Maxum responded by disclaiming coverage under the policy and informing EWES that it would not provide a defense or indemnification, citing the policy’s Employer Liability Exclusion. The letter also reserved Maxum’s right to claim any other defense including that “coverage for this matter may be barred or limited to the extent the insured has not complied with the notice provisions under the policy.”
Hoover proceeded to trial against EWES and obtained a $16.4 million negligence judgment. In February 2007, Maxum filed a declaratory judgment action against EWES. Maxum did not include failure to provide notice as a reason for denying coverage in its complaint. Instead, Maxum simply stated that EWES’s claims were precluded by the Employer’s Liability Exclusion. Hoover obtained an assignment from EWES and sued Maxum alleging wrongful denial of coverage. In its motion for summary judgment in the third-party action, Maxum again asserted only the Employer Liability Exclusion as a basis for denying coverage.
This case provides a good discussion of the three options available to an insurer when confronted with a claim: (1) the insurer can defend the claim, thereby waiving its policy defenses and claims of non-coverage; (2) the insurer can deny coverage and refuse to defend, leaving policy defenses open for future litigation; or (3) the insurer can defend under a reservation of rights.
According to Justice Hunstein, who wrote the majority opinion for the Supreme Court, at a minimum, a reservation of rights must fairly inform the insured that not withstanding the insurer’s defense of the action, it disclaims liability and does not waive the defenses available to it against the insured. A reservation of rights is only available to an insurer who undertakes a defense while questions remain about the validity of the coverage.
Both the trial court and the Court of Appeals found that Maxum had properly reserved its right to assert other defenses later, including failure to provide adequate notice. Justice Hunstein disagreed, finding that Maxum failed to properly reserve its rights to assert a notice defense when it denied EWES’s claim on the grounds of the Employer Liability Exclusion and refused to undertake a defense. The “reservation of rights letter” sent by Maxum could not actually be a reservation of rights letter because Maxum never undertook the defense of the insured. It was therefore only a denial letter.
Justice Hunstein and the majority of the Court believed that the letter sent by Maxum was also ambiguous and that reservation of rights letters must be unambiguous. If it is ambiguous, a reservation of rights must be construed strictly against the insurer and liberally in favor of the insured. The letter from Maxum was inadequate, according to the Supreme Court, because it did not unambiguously inform EWES that Maxum intended to pursue a defense based on untimely notice of the claim. Boilerplate language in the letter purporting to reserve the right to assert a myriad of other defenses at a later date did not clearly put EWES on notice of Maxum’s position.
The Supreme Court found that Maxum waived its right to contest coverage based upon the notice provisions of its policy because: (1) when Maxum filed its declaratory judgment action it did not mention a defense based on untimely notice; (2) during the discovery period in the underlying tort claim Maxum did not investigate whether EWES gave Maxum notice of the occurrence as soon as practicable as required under the policy; and (3) when Maxum moved for summary judgment in the underlying tort action, Maxum’s sole basis for asserting it was entitled to summary judgment was based on the Employer Liability Exclusion in the policy.
The Employer Liability Exclusion did not apply, according to the Court, because that clause excludes coverage for bodily injury to “(1) An employee of the insured arising out of and in the course of: (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured’s business” Hoover was not performing duties related to the conduct of EWES’s business at the time of the accident.
Justice Melton wrote a dissent in which Justice Hines and Justice Nahmias concurred. According to Justice Melton, the letter from Maxum should not have acted as a waiver of the notice defense. In any contract litigation, the bare assertion of one defense does not waive every other defense available. Maxum would have every reason to obtain additional information to determine whether other grounds existed for denial of EWES’s claim. That is why a reservation of claims exists in the first place. In the context of any denial of any claim by any insurer, a reservation of rights to uncover additional defenses under the course of a challenge is not ambiguous. “It is a standard and acceptable means of determining one’s rights, often through litigation and discovery, when facts become evident.”
Justice Melton points out that under the majority’s reasoning, an insurance company could deny a claim based on one defense, discover during litigation that, but for the fraud of the insured, it could have raised another defense, and be unable to raise the new defense simply because it was not explicitly asserted the moment that the claim was denied. The mere assertion of one defense should not be considered the waiver of other defenses, absent some statement or conduct showing an intent to waive.
This opinion makes it even more important for insurers to pay very close attention to the wording of reservation of rights letters. Boilerplate language in a reservation of rights attempting to reserve defenses without specifically enumerating those defenses is now, arguably, ambiguous and ineffective.
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