What does the term "reservation of rights" indicate in insurance?

The term "reservation of rights" in insurance signifies that an insurer is maintaining its right to investigate a claim while not waiving its right to later deny coverage. When an insurer issues a reservation of rights letter, it explicitly informs the insured that the insurer may still contest its obligation to cover the claim, even as it begins its investigation or processing of the claim.

This is significant because it protects the insurer by allowing them to evaluate the validity of a claim without forfeiting their potential defenses against it. For instance, if during the investigation, the insurer discovers that the claim is not covered under the policy terms, the reservation of rights enables the insurer to deny the claim without having already assumed liability.

This concept ensures that insurers can act prudently and protect their interests, while also keeping the insured informed about the status of their claim. They can continue to provide necessary services or benefits while reserving their legal rights regarding coverage.