What is an insurance Reservation of Rights? | Local

“My father, despite being financially secure, cries poverty, and refuses to spend money for upkeep of our home. This behavior has gotten him and mom sued over their enormous tree that split apart in a storm, crashed into a neighbor’s house, caused huge damage and injured some of the occupants.

“Dad was repeatedly warned by our neighbor’s gardener that the tree was diseased and in danger of falling down. I urged him to spend the money to have it removed, but he refused.

Attached to the email were close-up photos of this monster of a tree, and according to an arborist we consulted, revealed clear signs of disease and should have been removed, years ago.

“Our homeowner’s insurance claims adjuster feels that Dad’s behavior exhibited gross negligence, bordering on intentionally exposing people and property to a known risk of harm.

“The adjuster told dad, ‘You are lucky the D.A. is not prosecuting you. What is your problem? You get a $150,000 yearly pension, own this house free and clear, have no debt, and yet refuse to spend a dime on necessary home maintenance.”

“A lawyer representing the insurance company sent a Reservation of Rights letter. Can you please explain what that means, because I get the feeling this is not a good thing. Thanks. Marco from Auburn, California.”

Our reader is correct. Receiving a Reservation of Rights letter is not good at all.

Insurance Law 101

Utah attorney Randall K. Edwards writes extensively on these very issues. He began his analysis with a basic look at the limitations–what we might not receive–when obtaining property insurance.

“We purchase automobile, homeowners and other types of liability insurance expecting if we are sued, our insurance company will always pay the claim or represent us in court.

“However, insurance policies are written in such a way that even lawyers can’t understand them! It is virtually impossible to have a realistic notion of the mind-boggling limitations contained in the fine print which states when you might not be protected.

“So, you have a claim, notify your insurance company, and they agree to defend you with a reservation of rights. This means that it agrees to defend you without admitting there is coverage under your policy for this loss or event, and that it reserves the right to stop defending you or to deny coverage at a future date.”

What would trigger a Reservation of Rights letter?

Most insurance policies cover negligence – true accidents — but not intentional acts of the insured.

For example, if, while legally turning right on a red-light, I hit a cyclist I should have seen who did not stop and wait for the green, that’s negligence and not an intentional act.

But if, as one of our clients told the police, “I wanted to bump him – he deserved the lesson in respecting the rules of the road!” That’s intentional conduct. (It also proved that our client was an idiot.)

“In general,” Edwards points out, “Insurance policies contain language which excludes or denies coverage for gross negligence or intentional acts. This means the company will pay those damages resulting from negligent conduct, but not those due to intentional action.

“Insurance companies don’t just issue Reservation of Rights letters without a thorough examination of the incident. The details of the claim – often, as in your reader’s tree case, what led up to it – will determine if it is considered negligent or intentional conduct.

“If the insurance company can establish a homeowner was aware of the danger or should have been aware and chose to ignore it, it would be appropriate to issue a Reservation of Rights letter,” he believes.

And if you are ever sent one, what steps must be taken?

Receiving a Reservation of Rights letter

While Reservation of Rights letters may look like innocent form letters, these are extremely serious notifications. At the very least, contact your insurance company and ask why they think the claim may not be covered.

“Regardless of what you are told,” Edwards underscores, “It is critical to immediately find a lawyer who handles your type of case. Now there is a conflict of interest created by your insurance company’s refusal to admit coverage. However, you have a right to be protected from this conflict.

“The good news is that, in some instances, your insurance company may be required to pay your attorney fees, or a portion of the fees,” he concluded.

Moral to the story

There comes a time when children need to become their parent’s parent, when a failure to act can have disastrous consequences. “I should have just paid to have the tree removed, but didn’t want to upset dad. It was a mistake,” our reader’s email concluded.

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