What Is a Reservation of Rights Letter? What Michigan Policyholders Need to Know

If you have submitted a claim to your insurance company, or been sued and asked your insurer to defend you, you may have received a letter stating that the company is "reserving its rights" under your policy. These letters are often long, dense, and unsettling. Policyholders frequently ask: Does this mean my claim is being denied?

Not necessarily. But a reservation of rights letter is a signal that your insurance company is preserving its ability to deny coverage later, and it deserves your careful attention.

WHY INSURANCE COMPANIES SEND RESERVATION OF RIGHTS LETTERS

Insurance companies issue reservation of rights letters after completing an initial investigation of a claim and making an initial determination of coverage. The letter typically summarizes the information gathered during the investigation, identifies policy provisions that bear on coverage, places the insured on notice of specific conditions to coverage, and informs the insured of potential reasons coverage may be denied in the future.

The reason insurers send these letters is rooted in Michigan law. Generally, once an insurance company has denied coverage and stated its defenses, two legal doctrines come into play, which are waiver and estoppel. Both doctrines potentially prevent the insurance company from raising new defenses it did not notify the insured of when it became aware of it.

RESERVATION OF RIGHTS IN LIABILITY CLAIMS

Reservation of rights letters are especially common when a third party sues a policyholder and the insurance company agrees to provide a defense. Under Michigan law, when an insurance company undertakes the defense of its insured, it has a duty to give reasonable notice to the insured that it is proceeding under a reservation of rights. If it fails to do so, the insurance company may have waived or be estopped from later denying liability.

A GENERAL RESERVATION IS NOT ENOUGH

Insurance companies almost always end their letters with sweeping language reserving "all rights and defenses under the terms, conditions and exclusions of the policy, whether or not they have been specifically referred to in this letter."

Here is what many policyholders do not know: under Michigan law, a general reservation of all rights and defenses, without more, is insufficient to satisfy the insurance company's duty to give reasonable notice. The insurer must specify the policy language it may rely upon to deny coverage so that the insured is reasonably informed and can take appropriate steps to protect his or her rights under the policy.

The most common pitfall for insurance companies is the failure to specify which provisions, exclusions, or limitations they may invoke. If your insurer's letter is vague on this point, that failure may matter a great deal later.

WHAT SHOULD YOU DO IF YOU RECEIVE ONE?

1. Do not ignore it. The letter identifies the exact grounds on which your insurer may later deny your claim. Understanding those grounds early lets you protect yourself.

2. Read the specific policy provisions cited. Compare them to the facts of your claim. Are they actually applicable?

3. Watch for vagueness. If the letter reserves rights only in general terms without identifying specific policy language, the insurer may not have satisfied its notice obligations under Michigan law.

4. Consider retaining counsel. A reservation of rights letter means the insurance company reviewed your claim against the policy and believes it could potentially lead to lack of coverage as the matter develops further. An attorney who exclusively represents policyholders can evaluate whether the reserved defenses have merit and respond before positions harden.

THE BOTTOM LINE

A reservation of rights letter is not a denial, but it is still an indicator that the insurance company is reserving its rights to deny the claim later. Michigan law imposes obligations on insurers who issue them, and insurers do not always comply. If you have received a reservation of rights letter in connection with a claim, having it reviewed early by experienced coverage counsel can preserve rights you may not know you have.

KUTINSKY PLLC exclusively represents policyholders, insureds, and claimants in disputes with insurance companies. Contact us to discuss your claim.