Reservation of Rights

What Is A Reservation Of Rights?

A reservation of rights is the insurer’s way of defending a claim without conceding coverage. The letter identifies the policy provisions the insurer believes may exclude or limit coverage, explains the facts that raise the question, and states that the insurer’s participation in the defense does not waive its right to deny coverage once those facts are resolved. The insurer then hires defense counsel, investigates, and often negotiates, all under the shadow of the letter.

The alternative, a defense without reservation, carries risk for the insurer. North Carolina courts have treated an insurer that assumes the defense with knowledge of a coverage defense and without reserving it as having waived the defense or being estopped from asserting it, because the insured relied on the insurer’s control of the case. The reservation of rights exists to prevent that result.

What Is The Difference Between The Duty To Defend And The Duty To Indemnify?

The duty to defend is broader. North Carolina courts decide whether an insurer must defend by comparing the allegations of the complaint with the language of the policy: if the facts alleged, taken as true, would be covered, the insurer must defend the whole suit, even if the claim is weak and even if other allegations fall outside the policy. The duty to indemnify, the duty to pay, is narrower and depends on the facts as they are ultimately determined. An insurer can owe a defense today and owe nothing at the end.

The reservation of rights lives in the gap between the two duties. It lets the insurer satisfy the broad duty to defend while preserving its position on the narrow duty to pay. When the coverage question is important enough, the insurer files a declaratory judgment action, a separate lawsuit asking a court to decide whether the policy applies, and the injured person is often named as a party so the ruling binds everyone.

What Does North Carolina’s Auto Insurance Statute Protect Despite A Reservation Of Rights?

A floor. Under N.C. Gen. Stat. § 20-279.21, every motor vehicle liability policy is subject to provisions the statute writes into it. The insurer’s liability with respect to the coverage the Financial Responsibility Act requires becomes absolute whenever a covered injury occurs; the policy may not be canceled or annulled as to that liability by any agreement between the insurer and the insured after the injury; and no statement made by the insured and no violation of the policy defeats or voids it. In practical terms, as to the minimum coverage the law requires, coverage defenses built on the insured’s own misconduct, such as misstatements on the application or failure to cooperate, do not deprive the injured person of the statutory minimum.

The statute also protects the injured person from the other side. The definition of an uninsured motor vehicle in § 20-279.21(b)(3) includes a vehicle that has liability insurance where the insurer denies coverage or has become bankrupt. If the reservation of rights ripens into a denial, the injured person’s own uninsured motorist coverage can respond, which is why the claim should be opened early. And the insurer’s conduct is regulated: N.C. Gen. Stat. § 58-63-15(11) lists failing to affirm or deny coverage within a reasonable time, misrepresenting policy provisions, and failing to explain the basis for a denial as unfair claim settlement practices, remedies that in North Carolina belong to the insurer’s own policyholder rather than to a third-party claimant.

• Absolute liability: for the required coverage, the insurer’s liability attaches when the injury occurs under § 20-279.21(f)(1).
• No post-injury cancellation: insurer and insured cannot agree away the coverage after the crash.
• Denial creates UM coverage: a vehicle whose insurer denies coverage is an uninsured motor vehicle under § 20-279.21(b)(3).
• Coverage above the minimum: excess limits remain subject to the policy’s terms and the reservation.

What Should An Injured Person Do When The Other Driver’s Insurer Reserves Its Rights?

Open every alternative claim. The first is uninsured motorist coverage under the injured person’s own policy, which steps in if coverage is denied. The second is underinsured motorist coverage, if the at-fault driver’s limits, when they are confirmed, are too low. The third is any other liable party: an employer, a vehicle owner, a bar that overserved the driver. The reservation of rights is a warning that the most obvious source of recovery may fail, and the response is to build the others before the deadline.

A worked example: Luis is seriously hurt in Raleigh by a driver who was delivering restaurant orders through a phone app at the time. The driver’s personal auto insurer defends him under a reservation of rights, citing the policy’s business-use exclusion, and files a declaratory judgment action. Luis’s lawyer answers that action, puts Luis’s own insurer on notice of an uninsured motorist claim, and investigates whether the delivery platform carried coverage. The court holds that the exclusion applies above the statutory minimum. Luis recovers the required minimum from the driver’s insurer, pursues his uninsured motorist coverage for the balance, and never relied on a single policy.

Does A Reservation Of Rights Change The Fault Rules In North Carolina?

No. Coverage and fault are separate questions. The reservation of rights concerns whether the insurer will pay for what its insured did; it has nothing to do with whether the insured was negligent or whether the injured person contributed to the injury. The defense lawyer hired under the reservation will still plead contributory negligence under N.C. R. Civ. P. 8, and under N.C. Gen. Stat. § 1-139 the defendant still bears the burden of proving that the injured person’s own negligence was a proximate cause of the crash. A plaintiff found contributorily negligent recovers nothing from any policy, reserved or not.

The reservation does change the dynamics of settlement. An insurer that doubts its coverage may be reluctant to pay, or eager to settle cheaply before a court rules against it; the insured, facing personal exposure if coverage fails, may press the insurer to settle. Knowing which pressure is operating, and keeping the uninsured motorist claim ready, is how an injured person turns a coverage dispute into leverage rather than delay.