifications that develop into long tail complex claims, especially in cases where the particulars of the claim are not available at notification stage.This means that the insurer has a right to deny the insured’s claim at a later stage, pending the outcome of the investigation, as coverage would not have been confirmed.
Should the outcome of the investigation find that the insurance policy has been breached, or that the incident is not covered under the policy, the insurer may then raise its initial reservation of rights and reject the insured’s claim against the policy.
Entitled to reserve rights
The insurer would be entitled to reserve their rights in circumstances where the claim is potentially a late notification, non-disclosed at inception of the policy, where there is admission of liability without the insurer’s consent or when the claim falls wide of the policy because of noted exclusions, i.e., such as fines or penalties.
The purpose of a reservation of rights is to allow the insurer to investigate possible policy issues, confirm certain facts and further evaluate the circumstances surrounding the claim, without prejudice to insurer’s rights and without prejudicing the defense of the insured’s claim.
When the insurer reserves their rights with the insured, this does not mean that a claim has been denied. It essentially means that the insured’s policy may not cover the claim due to certain inherent policy issues. Thus, whilst the insurer may elect to appoint an attorney or loss adjuster to attend to the insured’s claim against the policy – this does not guarantee that the claim will be accepted or covered by the policy.
In law, an insurer is required to reserve their rights when any policy breach arises, so as to avoid any dispute at a later date that the insurer had waived its rights.
Safeguarding everyone’s rights
However, it should be noted that although a reservation of rights protects an insurer's interests, it also warns an insured that their claim or a portion thereof may not enjoy coverage, which then allows the insured to also safeguard their interests that may potentially be uninsured.
Accordingly, where the insurer has reserved its rights, a duty arises for the insured’s broker to promptly enquire as to the reasons of such reservation by the insurer, and to immediately liaise with the insured in attending to the queries raised by the insurer, to resolve the inherent policy issues.
The act whereby an insurer reserves its rights may be received with a sense of foreboding by an insured, however, it is necessary to safeguard everyone’s rights.
Bonginkosi Ntuli
Claims Specialist, Professional Indemnity and Liability
