You report a malpractice claim to your insurer giving an overview of what the claim was about. Next thing you know you get a reservation of rights letter from your insurer. When you top sheet the reservation of rights letter you start to get upset because it looks like the insurer is getting ready to decline coverage. Normally nothing could be further from the truth as in most cases there is coverage. After the reservation of rights letter the insurer appoints counsel to defend you. So, there is nothing to worry about, right?
So why does a malpractice insurer send out a reservation of rights letter in the 1st place if they end up paying a covered loss? A good reservation of rights letter will outline the facts as the insurer knows them and it will also reference your attorney malpractice policy sections that deal with coverage of the claim. Normally it will reference the sections that possibly would exclude coverage and well as the parts that policy coverage may be found for this claim. It likely will mention potential defenses that the insurer may have that would preclude coverage. The insurer is reserving its rights even as it provides the insured a defense of the claim until all the facts are known.
If an insurer does not send out a timely reservation of rights letter the insurer can lose its right to a defense if there is no coverage. Becker v The Bar Plan Mutual Insurance Company is a case study on what happens when a reservation of rights letter is not viewed as timely nor adequate.
The underlying case that caused the malpractice claim was when Becker hired Kansas Attorney Seck to represent him in certain loan transactions. The short story is that Seck failed to perform a UCC search on the collateral. Becker found this out after the fact when the business failed, and he was in 2nd position to collect on the $5.5 million of loans made.
Becker having learned that his loan security was likely worthless fired Seck via e-mail on 2/6/2012. In the e-mail Beck pointed out the errors that were made by Seck and the likelihood that because of these errors Becker expected to claim “very large damages”. Even though Becker and Seck later became amicable again, Becker’s efforts to collect on the debt were stymied by the bankruptcy filing of the debtor in August 2012.
Seck’s Bar Plan legal malpractice insurance renewed in October of 2012. Seck’s policy carried 100/300 policy limits. When Seck renewed the coverage, she failed to inform The Bar Plan about the February 6, 2012 e-mail on the renewal application.
On November 12, 2012, Becker sent a demand letter to Seck and on November 19 Seck notified the Bar Plan of the claim. And on January 2013, Beck filed suit against Seck. The Bar Plan’s outside counsel advised that the case would be difficult to win and advised The Bar Plan to settle. On February 22, Becker’s new attorneys submitted an offer to The Bar Plan but this offer was allowed to expire.
On February 25, The Bar Plan finally got around to reviewing the claim for coverage issues. And on March 5th another attorney was assigned to the file and a reservation of rights letter was sent on March 11. By March 28th, the newly assigned attorney concluded that there was no coverage due to the untimely notice of the claim to The Bar Plan. On April 16, this attorney sent a coverage denial letter to Seck.
“On August 23, 2013 (after the denial of the coverage appeal), Seck confessed judgment to Becker for $3,905,000. She assigned Becker all her rights to sue The Bar Plan for bad faith as consideration for Becker's agreement not to enforce or collect on the judgment against her.”
On August 27, 2013 Becker filed an “insurance bad faith” claim against The Bar Plan.
So, what does all this have to do with a timely reservation of rights letter?
Summary judgements were filed by both parties. The district and appeals courts both sided with The Bar Plan to dismiss. But now it is before the Kansas Supreme Court. Becker sites the following:
"'The general rule supported by the great weight of authority is that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground for forfeiture or noncoverage. The insurer's conduct in this respect operates as an estoppel to later contest an action upon the policy, regardless of the fact that there has been no misrepresentation or concealment of material facts on its part, and notwithstanding the facts may have been within the knowledge of the insured equally as well as within the knowledge of the insurer.'" (Emphasis added.) Snedker v. Derby Oil Co., Inc., 164 Kan. 640, 643, 192 P.2d 135 (1948) (quoting 29 Am. Jur. 672, § 878)”
The Kansas Supreme Court determined that there were sufficient facts in dispute to not allow the Summary Disposition of the case and sent it back to the District Court.
A timely reservation of rights letter may have prevented this reversal and the associated legal expenses back to the District Court. Not to mention a bad faith claim ups the ante well beyond the 100/300 policy limits.
This is why good claims procedures dictate that one of the 1st steps in any malpractice claim is to determine coverage and send out a “well-reasoned” reservation of rights letter.
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Lee Norcross, MBA, CPCU
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