Understanding the Impact of a Reservation of Rights Letter

When an association has a claim and reports it late or if there is a concern of coverage in the policy, the insurance carrier can issue a “reservation of rights” letter to protect themselves in the claim. A reservation of rights letter is a document issued by an insurance company to the insured, for example, to an association. The letter states a claim may have limited or no coverage which is within a carrier’s right.

One of the main reasons a carrier issues a reservation of rights letter is because a claim wasn’t reported to the carrier in a timely manner and an investigation has been delayed. Claims reported three to four weeks or greater after an occurrence with significant damage could trigger an insurance company to issue this letter to protect their interest. Delayed claims reporting hinders the claim investigation, which is the carrier’s right to do when a loss occurs. One of the insurance policy conditions is to preserve the property in a loss so that more damage doesn’t occur and to notify the carrier as soon as possible.

A reservation of rights letter is also sent when a claim is filed for something that may not be covered. Mold and mildew growth are good examples. When microbial growth is found, limited coverage or no coverage often exists in the insurance policy. Owners need to understand when they delay reporting a claim or don’t start mitigation right after the loss, it creates a negative impact on a claim. If the insurance carrier does not cover damages within a claim, the financial responsibility for the repair falls on the owners and/or an association.

Association Boards need to be proactive and set up a claims process for owners when sudden and accidental events occur. If damage is only contained to units, the association still needs to be involved, especially if the association holds insurance coverage on the homes in the community. It’s important for the Board to establish one person who serves on the Board or committee with the Board’s direction as the point of contact in all association claim matters. Communication to owners regarding the claims process and the claim point of contact is critical. This helps ensure everyone is on the same page and improves communication with the carrier.