It is the law in many jurisdictions that an insurer’s actions, or lack thereof, can result in a matter qualifying for coverage notwithstanding the otherwise clear application of a coverage defense.  The recent decision by the Supreme Court of Indiana in Ashby v. Bar Plan Mutual Ins. Co., 2011 Ind. LEXIS 513 (Ind. June 21, 2011) addresses this concept of coverage by estoppel, and underscores the need for focused insurer communications from the first notice of a matter, regardless of whether notice is provided by the insured or by the claimant.

Ashby involved coverage under a legal professional liability policy.  The policy was issued by the Bar Plan Mutual Insurance Company (“Bar Plan”) to an individual attorney who represented prison inmates in personal injury matters.  The policy required the insured, as a condition precedent to coverage, to provide written notice to the Bar Plan within twenty (20) days of the date of claim.  Sometime after the policy was issued, the insured attorney abandoned his law practice, resulting in his suspension and later disbarment.  During this period, the insured allegedly committed malpractice in connection with two separate personal injury matters he was prosecuting. 

Because the insured’s location was unknown at the time, the two clients wrote to the Bar Plan directly to advise of their claims.  In both instances, the Bar Plan wrote acknowledgment letters to the claimants to provide a claim number and to request additional information concerning their claims.  In one of the letters, the Bar Plan specifically advised that it was willing to work with the claimant to resolve his malpractice claim.  Neither letter advised of any grounds on which coverage might be available.  The claimants later filed suits against the insured, and the suits were consolidated.  The Bar Plan intervened in the consolidated matter and asserted a cross-claim seeking a declaration that it had no indemnity obligation on the grounds that the insured (a) never provided notice of claim under the policy and (b) breached the policy’s cooperation clause.

The Indiana Supreme Court agreed that the policy could only be triggered by the insured, rather than by the claimants, and that as such, the failure of the insured to have provided notice of claim, as prescribed by the policy, should have been a dispositive coverage defense.  The court nevertheless held that summary judgment was not proper as there was a question of fact as to whether the Bar Plan should be estopped from denying coverage.  The court concluded that the acknowledgment letters sent to the claimants implied that coverage was available since the letters specifically advised of a claim number and requested information pertinent to the Bar Plan’s investigation.  Moreover, the absence of any discussion of a possibility of non-coverage, explained the court, created “genuine issues of fact as to whether [claimants] were misled to believe” that their claims were covered by the Bar Plan policy.

The court remanded the matter for further proceedings on whether claimants detrimentally relied on the Bar Plan letters.  Regardless of how that particular issue is resolved, the Ashby decision illustrates in clear terms just how important it is for insurers to employ focused and specific language in each piece of coverage correspondence, even upon the initial reporting of a matter, so as to avoid a coverage by estoppel situation.