What is a 'reservation of rights' letter?

A Reservation of Rights (ROR) letter is sent by the insurer when coverage is uncertain — when the insurer must investigate and possibly defend a claim but has not yet determined whether the loss is actually covered. The letter formally notifies the insured: (1) The insurer is investigating and may provide a defense (for liability claims) or repair/payment (for first-party claims) under the policy; (2) The insurer is doing so without waiving any coverage defenses; (3) If investigation determines the claim is not covered, the insurer reserves the right to withdraw and deny coverage. Why used: in liability claims, the insurer often must provide defense even if coverage is uncertain (the duty to defend is broader than the duty to indemnify); without an ROR, the insurer might be deemed to have waived coverage defenses by providing defense. The ROR keeps the coverage question open while investigation proceeds. After investigation: insurer may pay/defend fully, deny coverage entirely (then file declaratory judgment action if needed), or settle with reservation. Improper or untimely RORs can themselves be bad faith. The insured may want their own attorney (sometimes paid by the insurer) given the conflict of interest the ROR creates.