When might an insurer issue a reservation of rights letter, and what does it accomplish?

• A. When a claim is clearly covered.
• B. When coverage is uncertain.
• C. Never.
• D. Always after settlement.

Answer: (B)

A reservation of rights letter is issued when there is uncertainty about whether a claim is covered under the policy. It informs the insured that the insurer will defend the claim now but that the policy’s coverage is not yet determined. The insurer reserves the right to deny coverage or to seek reimbursement for defense costs if it’s later found that the claim isn’t covered. This approach allows the defense to proceed without waiting for a final coverage decision, while protecting the insurer’s rights and giving the insured notice that admissions, settlements, or other actions could affect coverage. It isn’t used when coverage is clearly present, and it isn’t something that happens after a settlement is already reached.