Reservation of Rights Letter: When Your Insurer Defends a Claim but May Not Pay It

What a reservation of rights letter means

A liability policy makes your insurer do two jobs: defend you against a lawsuit and pay what you owe, up to the limit. A reservation of rights letter says the insurer will do the first job now but may refuse the second. New York’s insurance regulator describes it this way: after a lawsuit is filed, the insurer serves the letter to keep its right to affirm or deny coverage for the claims it has agreed to defend (OGC Opinion 07-09-04, September 6, 2007).

Insurers send these letters for a reason. Defending you without one could later be used to argue that the insurer gave up its coverage defenses. New York’s regulator says insurers often use the letters to head off exactly that argument, that no regulation sets their wording, and that a reservation letter should not be confused with a disclaimer. A disclaimer announces that the insurer intends to deny coverage, and a reservation letter usually does not work as one (OGC Opinion 05-02-18, February 10, 2005).

The defense itself is real. The standard business auto form, ISO CA 00 01 (the 10 13 edition Sonoma County posts), gives the insurer “the right and duty to defend” any insured against a suit for covered injury or damage, and no duty to defend a suit the insurance does not apply to. The expenses the insurer incurs are supplementary payments, so they do not reduce your limit. The duty to defend ends when the limit is used up by paying judgments or settlements.

Why NEMT claims get a reservation of rights

The letter names the facts the insurer is still checking. On a NEMT claim, these are the ones to look for:

• A van that was never added to the policy. Under symbol 7, specifically described autos, a newly bought van is covered only if the policy already covers all your owned autos for that coverage, or the van replaces one that had it, and you tell the insurer within 30 days. See commercial auto symbols.
• A driver the policy excludes. In California, a named driver exclusion removes both coverage and the insurer’s duty to defend while that person drives, including a claim that you negligently let them take the van (Insurance Code 11580.1(d)). An insurer that is unsure who was driving may defend while it finds out. See excluded driver.
• An exclusion that may fit the facts. The business auto form excludes injury expected or intended from the standpoint of the insured, so a claim that a driver assaulted a rider can draw a reservation on that point. Abuse claims also turn on your general liability policy and any separate limit it sets for them. WellTrans’s Indiana agreement (revised October 16, 2025) requires general liability that covers sexual abuse and molestation without sub-limits. See abuse and molestation coverage.
• Late notice or missing papers. The business auto form says the insurer has no duty to provide coverage unless you give prompt notice of the accident and immediately send every demand, notice, summons, or legal paper you receive.

A reservation of rights on a NEMT claim: an example

You buy a fifth wheelchair van on April 28 and put it on the road on May 2. Your liability coverage uses symbol 7, and your agent never adds the van. On June 10, your driver backs it into a parked car outside a dialysis center, and the rider on board says the jolt hurt her neck. In August, her family sues your company and the driver.

Your insurer sends a reservation of rights letter. It will defend both of you, but it reserves the right to deny coverage because the van is not listed in the declarations and the insurer has no record of being told about it by May 28, the 30th day after you bought it.

The letter is a to-do list. Find the email or form you sent asking to add the van, and the agent’s reply. If you run MTM Health trips, its agreement also requires a scheduled auto policy to list every vehicle and has you tell MTM at once when you add one (section 9.D). Send the insurer your bill of sale, your vehicle list, and the date the van started carrying riders. If the insurer later denies coverage, you could face the defense costs and any judgment without it, which is why the proof matters now.

What to do when you get a reservation of rights letter

1. Read each reason. Match it to the policy section the letter quotes and note any fact the insurer has wrong.
2. Send the letter to your agent the same day. Ask what the agent sent the insurer and when.
3. Answer in writing. Correct each wrong fact and attach your proof: the vehicle schedule, the driver list, dispatch and trip records, and dates.
4. Keep cooperating. The business auto form requires you to help with the investigation and defense, authorize the insurer to get medical records, and make no payment or promise without its consent, except at your own cost.
5. Ask about your own lawyer. New York’s regulator calls these questions complex and fact-specific and advises getting advice from your own attorney. In California, ask whether the reservation entitles you to independent counsel (see below).
6. Tell your broker about the claim. MTM Health’s standard agreement (the January 1, 2023 version Pennsylvania posts) requires immediate notice of any civil claim against you or your drivers from its trips (section 2.R). When a suit names MTM, you must defend it at your own cost (section 10.B). WellTrans’s Indiana agreement lets WellTrans contact your agent or insurer directly about your coverage.
7. Send records the right way. If your company is a HIPAA covered entity, you may give the insurer and defense lawyer the trip records the claim needs, because your health care operations include arranging for legal services and general business management. Limit what you send to the minimum necessary (45 CFR 164.501, 164.502(b), and 164.506(c)). A subpoena or court order from the rider’s side follows 45 CFR 164.512(e) instead: an order permits only what it names, and a subpoena without one needs a written assurance that the rider was given notice or that a qualified protective order was sought.

State rules on reservation of rights letters

These are the rules in three large states. Elsewhere, the answers come from each state’s own statutes and court cases, so ask a local attorney or your state insurance department.

• California. When an insurer reserves its rights on an issue that the lawyer it hired could steer, a conflict of interest may exist, and the insurer must then provide independent counsel unless you waive it in writing (Civil Code 2860). No conflict arises from punitive damages claims or from a suit above your limits alone. The insurer may require counsel with five years of civil litigation practice, including substantial defense experience in the subject of the suit, and errors and omissions coverage, and it pays the rates it pays its own lawyers in that community. Separately, a written denial of a claim on your own policy must list every reason and explain how each policy provision applies (10 CCR 2695.7(b), quoted in the Department of Insurance’s guide of January 9, 2026).
• New York. No statute addresses reservation letters specifically, though the state’s regulator notes extensive case law on them. When an insurer under a policy issued or delivered in New York denies coverage for death or bodily injury from an accident in the state, it must give written notice of the disclaimer as soon as reasonably possible to you and to the injured person (Insurance Law 3420(d)(2), revision of July 3, 2026). A reservation letter usually does not count as that notice (OGC Opinion 05-02-18).
• Texas. An insurer that fails within a reasonable time to affirm or deny coverage, or to send a reservation of rights, commits an unfair settlement practice (Insurance Code 541.060(a)(4)).

For who can come after the company after a crash, and how broker defense and indemnity clauses work, see NEMT liability. For the first hours after a crash and every reporting deadline, see what to do after a NEMT vehicle accident.