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

October, 2010
What Every Insurer Should Know . . . . . . . . . . . . . . . 
                                       ABOUT LIABILITY WHEN CONTROLLING THE DEFENSE
                                                                   WITHOUT 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.

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Insurance companies routinely issue a reservation of rights letter to the insured upon receipt of a potential new claim. The Wisconsin Court of Appeals recently held that failing to issue a reservation of rights letter while controlling the defense of a claim will preclude an insurance carrier from subsequently denying coverage in the event of an adverse ruling. In Maxwell v. Hartford Union High School District, Appeal No. 2009AP2176 (August 25, 2010), found at http://www.wicourts.gov/ca/opinion/DisplayDocument.html?co ntent=html&seqNo=53557, a terminated employee (Maxwell) filed suit for breach of contract against the Hartford Union High School District (“the District”). The claim was referred to the District’s carrier, Community Insurance Corporation (“CIC”). CIC appointed an attorney from its approved list to defend the District against Maxwell’s claim. CIC did not issue a reservation of rights letter. Following a series of partial summary judgment motions brought by Maxwell, the circuit court found the District was liable for breach of contract and awarded compensatory damages of $103,824.22. After the District’s liability was determined, CIC asserted that its policy contained a clause specifically excluding coverage for amounts due under a performance contract and for lost wages and benefits, and therefore CIC was not obligated to pay damages awarded to Maxwell. The District then filed a third-party complaint, seeking a declaratory judgment that the policy provided coverage and CIC was barred from asserting coverage defenses. In reversing the circuit court’s determination of no coverage, the Court of Appeals noted that insurance carriers were advised in Grube v. Daun,173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992), to issue reservation of rights letters when they wish to contest coverage. Maxwell, ¶12. It “would make a mockery” of Grube to accept that an insurer can still deny coverage after exercising full control over a lawsuit and a final judgment detrimental to the insured is entered, all without the insurer issuing a reservation of rights. Id, ¶32. Reservation of rights agreements “must be encouraged by imposing consequences if an insurer puts the insured at risk by assuming dominion and control over a lawsuit without a reservation of rights and with knowledge of facts indicating noncoverage, and then seeks to avoid coverage after a final judgment is entered against its insured.” Id. Because the District relied on CIC’s defense to its detriment and was prejudiced, the Court of Appeals held that CIC was estopped from denying coverage. Id, ¶33. This case serves as a stern reminder to insurers that they should issue a reservation of rights letter at the outset of any case where the underlying facts may give rise to a coverage defense.

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