What is a reservation of rights in insurance?

A reservation of rights is a crucial concept in insurance that refers to a situation where an insurer acknowledges that it will defend a claim made by a policyholder but still insists on retaining the right to later deny coverage for that claim based on specific policy exclusions or other reasons. This practice allows the insurance company to fulfill its obligation to provide a defense while simultaneously preserving its legal rights regarding coverage.

This is especially significant in scenarios where there may be questions about the validity of the claim under the terms of the policy. By issuing a reservation of rights, the insurer communicates to the policyholder that although it will provide a legal defense, it is not waiving any potential defenses to coverage that it may have.

This concept ensures clarity in the relationship between the insurer and the insured, helping to prevent misunderstandings about the insurer's position during the claims process. In contrast, the other answer choices do not accurately capture the essence of a reservation of rights:

• The first option refers to a policyholder's acceptance of terms, which does not convey the insurer's conditional stance on coverage.
• The second choice suggests immediate settlement, which is not applicable in the context of reserving rights.
• The last option mischaracterizes a reservation of rights as a guarantee, which defeats the