National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Diane Polscer: Insurers are often concerned with making the reservation of rights letter so broad that they become easy to attack in a deposition of the claims handler should a coverage action be filed. With those caveats, we do typically prepare a broader rather than narrower reservation of rights letter.

Michael Aylward: The key to a reservation of rights is to clearly communicate to the policyholder those coverage issues that are apparent to the insurer. If it’s written too broadly, it can have unintended consequences like generating a conflict of interest that might deprive the insurer of the right to defend.

Chris: Some reservation of rights letters are so long, convoluted and full of legalese that they would make a law professor's head spin. How can unsophisticated insureds ever be expected to comprehend letters that cite a dozen policy provisions with little (if any) discussion of why the provisions are being raised or what the insured is supposed to understand about the suit pleadings and the policy?

Diane: Part of the problem with determining a general rule for what to include in a reservation of rights letter is that states have particular limits or requirements. In general, insurers should include every defense that may apply. This is especially true in states that recognize coverage by estoppel. In Washington, however, WAC 284-30-930 makes it an unfair practice to deny a claim “on the basis that the insured expected or intended the damage” unless the position is supported by the facts and the law.

Kevin Merriman: The question poses unique issues in New York for reservations of rights letters that also serve to partially or fully disclaim coverage for a claim. New York Insurance Law §3420(d), applicable to bodily injury and death claims arising from accidents in New York, requires insurers to disclaim coverage “as soon as is reasonably possible.” The failure to do so results in waiver of policy defenses.

Chris: If the purpose of such letters are to warn the insured that the defense or indemnity benefits might not be available later so they can plan for contingencies and can watch what they disclose to assigned defense counsel, then comprehensibility is paramount. Many courts and many carriers seem to have forgotten this. Instead, fears of "waiver" have lead to some outrageously long and confusing RORs which, in the end, achieve none of the aims intended by the courts when initially requiring such letters to be sent.

Michael: Most states, including my home state of Massachusetts, will allow an insurer to supplement its coverage position if new facts emerge or the policyholder isn’t prejudiced by the assertion of new defenses. Even so, we always recommend that insurers include a standard paragraph at the conclusion of a RoR reserving the right to supplement their position as new facts and developments may warrant.

Sara: California allows a general reservation of rights as long as it apprises the insured of the reason (or at least some of the reasons known at the time based on the information then available) for the coverage decision.

Chris: Texas law requires the insurer in a liability claim to raise those policy defenses which are apparent from the facts pled or the facts known or run the risk of waiving those claims if the carrier later decides to withdraw the defense or deny indemnity benefits. As new facts are pled or new facts are discovered, amended RORs are permissible and customary. So, the fear of not being able to later amend a ROR is generally unfounded.

Kevin: The obligation to issue a disclaimer is triggered not by unassailable facts, but by sufficient facts upon which to base the disclaimer. Conversely, insurers need not invoke unknown policy defenses.

Sara: The reservation of rights should also remind the insured to read the policy and that there may be other provisions that apply to the claim, and (if permitted in the jurisdiction) that the reservation will be updated as the matter develops, the insurer's investigation continues, and issues arise.

Kevin: New York courts have ruled that a reservation of rights letters is no substitute for the written disclaimer required by Section 3420(d). Also, it doesn’t toll the period within which a disclaimer must be issued. Thus, insurers that opt to limit their response to those provisions of their policies that are “clearly” triggered by a claim might be inviting unwelcome scrutiny about what they knew or should have known under the circumstances, and whether such knowledge was indeed sufficient to invoke a policy defense.

Sara: The California Fair Claims Practices provide that the insurer is to "provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law" for the coverage determination. Cal. Ins. Code Section 790.03(h)(13). And, every insurer is required to disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. California Fair Claims Settlement Practices Regulations, Cal. Code Regs., Title 10, Chapter 5, Subchapter 7.5, Article 1, Section 2695.4.

THE BOTTOM LINE:  Clear and timely communication is vital. 

After the Illinois action was dismissed for lack of personal jurisdiction, a similar action was brought in 2004 against the Church in its home state of Georgia. The claim was again tendered to GuideOne which split the file between a liability and coverage adjuster. The coverage adjuster explained that, “We didn’t see coverage but we would have to evaluate what we currently have to see if there would be coverage issues.”

Without issuing a written reservation of rights, GuideOne then assumed the defense of the lawsuit for over ten months before it finally denied coverage and withdrew its defense. Although the insured engaged its own counsel, they were unsuccessful in persuading the court to extend pre-trial deadlines and the court shortly thereafter entered summary judgment against the insured. The Church ultimately settled the claims for $1 million and brought suit against GuideOne.

It does not appear that there was any dispute that the underlying claims fell outside the scope of the CGL coverage. Nevertheless, the Church argued that GuideOne was estopped to assert these coverage defenses by reason of its failure to assert them at the point that it undertook the defense of its insured. The Church further argued that any oral communications to it could not constitute an effective reservation of rights.

As to the first point, the Supreme Court held that it did not matter whether a reservation of rights was written or oral so long as it fairly informed the policyholder of the insurer’s position. By reason of this analysis, however, it found that the claim adjuster’s vague reference to coverage issues did not satisfy the requirements of a reservation of rights. Further, the Georgia Supreme Court refused to find that the reservation of rights letter and denial issued in the earlier litigation in Illinois had put the insured on notice concerning GuideOne’s position with respect to the later claims in Georgia. “Even if the prior reservation of rights is considered in conjunction with the adjuster’s statement in this case, the two communications are, at best, ambiguous because only the former effectively reserved the rights of an insurer to withdraw, and then only the rights of a different, though related, insurance company in a separate action which involved a distinct policy.”

Having found that the reservation of rights was not effective, the court ruled that GuideOne was estopped to raise these coverage defenses by reason of the fact that it had controlled the defense of its insured. It refused to require proof that the insured had been prejudiced as the result of this defense, finding that under such circumstances prejudice must be conclusively presumed.

Cases such as GuideOne illustrate the general conflict between issues involving the duty to defend and the general principle that an insurer cannot “waive into coverage.” Although courts have long recognized an exception to this principle in cases where delays or misconduct by the insurer have caused prejudice to the insured, they have differed with respect to whether prejudice must nonetheless be actually established or not. Some states have established a rebuttable presumption of prejudice that the insurer may nonetheless overcome (albeit with difficulty given the nature of such cases). This case is unusual, on the other hand, in holding that there is a conclusive presumption of prejudice that forecloses any opportunity on the part of the insurer to contest whether prejudice actually resulted. This holding is also somewhat unusual in that, given the circumstances of the case, it appears that the Church was actually prejudiced by the timing and lateness of the insurer’s denial.
 

With respect to timeliness, the policies contained a two-year incontestability clause as required by Section 3203(a) of the New York Insurance Law; however, the action was commenced two years and two days after the policies were dated. Security Mutual argued that since the two-year anniversary fell on a Saturday, New York General Construction Law § 25 (extending contractual deadlines falling on weekends and holidays) and § 25-a (extending statutory deadlines falling on weekends and holidays), applied to extend the time to file the action by two days. Defendants countered that § 25-a was only applicable to statutory deadlines and since the incontestability clause was written into the contract, the only applicable provision was § 25, which applies to contractual deadlines. Defendants further argued that there was no applicable extension under § 25 because it only applies to performance of a contractual "condition," and the incontestability clause was not a “condition” within the meaning of the General Construction Law.

The Appellate Division agreed with Security Mutual, holding that §25-a applied because the incontestability clause was required by statute. The Court reasoned that if the insurance policy had failed to contain the incontestability provision, it would have been read into the policy since it is required by statute. Under this reasoning, a ruling that §25 (as opposed to §25-a) governed would produce an anomalous result: “[A]n insurer that complies with the law and includes in its life insurance policies the clause it is required by law to include will have a shorter period of time in which to contest the policies than it would have if it omitted the clause from the policies.” Therefore, the Court concluded the action was timely filed.

Defendants argued that the rescission claim should be dismissed, reasoning that Security Mutual was estopped from seeking that relief because it had accepted premiums after learning of grounds for rescission. Finding that Security Mutual had collected and retained nine premium payments totaling $40,000 since the action was commenced, the Appellate Division agreed. The Court rejected arguments that commencement of a rescission action prevented estoppel as contrary to N.Y. precedent. Rodriguez, 2009 WL 144524 (discussing Continental Ins. Co. v. Helmsley Enters., 211 A.D.2d 589 (1st Dep’t 1995) (holding that plaintiff waived right to seek rescission of insurance contract when it knowingly accepted premium payments for several months following discovery of alleged misrepresentations) and Scalia v Equitable Life Assurance Soc’y, 251 A.D.2d 315 (2d Dep’t 1998) (holding that that insurer’s continued acceptance of premiums after learning of facts permitting rescission of policy constitutes an estoppel against right to rescind)).

As for the fraud claims, the Court held that they were pled with sufficient detail under CPLR 3016(b), since the complaint included allegations of misstatements of net worth, falsity of medical statements, and the proffering of fictitious accountant and medical records. Thus, the Court concluded that the motion to dismiss the fraud claims was properly denied.
 

In May of 2002, the insureds sought coverage under a policy’s “collapse” provision after they learned that “hidden decay” had progressed to such a point that their home was in danger of an imminent collapse. Fabozzi, 2009 U.S. Dist. LEXIS 1109, at *7. Lexington sent a representative to investigate the claim, and the insureds alleged that the representative had assured them that the claim was covered and would be paid. Id., at *8. However, about two weeks later, Lexington sent a letter to the insureds advising them that an investigation was being conducted and that the company was reserving all of its rights under the policy. Id. at **8-9. The insureds asserted that over the next two-and-a-half years they repeatedly contacted their insurance broker who continued to reassure them that “Lexington is a good company,” and the claim would be paid. Id., at **10-11.

In October of 2004, the insureds filed suit against Lexington, alleging that it breached the insurance contract by failing to pay the claim. Id., at *13. In response to Lexington’s argument that the suit was barred by the policy’s two-year limitation on suits clause, the insureds argued that the “two-year limitation period did not begin to run until July 2003, after the cause of damage was determined.” Id., at *14. The Court reviewed case law from 1856 through 2008 in an attempt to determine when the two-year period commenced running. The review included a 1992 case wherein a New York court had held that a similar limitation of suits clause “did not begin to run until the full extent of the loss was known.” Id., at *20. However, the Court found that in more recent cases, “New York courts appear to have abandoned the rigid approach that underlay the ancient cases … in favor of a more flexible approach that considers the plain meaning of the contractual language.” Id., at *21. Accordingly, the Court applied the limitation of suits clause according to its plain language and held that the claim was time-barred. Id., at *22.

With respect to the insureds’ estoppel argument, the Court held that the letter Lexington sent to its insureds about two weeks after the Lexington representative visited the insureds’ home, “undercut any assurances that [the insureds] may have previously received.” Id., at *8. Moreover, due in part to the insurance broker’s reference to Lexington as a third-party, the Court held that the insureds “either knew or should have known that [they] could not rely on assurances” from the broker. Id., at *25. At the very least, the Court noted, the insureds should have realized that the claim would not likely be paid when Lexington took one of the insured’s depositions, prior to the litigation and prior to expiration of the two-year limitation period, that included several questions “which suggested Lexington’s belief that [the insured] had not given prompt notification of the damage.” Id., at *26.

Plaintiff’s primary argument was that the policy was “irremediably ambiguous” because the retroactive date was meaningless to the property at issue, one of 17 properties, because the tanks at that location were installed after the retroactive date. Plaintiff argued this created an ambiguity because there was a potential for coverage based on a leak from before the tanks were installed. Plaintiff argued that because of this ambiguity the policy should be interpreted to cover tanks and prior tanks at a scheduled location so long as the release happened after the retroactive date.

The Oregon Court of Appeals rejected this argument. Following Oregon’s interpretative rules, the Court found that the policy was not ambiguous. The Court found that Plaintiff’s proposed interpretation was not plausible because it is directly contradictory to policy language that the policy was location and storage tank specific. Since Plaintiff’s proposed interpretation contradicted specific policy language, it was by definition not reasonable.

The Court also rejected an argument that the insurer was barred from taking its position by the doctrine of judicial estoppel. Plaintiff argued that because the insurer had taken a contrary position in a case in Alaska, that it should be estopped from asserting that the policy does not apply to older tanks at a scheduled location. The Court found that since the insurer did not prevail in the Alaska case, that judicial estoppel does not apply.