All too often, instead of sending reservation of rights letters that unambiguously inform the insured of the insurer’s coverage position, insurers send longwinded, generic letters with a cursory discussion of the claim’s facts, minimal (if any) coverage analysis, extensive policy quotations, and boilerplate reservation language. When presented with this type of ambiguous and vague insurer “reservation of rights,” many courts conclude that the insurer fails to properly preserve some or all of its coverage defenses. See, e.g., Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240, 1242 (Ill. App. Ct. 1991) (“[b]ased on the equivocal nature of Royal’s [reservation of rights] letter, we find that Royal did not reserve all its rights and defenses, particularly its professional liability defense”). See also Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (reservation of rights was invalid because it failed to “unambiguously inform [the insured] that [the insurer] intended to pursue a defense based on untimely notice of the claim”). Recently, a Missouri Court of Appeals found that an insurer’s “ineffective” reservation of rights estopped the insurer from using a court’s finding of no coverage to avoid a bad faith judgment.
In Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., the Missouri Court of Appeals affirmed the lower court’s bad faith judgment against an insurer on the basis that, among other things, the insurer failed to provide a “proper and effective” reservation of rights letter. Case No. WD76880, 2014 Mo. App. LEXIS 975, at *13-15 (Mo. Ct. App. Sept. 2, 2014). In that case, the insured, Advantage, was sued in a construction defect case and tendered the claim to its insurer, Mid-Continent, which had sold it primary and umbrella CGL policies. Mid-Continent sent letters to Advantage asserting that it was reserving its rights and that it would “promptly” inform Advantage of its coverage analysis. Mid-Continent, however, failed to inform Advantage of its internal conclusion that there was no coverage and subsequently ignored Advantage’s demands for coverage. Advantage was ultimately found liable in the underlying construction defect case. In the coverage litigation, the trial court confirmed that Advantage’s claim was not covered but nonetheless returned a bad faith judgment against Mid-Continent. Mid-Continent appealed.
On appeal, Mid-Continent claimed that there was no basis for the bad faith judgment because it defended Advantage under a reservation of rights while investigating a claim that the court ultimately determined was not covered. The Missouri Court of Appeals disagreed. Mid-Continent’s “reservation of rights” letters “did not constitute an effective reservation of rights.” The letters “only vaguely informed the insured” of Mid-Continent’s investigation, coverage analysis and reservation of rights. Also, while the letters “generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy[,]” they did not “clearly and unambiguously explain how those provisions were relevant to Advantage’s position or how they potentially related to coverage issues.” Mid-Continent also failed to promptly advise Advantage of its coverage analysis after concluding there was no coverage. The court explained,
Defending an action with knowledge of non-coverage under a policy of liability insurance without a proper and effective reservation of rights in place will preclude the insurer from later denying liability due to non-coverage. [cites] 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 …, 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. Consequently, the circuit court did not err in submitting the bad faith claim to the jury despite its declaratory judgment to the effect that the policy language did not expressly provide coverage.
Id. (emphasis in the original). Therefore, the bad faith judgment against Mid-Continent was affirmed.
The Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co. case is a significant win for policyholders in supporting the principal that a bad faith judgment can be rendered even if the claim itself is found to not be covered.