Why it matters

A Missouri appellate court recently determined that a commercial liability insurer was estopped from denying coverage for an underlying multimillion-dollar construction defect suit against its insured because its reservation of rights letters were ineffective to preserve the insurer’s right to deny coverage. The court held that the insurer’s purported reservation of rights letters were insufficient because they failed to “clearly and unambiguously” explain what coverage issues might exist and which few policy terms really mattered. A “proper reservation of rights,” according to the court, provides the insured “with full knowledge of the position of the insurance company.” As a result, the court upheld a jury’s bad faith damages award of $5 million – even though the court had previously found that the CGL policy at issue did not cover the claims in the underlying lawsuit against the insured.

Detailed Discussion

Advantage Building & Exteriors, a construction company, was sued in 2008 for property damage as a result of purported construction defects. Pursuant to the terms of a commercial general liability (CGL) policy with Mid-Continent, Advantage tendered the suit seeking a defense and indemnity.

Mid-Continent agreed to defend the claim subject to a “reservation of rights” (“ROR”) letter. Throughout the underlying litigation, Mid-Continent sent additional ROR letters and promised to advise Advantage when it made a coverage decision.

After refusing repeated requests from Advantage to settle the underlying litigation within the policy limits (and engaging in other bad faith conduct recounted at length in the appellate decision), Mid-Continent denied coverage on the eve of trial, withdrew its defense, and initiated a coverage action.

Advantage promptly reached an agreement with the underlying claimant to assign its rights to the proceeds of any award Advantage received when it sued Mid-Continent.

After a bench trial, the court in the underlying case ruled in favor of the claimant. Advantage then asserted a counterclaim in Mid-Continent’s parallel declaratory judgment action accusing Mid-Continent of bad faith for failing to settle the underlying action within policy limits. Advantage sought recovery of the compensatory damages awarded in the underlying lawsuit as well as punitive damages.

Mid-Continent obtained a summary judgment ruling in its favor that there was no coverage so it was not obligated to reimburse Advantage for the compensatory damages award. However, the trial court permitted Advantage’s bad faith claim to go the jury.

The jury ruled in Advantage’s favor, awarding damages for its bad faith claim, and also assessed punitive damages against Mid-Continent.

Mid-Continent appealed. The appellate court held that the purported ROR letters issued by Mid-Continent were insufficient under Missouri law. A “proper reservation of rights,” according to the court, provides the insured “with full knowledge of the position of the insurance company.” The letters sent by Mid-Continent did not meet this standard, as they only “vaguely” explained that the insurer was investigating its coverage defenses.

As such, the court concluded, Mid-Continent had not effectively reserved its rights and was therefore estopped from denying coverage.

The issue of damages was remanded because of an improper jury instruction, so the case stands only for the proposition that the RORs were not effective.

To read the opinion in Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Co., click here.