Texas All Lines Adjuster Practice Test

What does 'reservation of rights' mean in insurance?

1. A guarantee of coverage under the policy

2. A notification that a loss might not be covered

3. An agreement to pay for all losses

4. A waiver of certain policy provisions

The correct answer is: A notification that a loss might not be covered

'Reservation of rights' in insurance refers to a situation where an insurer informs the insured that while they are investigating a claim, they are reserving their right to deny coverage for the claim based on the terms of the insurance policy. This notification serves as an important communication, indicating that there is uncertainty regarding the applicability of the policy to the specific loss, and that the insurer retains the right to assert that the claim may not be covered by the policy. This practice allows the insurer to proceed with the investigation or defense of a claim while still maintaining the right to deny liability in the future if it is determined that the claim falls outside the coverage provisions of the policy. It is a protective measure for insurers, ensuring they do not inadvertently waive their rights under the policy simply by acknowledging the claim or beginning the investigation process. The other options do not accurately represent the concept of 'reservation of rights'. Guaranteeing coverage or agreeing to pay for all losses would imply unconditional acceptance of the claim, which is contrary to the purpose of reserving rights. Likewise, a waiver of certain policy provisions suggests a permanent alteration of the insurance contract, rather than an indication of potential non-coverage related to a specific claim.