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

An insurer that undertakes the defense of its insured for a sufficiently lengthy period of time without reserving its rights to deny coverage waives coverage defenses. So held the 7th Circuit in Nutmeg Ins. Co. v. East Lake Management & Development Corp. (7th Cir. (Ill.) Jan. 22, 2008) (unreported). In this case, the insurer hired counsel to defend its insured, but did not issue a reservation of rights until two years later. The insurer continued to defend for another two years before issuing a coverage denial. The court concluded that, whether the delay was two or four years, it was too long under Illinois law. The court rejected arguments that the insured was required to demonstrate prejudice by the delay; while prejudice would be required to establish a claim of estoppel, the delay in this case constituted a waiver for which no showing of prejudice was required. The court also rejected arguments that the loss was uninsurable as a matter of state law, and that neither waiver nor estoppel could create coverage for uninsurable losses. Finding no Illinois cases, the court cited precedent in California and New Jersey for the proposition that the defense of uninsurability may be waived or forfeited, and predicted that Illinois courts would agree. Compare this holding with the rule in New York that an insurer cannot through waiver create coverage that a policy was not written to provide (see Schiff Assoc. v. Flack, 51 NY2d 692 (1980); Zappone v. Home Ins. Co., 55 NY2d 131 (1982); Central General Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997)). While coverage may be created by estoppel (which requires prejudice), waiver applies only to defenses based on policy exclusions and breach of policy conditions.

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In a claim by injured worker against worker’s compensation claims administrator alleging tort of outrage, Alabama Supreme Court holds that claims adjuster’s files were not privileged work-product, and that communications between administrator an its counsel were also subject to disclosure. At issue in Ex Parte Meadowbrook Ins. Group, Inc. (Ala. Dec. 21, 2007) was claimant’s right to “(1) [the] adjuster's claims notes made after [claimant’s] worker's compensation case was filed … up to the filing of this case, and (2) correspondence and e-mails exchanged between [claims administrator] and [counsel hired to defend it] within that time period pertaining to the decision to terminate [claimant’s] worker's compensation benefits.” Court concluded that claims administrator failed to offer evidence indicating contents of claims file were prepared in anticipation of litigation or trial. Court reasoned that since administrator had an independent contractual duty to investigate claim, it could not rely on mere blanket objections, but was required to show when documents were created, why each document was prepared and how it was used. As for communications with counsel, though they were subject to attorney-client privilege, the privilege was deemed waived because administrator was relying on advice of counsel as a defense to the tort claim. Court held that where advice of counsel is asserted in defense to culpability for a decision, plaintiff is entitled to all relevant documents bearing on the decision.

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