Liability insurance policies generally require the insurer to defend the policyholder against a lawsuit if there is even a possibility the claim is covered, even if coverage is ultimately uncertain. Rather than immediately denying a claim outright, an insurer facing genuine coverage questions will often send a reservation of rights letter: it agrees to defend or process the claim for now, but explicitly reserves the right to contest coverage later, potentially after the underlying case is resolved.

This approach lets the insurer avoid the risk of wrongfully refusing a defense — which can itself create liability — while still preserving its ability to argue, once more facts are known, that the loss falls outside the policy or within an exclusion.

A reservation of rights letter usually identifies the specific policy provisions the insurer believes may limit or exclude coverage, explains what information the insurer still needs, and describes what the insurer will do in the meantime — such as providing a defense under a reservation. It is meant to put the policyholder on notice that coverage is not guaranteed, even while defense costs are being paid.

Because the letter is often technical and cites specific exclusions or conditions, it can be difficult for a policyholder to fully understand its implications without reviewing the underlying policy alongside it.

Receiving a reservation of rights letter does not mean the claim has been denied, but it does mean the policyholder should not assume coverage is settled. In some situations — particularly in liability cases — a reservation of rights can create a conflict of interest between the insurer and the policyholder, since the insurer defending the case may also be building a record to later deny coverage for the same case.

Depending on the state and the circumstances, a policyholder facing this kind of conflict may have the right to independent counsel, sometimes called 'independent counsel' or 'Cumis counsel' in some jurisdictions, paid for by the insurer, precisely because the insurer's interests and the policyholder's interests may no longer be fully aligned.

Reading the letter carefully alongside the actual policy — not just the insurer's summary of it — helps clarify exactly which provisions are in question and why. If the stakes are significant, consulting an attorney who is not affiliated with the insurer, specifically about the coverage question and whether independent counsel rights apply, is often worthwhile.

Responding to the reservation of rights letter in writing, asking clarifying questions or disputing the insurer's stated basis for reserving rights, can also help preserve the policyholder's position if a coverage dispute develops later.