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Table of Contents
What Is A Reservation of Rights Letter
A reservation of rights letter is provided by one party to another to protect certain legal rights.
What is important to note is that you do not use a reservation of rights letter to deny a potential claim against you, rather you’ll use it to protect a potential claim you may have.
For example, insurance companies will typically send a reservation of rights letter to insured parties indicating that they are handling the claim while their investigation is ongoing but they may ultimately deny the claim.
In other words, the insurance company is telling the insured that the mere fact that it is starting to handle the claim does not mean that it has confirmed coverage under the policy.
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Why Is A Reservation Letter Important
Reservation of rights letters are important as they allow you to legally protect your rights in such a way that your actions, conduct, and written statements could not be used against you to deny you of your rights.
For example, a merchant sells 1,000 units of a certain product at $100 per unit.
After the order is placed, the client disputes the unit price and claims that the units sold were of $75 and issues a check for $75,000 to the merchant.
The merchant does not agree to only receive $75,000 and wants to protect its claim for $100,000.
As a result, the merchant will send a reservation of rights letter to the client indicating that it will cash the $75,000 check and reserves its rights on the full $100,000.
This way, the cashing of the check cannot be used against the merchant having waived the right to claim the remaining $25,000.
In the insurance sector, reservation of rights letters are routinely sent out by insurers following a claim.
Quite often, when an insurance company sends out a ROR letter, it’s likely that they do not believe that the insured is covered under the policy and, as a precautionary measure, they’ll send the letter to protect their rights.
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How Reservation of Rights Letters Work
Consider the reservation of rights letter as a formal notice to another party where you expressly stipulate your rights and make it clear that you are reserving your rights to take action or assert a claim in the future.
With this notice, your objective is to make sure that there’s no ambiguity about what are the rights you are intending to protect and that your performance or non-performance cannot be construed as any type of waiver of your rights.
Since reservation of rights letters are used quite often in the insurance world, let’s see how it works in this context.
Let’s assume that a person suffers damage to her real estate property and files a claim with her insurer.
The insurer preliminarily assesses the claim and does not have enough information on the circumstances of the claim to be able to accept or deny coverage.
In this case, the insurance company will send the claimant a letter that indicates they have received the claim and that they are processing it.
However, they’ll further indicate that they are currently performing further investigations on the claim allowing them to assess the insured’s coverage.
Once their investigation is completed, they will be in a position to accept or deny the insurance claim.
The insurance company’s objective is to ensure that the insured does not use the preliminary processing of the claim and investigation as a validation of coverage thereby preventing the insurance company from denying the claim at a later point in time.
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Reservation of Rights Letter Requirements
A reservation of rights notice can be sent in a form of a letter where it’s important to mention a few key elements.
The first important element to indicate is to identify yourself and provide a brief overview as to why the letter is being sent (the circumstances of why you are sending the letter).
The next element is to clearly assert the rights you are looking to legally protect.
Following that, depending on the context, you may choose to provide further details on the next steps and what to expect going forward.
Another key requirement is to use the phrase “without prejudice” or “under protest” in your letter (this is a formal requirement under Section 1-308 UCC
Coming back to our insurance reservation of rights letter, the insurer will:
- Outline the policy number
- Make specific reference to the claim
- Indicates that it has the right to accept or deny coverage under the policy
- Inform the insured that it is going to perform a further investigation on the claim
- Advises the insured that it will confirm the acceptance or denial of the claim at a later point in time
During the time the insurance company is investigating the eligibility of the claim under the policy, it will potentially act in a way that may suggest that the insured is covered under the policy.
As a result, the reservation of rights letter from the insurance company protects it from the possible allegation that it waived its rights to deny the claim.
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Reservation of Rights Letter FAQ
Let’s look at a few questions related to the “reservation of rights letter”.
What to do when you get a reservation of rights letter?
If you receive the notification of a letter where someone is reserving their rights, it’s important that you make sure you understand the content of the letter and take action as may be needed.
The first step is to assess what are the rights the other party is looking to protect.
If you disagree with such rights, the next step is to make sure you consult with a legal advisor to see if and how you should deny the content of the letter in such a way that you do not hurt your own case.
Also, if the letter requires that you take action before a certain date, make sure that you either take the necessary action, or if you do not agree to take such action, make sure you inform the other party.
Evidently, I’m providing you with a general approach to follow that may not be applicable to everyone.
You should make sure you consult with a qualified attorney to take the proper legal steps so you can protect your own rights.
How is a reservation of rights letter used?
Reservation of rights letters are typically used in cases where a party is required to perform certain obligations under a contract or the law but does not want that performance to be deemed as a waiver of certain rights they may assert in the future.
For example, John has a contract with Mary where he is required to renovate her basement.
During the course of the project, John sends an invoice to Mary asking her to pay $2,000 for the materials purchased.
Mary disagrees with the material costs and claims that it should have only cost $1,000 as per the contract.
However, Mary does not want John to abandon the work due to this material cost dispute.
As a result, Mary will pay John $2,000 and provide him with a reservation of rights letter indicating that she does not agree with the $2,000 cost but she is making the payment to ensure John completes the work on time.
With the notification of the letter, Mary is making sure that John cannot argue that she finally had accepted to pay $2,000 for the material instead of $1,000.
Mary is therefore protecting her legal right to claim a refund of $1,000 for the material cost.
Takeaways
So there you have it folks!
Reservation of rights letters can be useful at times in making sure that your legal rights are protected.
When your action or inaction can potentially lead to an argument that you have waived certain legal rights, you should use a reservation of rights letter to make sure you are protected.
In this article, I answered several key questions such as “what is a reservation of rights letter”, what are the ROR letter requirements, and how does it work.
Now that you’re fully equipped with this information, good luck with your contract!
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