Coverage Denial Absent a Reservation of Rights
In a recent decision, the Southern District Court of Appeals held that an insurer’s failure to send a reservation of rights letter did not act as a waiver of its right to deny coverage. However, the ultimate resolution of Smith v. Maryland Casualty Company and its potential impact on Missouri bad faith law remains to be seen.
Smith v. Maryland Casualty Company
The case arose from an automobile accident in which a passenger, Smith, sued the driver, two other individuals, and Team Navigator, LLC. Smith alleged that at the time of the accident the driver was an agent of Navigator and thus covered by two policies issue by Maryland Casualty. Upon the filing of the first lawsuit, Maryland Casualty issued a reservation of rights letter to the driver, reserving all of its policy defenses.
The first suit was dismissed for failure to prosecute, leading Smith to file a second lawsuit and naming only the driver as a Defendant. This second suit was tendered to Maryland Casualty by the same attorney retained by Maryland Casualty in the first lawsuit. The attorney was informed that the driver’s defense “would continue under the same terms and conditions” as the defense in the first suit. However, no reservation of rights letter was sent to the driver by Maryland Casualty.
Maryland Casualty eventually filed a Declaratory Judgment action in federal court asking the court to find no coverage for the automobile accident. Following this, the underlying parties entered into a §537.065 agreement and proceeded to trial where a $1,834,298 judgment was entered in Smith’s favor.
After the judgment became final, Smith filed an equitable garnishment action in which the driver asserted a cross-claim against Maryland Casualty for bad-faith refusal to settle. Maryland Casualty answered that the driver was not an insured under the policy or exclusions in the policy negated coverage.
The driver then filed a motion for summary judgment alleging that Maryland Casualty had waived any policy defenses by failing to notify him of the reservation of rights in the second lawsuit. The trial court agreed, finding that Maryland Casualty had waived any defenses by taking control of the defense in the second lawsuit before notifying the driver of a reservation of rights. No decision or judgment was entered pertaining to the cross-claim for bad faith.
Maryland Casualty appealed the trial court’s ruling, stating in part that the undisputed facts did not show Maryland Casualty had waived its right to deny coverage by its failure to send a reservation of rights letter in the second lawsuit.
Southern District’s Opinion
The Southern District agreed with Maryland Casualty and found that its failure to send a reservation of rights letter in the second lawsuit did not automatically entitle the underlying parties to judgment as a matter of law. The Court noted that although the failure to send a reservation of rights letter supports a finding of waiver, Missouri law requires an insured be fully informed of the Insurer’s coverage position. Since a reservation of rights letter was sent in the first lawsuit, facts in the record could support an inference that the driver did receive notice of Maryland Casualty’s position.
The Court went on to distinguish the case from the holding in Advantage Building & Exteriors, Inc. v. Mid-Continent Casualty Company (discussed in the January issue of Bad Faith Update), stating that Advantage was decided on a theory of estoppel as opposed to waiver. The case was ultimately remanded back to the trial court for further proceedings.
Although the Southern District, under these facts, refused to find as a matter of law that an insurer who failed to send a second reservation of rights waived the right to later deny coverage, the final resolution of this case may eventually impact Missouri insurance law. It will be interesting to see how the theory of waiver impacts the insureds ability to assert a bad faith claim as well as the ultimate issue of indemnification under the policy.
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