(Article from Insurance Law Alert, September 2020)
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The Tenth Circuit ruled that an insurer was obligated to indemnify a punitive damages award notwithstanding a punitive damages exclusion, finding that the insurer was estopped from denying coverage based on its delay in reserving its rights. Interstate Fire & Cas. Co. v. Apartment Management Consultants LLC, 2020 WL 5049018 (10th Cir. Aug. 27, 2020).
An apartment tenant sued her landlord and its management company (the “Defendants”) after sustaining carbon monoxide injuries. The suit sought compensatory and punitive damages. Interstate, the Defendants’ primary and excess insurer, assumed the defense of this suit. Approximately eighteen months later (and one month after Defendants’ summary judgment motion was denied in the underlying suit), Interstate sought to reserve its right to disclaim coverage for punitive damages based on a punitive damages exclusion in the primary policy. The Defendants argued that Interstate was estopped from relying on the exclusion based on its unconditional assumption of the defense and delay in reserving its rights. A Wyoming federal district court agreed and granted the Defendants’ summary judgment motion. The Tenth Circuit affirmed.
The Tenth Circuit emphasized that Interstate was on notice that the underlying suit sought punitive damages, but failed to reserve its right to deny coverage on that basis until eleven days before the trial commenced. In addition, the court noted the failure of insurer-appointed counsel to “mount a full-bore assault on the claims for punitive damages under Wyoming law, which creates significant obstacles for obtaining a punitive damages award.” The court concluded that these actions resulted in prejudice to the Defendants.
Further, the court ruled that coverage was triggered under Interstate’s excess policy, which followed form to the primary policy. The court reasoned that Interstate was “legally obligated to pay” the punitive damages award under the primary policy by virtue of equitable estoppel. As such, the excess policy, which applied to sums that that the insured “becomes legally obligated to pay as damages after the primary policy of insurance has been exhausted,” was triggered. Refusing to enforce the punitive damages exclusion, the court stated:
Allowing a retrograde application of the Primary Policy’s punitive damages exclusion to cancel the clear coverage obligations of the Excess Policy to pay [the Defendants’] “ultimate net loss” above the Primary Policy’s aggregate limit would be inconsistent with the provisions of the Excess Policy that explicitly agreed to provide such coverage.
The Court of Appeals of Georgia similarly granted summary judgment to policyholders, finding that an insurer was estopped from seeking to void the policy based on misrepresentations because of a delay in issuing a reservation of rights. Penn-America Ins. Co. v. Morgan Fleet Services Inc., 2020 WL 4726544 (Ga. Ct. App. Aug. 14, 2020).
A bus driver sued Morgan Fleet Services (“MFS”) after she was injured exiting a bus that had caught fire. Penn-America, MFS’s insurer, notified outside counsel that it would defend under a reservation of rights and that a “letter w[ould] be forwarded shortly.” Six months later, Penn-America issued an email reserving its right to withdraw from the defense in the future and to “assert additional defenses to any claims for coverage in the future as may be necessary or appropriate.” The letter also noted that in its policy application, MFS identified its business as seat cover installation and failed to indicate its bus inspection services, the conduct upon which the underlying lawsuit was based. Penn-America therefore expressly reserved its right to rescind or void the policy based on that misrepresentation.
In ensuing litigation, Penn-America and MFS cross-moved for summary judgment. Penn-America sought to void the policy and MFS argued that Penn-America was estopped from asserting non-coverage based on its assumption of the defense without effective notification of its reservation of rights. A Georgia trial court ruled in MFS’s favor and the appellate court affirmed.
The appellate court concluded that Penn-America’s reservation of rights was insufficient to avoid waiver. The court explained that shortly after it agreed to defend, Penn-America noted (in an email to outside counsel) that it “was aware of and investigating the potential for non-coverage” based on the inconsistencies between the application information and the allegations in the underlying complaint as to the nature of MFS’s business. The court reasoned that this email was “only a statement of future intent” to send a reservation of rights at a later date and was thus not “an actual reservation of rights.” Moreover, the court emphasized that the actual reservation of rights was not sent until six months later. As a result, the court concluded that Penn-America waived the defense of non-coverage.