LAW NOTES from the Law Offices of
Kay & Andersen, LLC

May, 2013
What Every Insurer Should Know . . . . . . . . . . . . . . . 
                              ABOUT THE EFFECT ON COVERAGE OF A FAILURE TO
                                                               ISSUE A RESERVATION OF RIGHTS ​
​​Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
When an insurance carrier is presented with a claim for which coverage may not exist, the normal practice is to issue a reservation of rights letter. However, does the failure to issue a reservation of rights letter preclude an insurer from subsequently contesting coverage? In light of a recent Supreme Court decision, the answer to that question in Wisconsin, in some cases, is no. In Maxwell v. Hartford Union High School District, 2012 WI 58, 341 Wis. 2d 238, 814 N.W.2d 484, (found at http://wicourts.gov/sc/opinion/ DisplayDocument.pdf?content=pdf&seqNo=83137), a school administrator (Maxwell) commenced a wrongful termination against her former employer, the Hartford Union High School District. The District’s insurance carrier, Community Insurance Corporation, assigned an attorney to represent the District. CIC did not send a reservation of rights letter to the District or the District’s general counsel who also appeared for the District in the litigation. After the circuit court granted partial summary judgment to Maxwell on her breach of contract claim and awarded compensatory damages of $108,824.22, CIC’s litigation manager took the position that CIC was not liable for any judgment for damages due under Maxwell’s performance contract or any settlement for lost wages or lost benefits. The District then filed a third-party complaint against CIC seeking declaratory relief that the policy provided coverage. The circuit court granted summary judgment in favor of CIC on the basis that the policy did not cover the underlying claims. After the Court of Appeals reversed the circuit court, the Wisconsin Supreme Court accepted a petition for review. The issue presented was whether CIC either waived or was estopped from asserting its noncoverage defense because it failed to issue a reservation of rights letter to the insured. The Supreme Court noted an insurer is liable for all risks it agrees to assume in the insurance contract, but that contract should not be rewritten to bind the insurer to a risk it did not contemplate and for which it has not been paid. Id, ¶ 34. In contrast, a forfeiture clause (i.e., notice provision) can be waived if the insured had purchased the coverage the insurer seeks to deny. Id, ¶ 61. Here, CIC provided a defense, fulfilling its duty to defend the District. CIC’s failure to issue a reservation of rights letter did not constitute a breach of the duty to defend or bad faith, and therefore CIC did not breach its duties to the District. Id, ¶ 59. While it ruled in favor of the insurance carrier, the Supreme Court reiterated the need for insurers to communicate with their insureds: “This opinion must not be interpreted as a license for insurers not to communicate forthrightly with their insureds–especially when insurers dispute coverage . . . Communication between the insurer and the insured, whether in the form of a reservation of rights letter or other form, demonstrates good faith, prevents surprises and hard feelings, and tends to avoid litigation between insurers and their insureds.” Id, ¶¶ 61-62. Thus, in Wisconsin, reservation of rights letters should be timely issued to insureds when questions of coverage arise, although the failure to do so may not bar a coverage defense as long as the policy clearly excludes coverage for the claim.

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