Insurance Law

Dentons on Consequences of Inadequate Reservation of Rights

By William T. Barker, Partner, Dentons US LLP

In Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Co., 2014 Mo. App. LEXIS 975 (Sept. 2, 2014), the court recognized that there was no coverage, but still held the insurer liable for bad faith failure to settle because it had failed to provide a timely and proper reservation of rights.  This commentary examines the decision and draws lessons for insurers.

Advantage Buildings & Exteriors, Inc. supplied exterior wall panels for a building constructed for Alsation Land Co..  Advantage was named in a construction defect suit brought by Alsation, along with the general contractor, Walton Construction Co.  Advantage had a $1 million CGL policy and a $2 million umbrella policy with Mid-Continent Casualty Co. and tendered to it for defense.  On August 12, 2008, Mid-Continent advised that it would investigate and perform a coverage analysis and was reserving is rights pending completion of those tasks.  Its letter stated that Mid-Continent "will promptly advise you of the outcome of our coverage analysis."

Advantage, in fact, concluded that it had no coverage for anything except $53,000 of interior damage.  (In the end, this was held correct.)  Despite being advised by defense counsel that liability was highly likely and that Advantage was exposed to millions of dollars in damages, Mid-Continent did not inform Advantage of its coverage conclusions until July 15, 2010, four days before trial and after a final mediation at which all other defendants had settled and Mid-Continent had offered only $50,000.

Upon learning of all this, Advantage settled with Alsation by agreeing to pay $500, to sue Mid-Continent, and to give Alsation the proceeds of any claims.  Alsation presented an unopposed case at a bench trial on July 22, and was awarded $4,604,000 for diminution in value, subject to credit for the amounts paid by other defendants.

In the coverage action, Mid-Continent was held estopped to deny coverage, and a jury finding of liability for bad faith failure to settle affirmed.  (Compensatory and punitive damages had to be retried, due to instructional errors.)

The court held that Mid-Continent's preliminary reservation of rights letters did not satisfy the requirements for a proper reservation:

the insurer owes the insured a duty to assert a proper reservation of rights that is timely and clear and that fully informs the insured of its position. The insurer must conduct any investigation and analysis of the claim "with reasonable diligence" and must "promptly notif[y] the insured of its position once the process is complete." A liability insurer that assumes the defense of its insured should promptly advise the insured of any grounds on which it appears that all or any part of that asserted liability might not be covered. The reservation of rights letter should be "specific and unambiguous," should "fully explain the insurer's position . . . with respect to the coverage issue," and "must avoid any confusion."

Defending without an adequate reservation estopped Mid-Continent to deny coverage.  With coverage thus established, the evidence was sufficient to permit the jury to find that the refusal to settle constituted bad faith.

This commentary analyzes the law elsewhere and concludes that the estoppel imposed is consistent with mainstream jurisprudence.  In particular, it notes that:

Because Missouri allows the insured to take control of the defense whenever there is a reservation, Advantage was entitled to and deprived of an opportunity make an informed decision whether to do so.  While that would be an adequate basis to support an estoppel, the facts in Advantage Buildings provided substantial additional support.  Had timely notice of the coverage issue been provided, Advantage could have attempted settlement at the mediation (or even before).  It certainly could have settled by adding $750,000 to Mid-Continent's offered $50,000 to accept the $800,000 post-mediation demand, and might well have been able to settle for even less at mediation or before.

The commentary further concludes that even apart from the estoppel to deny coverage, liability based on the excess judgment might be supportable based on Mid-Continent's failure to keep Advantage informed of settlement developments.  Finally, the commentary draws three lessons for insurers.

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    William T. Barker is a member of Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and the New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.

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