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July 26, 2014

Reservation of Rights Letter Required in Duty to Defend Cases

In insurance coverage disputes, a “Reservation of Rights Letter” is now a prerequisite in Wisconsin if in the event of an adverse judgment, an insurer wants to later deny coverage in cases in which it has assumed the duty to defend. So held the Court of Appeals in the case of Maxwell v. Community Insurance Corp., 2009 WI App 2176 (Aug. 25, 2010). As a result, insurers and policyholders alike would be advised to review pending matters to determine whether or not a Reservation of Rights Letter was tendered timely.

In Maxwell, a teacher sued the Hartford Union School District for breach of employment contract after the District eliminated her position. The District tendered the case to its insurer, Community Insurance Corporation, that hired defense counsel from Community Insurance’s approved counsel list. In the underlying case, however, the trial court found the District liable under the employment contract. Community Insurance’s claims administrator then notified the District that the policy specifically excluded coverage for employment contract claims. The District responded by filing a third party complaint seeking declaratory judgment against the insurer.

The Court of Appeals held the insurer could not decline coverage after it “agrees to defend the insured without a reservation of rights, retain counsel, and actively defends the insured through a final judgment detrimental to the insured ….” Slip. Op. ¶ 32. The Court warned that an insurer must reserve by agreement its right to deny coverage before “assuming dominion and control” over a tendered claim when it has “knowledge of facts indicating non-coverage.” Id.

Reservation of Rights Letters, thus, should at a minimum: 1) contain specific language requiring (or perhaps assuming) the insured’s agreement that, if the insurer defends the underlying case, it may do so reserving its rights to later deny coverage for non-covered claims; and, 2) itemize the potential basis for a subsequent coverage denial, the facts known to the insurer, and then obligate the insured to notify the insurer of any other facts, or those that develop at a later date, impacting coverage.

© MICHAEL BEST & FRIEDRICH LLP

About the Author

John D. Finerty, Jr. Michael Best Law Firm
Partner

John D. Finerty, Jr. is an AV rated trial lawyer and a partner in the Litigation Practice Group. He has extensive experience in complex litigation that involves specifically labor injunctions, corporate governance and D&O liability claims, employment law, minority shareholder disputes, EPLI coverage claims, restrictive covenant litigation, including injunctions and TROs, theft of trade secrets, Lanham Act unfair competition cases and trademark defense, ERISA, and labor consulting on mergers, acquisitions and bankruptcies.

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