Reservation of rights
A statement by which the insurer handles a claim or defends the insured while reserving the right to deny cover, without which it may be deemed to have waived its defenses.
At the start of a claim, the insurer often does not know whether its cover applies: the exclusion depends on facts that will only be established after investigation, or the risk disclosure may be disputed. Denying at once would expose the insured, and the insurer itself if it is wrong; accepting unconditionally would bind it. The reservation of rights lets it get through this period: the insurer takes charge of the investigation or defense while stating, in writing and precisely, that it reserves the right to rely on a given exclusion or forfeiture. In French law the stakes are set by article L. 113-17 of the Insurance Code: an insurer that takes control of litigation brought against the insured is deemed to waive all defenses of which it was aware at that time. An express reservation, made in good time, avoids that waiver. Common law systems follow the same logic, with an additional consequence in the United States: an insurer defending under reservation must sometimes pay for counsel chosen by the insured, because of the conflict of interest. For the claims handler, the reservation is a technical act whose omission costs the entire cover.
Textbook case: a liability insurer receives the summons served on its insured and appoints a lawyer to defend it, without writing anything, although it knew the risk disclosure might be inaccurate. A year later it wants to rely on voidance for misrepresentation: article L. 113-17 prevents it, for lack of a reservation when it took control of the litigation.
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