A more thorough explanation:

A reservation-of-rights letter is a notice sent by an insurance company to an insured person or entity. The letter informs the insured that the insurer may contest coverage or apply an exclusion that could negate the insured's claim. The insurer sends this letter to protect its contractual rights and avoid waiving them unintentionally.

Suppose a homeowner's insurance policy covers damage caused by fire, but the policy excludes damage caused by arson. If a fire damages a home, and the insurer suspects that the homeowner intentionally set the fire, the insurer may send a reservation-of-rights letter. The letter would inform the homeowner that the insurer may contest coverage if it determines that the fire was arson.

Another example is when an auto insurance policy covers accidents caused by negligence but excludes accidents caused by intentional acts. If a driver hits another car, and the insurer suspects that the driver intentionally caused the accident, the insurer may send a reservation-of-rights letter. The letter would inform the driver that the insurer may contest coverage if it determines that the driver intentionally caused the accident.

These examples illustrate how a reservation-of-rights letter protects an insurer's contractual rights and informs the insured of potential coverage issues.