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Insurer Reserves and the Reservation of Rights Game

When a person makes a disability claim, the insurer must create a financial reserve. A disability financial reserve is a monetary estimate of the cost of the entire claim. In theory, this money should be set aside to the eventual payment of claim as opposed to being used for paying operating costs, bonuses, or shareholder dividends. From the insurer’s accounting perspective, reserves are classified as liabilities on their balance sheet. For this reason, it is in the insurance company’s best interest to set aside the least amount of financial reserves as possible in order to create a healthier balance sheet for the company. How is this done? Very simple. Deny or terminate claims so as to reduce the reserves required and reduce the corporate liability load.

When the insurer is faced with no other alternative but to pay the claim, they will do so under a “reservation of rights.” The reservation of rights is defined as a pay status whereby an insurer can deny liability for payment of the claim in the future. This allows the insurer to downgrade its financial reserve on the claim so as to create a financial reserve gain on its books. The reservation of rights may be effected with no more statutory control than the mere say so of a claims manager with no specific reason or documentation is required.

“Reasons” given for placing claims on reservation of rights, when a company bothers to do so, include:

  • Any occupation investigation following payment of disability on an own occupation basis even where there is no change in a claimant’s health condition
  • Disagreement with insurer’s internal medical reviewer with opinion given by treatment provider
  • Insufficient medical evidence to support restrictions and limitations alleged

The real “reason” behind the insurer’s taking this approach to buy time to find a way to deny the claim without creation of a full claim reserve. It’s just another way of limiting liabilities on the books until the liability can be eliminated completely via claim termination.

Therefore, when an insurer states that your claim is being paid under a reservation of rights, the future of monthly disability payments is in jeopardy.

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