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In Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., -- S.W.3d – , 2014 Mo. App. LEXIS 975 (Mo. Ct. App. 2014), [enhanced version available to lexis.com subscribers], Mid-Continent’s insured, Advantage Builders, was sued for construction defects. Mid-Continent undertook its defense, under a “reservation of rights,” filed a declaratory judgment action, and a Missouri trial court found that Mid-Continent owed no coverage. It sounds like a textbook case in claim handling. So how it is that a Missouri appeals court held that Mid-Continent was liable for $3 million in compensatory damages for bad faith failure to settle and $2 million in punitive damages? [Although those damage numbers need to be re-tried because of a problem with how they were split.]
The answer is this: Even though Mid-Continent provided two reservation of rights letters to its insured, the appeals court held that the reservation of rights letters were not “effective.” It didn’t matter that the letters contained a lot of pages, setting out the facts at issue and voluminous policy language and that Mid-Continent stated that it was reserving its rights. Despite all those words, the court concluded that the letters did not adequately explain why Mid-Continent may not have owed coverage to its insured.
The court put it like this: “Here, both letters only vaguely informed the insured that Mid–Continent would investigate and perform a coverage analysis and that it was reserving its right to assert that there may be no duty to defend or indemnify against the claims. The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.”
Because of what the court called ineffective reservation of rights letters, Mid-Continent was estopped to deny coverage: “Here, Mid–Continent’s purported ‘reservation of rights’ notification was not timely or clear, nor did it fully and unambiguously inform the insured of the insurance company’s position as to coverage. Thus, regardless of the court’s January 2012 declaratory judgment ruling that the policy language did not explicitly cover the claims of Alsation, because Mid–Continent failed to effect a proper reservation of rights, it was prohibited from asserting only limited coverage for the claim. Therefore, Mid–Continent was estopped to deny coverage for the claim to the extent of its policy limits.”
There is a lot of detail to the opinion concerning how the claim was handled and how that played into the court’s decision. It’s too much to get into here. Although it cannot be overlooked. But the point of the discussion is that, simply because an insurer sends a letter, even a very long letter, and calls it a reservation of rights, may not make it so.
Despite how commonplace reservation of rights letters are for insurers in the claims context, some courts have concluded that they are not always done right – concluding that, while a letter with the words “reservation of rights” may have been issued, the notice provided to the insured in such letter, of the reasons why coverage may not be owed for some claims or damages, was not sufficiently specific to be adequate. The courts’ conclusion is that the reservation of rights letter did not “fairly inform” the insured of the bases why coverage may not be owed. See Safeco Ins. Co. of Am. v. Liss, No. DV 29-99-12, 2005 Mont. Dist. LEXIS 1073, at *41 (Mont. Dist. Ct. Mar. 11, 2005), [enhanced version available to lexis.com subscribers], (“In this case, the Court finds that Safeco’s reservation of rights letter did not ‘fairly inform’ Liss of the reasons it was reserving its rights and that the letter was inadequate as a matter of law to preclude application of the estoppel doctrine. The only factual reference contained within the policy is: ‘As you are aware, this lawsuit arises out of a gunshot incident on July 10, 1997.’ More importantly, the letter sets forth pages of policy provisions but does not explain why Safeco believed the insurance policy would possibly not cover Liss for the shooting incident. In other words, Safeco did not ‘apply’ the sole fact stated to the policy’s legal terms.”); Osburn, Inc. v. Auto Owners Ins. Co., No. 242313, 2003 WL 22718194, at *3 (Mich. Ct. App. Nov. 18, 2003), [enhanced version available to lexis.com subscribers], (“[W]e conclude that, because Auto Owners’ reservation of rights letter was not sufficiently specific to inform plaintiffs of the policy defenses the insurer might assert, the letter did not constitute ‘reasonable notice.’”); Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012), [enhanced version available to lexis.com subscribers], (explaining that a “reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position,” and holding that insurer’s letter was inadequate because it “did not unambiguously inform [the insured] that [insurer] intended to pursue a defense based on untimely notice of the claim”).
The significance of Advantage Builders is that it is the loudest and clearest decision I have seen to conclude that a reservation of rights letter, despite being many pages long, was ineffective because it did not fairly inform the insured of the bases why coverage may not be owed. More and more policyholders are surely going to borrow a page from the Advantage Builders playbook and argue that, despite being sent a letter that calls itself a reservation of rights, the insurer did not in fact reserve its rights. Because the letter they were sent did not clearly and unambiguously explain how the numerous cited policy provisions were relevant for purposes of explaining potential coverage issues, it was tantamount to no letter at all.
Three out of the last five of my Top 10 Coverage Cases of the Year articles have included one addressing reservation of rights letters that were ineffective because they failed to meet the fairly inform standard. Needless to say, given how many reservation of rights letters insurers write, this issue is critically important for them. Thankfully for insurers it is a preventable problem -- with everything they need to do being in their control.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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