June 4, 2012 – According to a recent decision from the Wisconsin Supreme Court, an insurer does not waive coverage clause defenses by failing to provide the insured with a reservation of rights letter.
Community Insurance Corporation (CIC) unsuccessfully defended the Hartford Union High School District in a contract dispute with a former employee, Dawn Maxwell, who won $103,824 in compensatory damages.
The school district then claimed CIC was required to pay the damages owed to Maxwell because it did not reserve a right to contest coverage during the unsuccessful defense.
The school district’s insurance policy specifically excluded liability for amounts due under performance contracts or agreements, which undisputedly applied to the Maxwell’s damages.
But the school district argued that CIC waived the right or was estopped from asserting noncoverage because it did not file the reservation of rights letter.
The Washington County Circuit Court ruled for CIC, but a state appeals court reversed, holding that CIC was estopped from denying coverage. However, in Maxwell v. Community Insurance, 2012 WI 58 (May 30, 2012), a 4-3 supreme court majority reversed the appeals court in favor of CIC.
“[W]e do not see the failure to issue a reservation of rights letter as grounds to require an insurer to provide insurance coverage that does not otherwise exist in the insurance contract,” wrote Justice David Prosser for the majority, stressing that insurers are strongly urged to communicate potential defenses.
Justice Prosser explained that since 1896, the doctrines of waiver and estoppel have been inapplicable to matters of coverage. “[I]f courts entertained the prospect that insureds could gain unpurchased coverage on account of collateral action by the insurer, unprotected insureds would have obvious incentive to pursue litigation,” Justice Prosser wrote.
However, the majority explained that waiver and estoppel still applies to a forfeiture defense in which the insurer has allowed the insured to breach a provision of the contract without timely acting on a forfeiture defense, such as when an insurer repeatedly accepts late premium payments.
“[P]roviding and assuming full control of a defense may be grounds for establishing waiver or estoppel of a forfeiture clause when the insurer fails to issue a reservation of rights,” Justice Prosser wrote.
Justice Patrick Crooks wrote a dissenting opinion, joined by Chief Justice Shirley Abrahamson and Justice Ann Walsh Bradley, asserting that CIC violated proper procedure to contest coverage when it failed to provide a reservation of rights letter to the school district and tendered an unsuccessful defense.
“As in duty to defend cases, an insurer can be held liable to cover damages for which it would have otherwise had a valid defense based on the insurer’s own actions during litigation that have prejudiced the insured,” Justice Crooks wrote. “This case illustrates precisely the kind of unfairness that reservation of rights letters are intended to prevent.”
Lori Lubinsky and Sara Beachy of Axley Brynelson LLP, Madison, represented Community Insurance Corporation. James Mohr Jr. of Mohr & Anderson LLC, Hartford, represented the Hartford Union High School District and the Hartford Union School Board of Education.
Joe Forward is the Legal Writer for the State Bar of Wisconsin.