Insurer’s Reservation of Rights May Increase Your Association’s Liability Costs
When faced with a significant liability claim, or even a small one, condo association boards have to decide whether to fight or settle it, typically in both cases, relying on insurance to cover the costs. A recent decision by a federal District Court in Massachusetts (Berkley National Insurance Company v. Granite Telecommunications) has made that already complicated decision potentially more difficult.
The damage claim came from an employee who was injured when sewage backed up in the kitchen in which he was working. Standing for several hours in putrid water caused a severe infection in his foot, requiring multiple surgeries. The worker sued Granite for medical costs and other damages.
The insurer (Berkley) initially refused to defend the claim, arguing that the policy specifically excluded infections caused by bacteria, fungi and other forms of pollution. When Granite threatened a suit challenging the denial of coverage determination, Berkley agreed to undertake the defense, but issued a “reservation of rights” letter asserting its right not to pay any judgment awarded the plaintiff should it turn out that the policy exclusions applied.
In most reservation of rights scenarios, the insurer pays the defense costs but declines to pay the claim if the policy doesn’t provide coverage. This case didn’t play out that way, which is why we are discussing it.
The damage claim went to mediation before the trial. Arguing that the plaintiff was almost certain to prevail, Berkley suggested that Granite settle and that the insurer and Granite divide the settlement cost. Granite refused, arguing that something other than fungi or bacteria caused the harm, so the company had no liability; but insisting Berkley should settle the claim anyway and pay the damages.
“Unfair” and “Coercive”
Berkley did as instructed, but then sued Granite to recover both the cost of the settlement ($1.5 million) and the defense costs. The court sided with Berkley, agreeing that the policy exclusions clearly applied, that Berkley had no duty to defend the claim and had done so only because of Granite’s “unfair” and “coercive” behavior.
The court said: “It would be fundamentally unjust for Defendants to retain the benefit of Berkley’s coverage….given that Berkley was under no obligation to defend or indemnify defendants, even though it was forced by defendants to do both.”
A couple of important points here:
This is not an appellate decision, so it isn’t binding on other courts.
The circumstances – specifically, Granite’s behavior, which the judge found “coercive” – were unique and may have contributed to the decision in Berkley’s favor.
Important Reminders
That said, while the facts may be unusual and while the decision is unlikely to set a precedent, other insurers may cite it nonetheless as grounds for adopting Berkley’s ‘claw-back’ strategy. And even if the decision doesn’t fundamentally change the insurance ground rules, it offers some important reminders to board members about how to handle reservation of rights situations specifically and insurance claims generally.
Heed the Warning. A reservation of rights letter is a flashing yellow light and you should treat it as such. It is a warning that your insurer may not pay a claim if the plaintiff prevails, and (based on this court decision) may not pay the cost of defending it, either. A reservation letter means you can’t assume the claim will be covered and you should consider that risk when deciding whether to fight the claim or settle it. In the worst case, the association could end up with a sizable legal bill on top of an uninsured liability claim. While the certainty of insurance coverage may strengthen the argument for fighting a claim, coverage doubts may dull the enthusiasm for that legal battle.
Select Your Attorney. An insurer who handles a claim under a reservation of rights is required to give you the option of having your own attorney handle the litigation rather than an attorney selected by the insurer. (The insurer pays the attorneys’ fees in both cases.) The association’s attorney is obviously the better choice and you should take it. An attorney employed or retained directly by the insurer will understandably be more concerned about protecting the insurer’s interests (and pocketbook) than the association’s and so may not argue as forcefully in favor of defending a claim or push as hard against an insurer’s plan to recover defense costs.
Notify the Insurer. Notify your insurer immediately when you receive a claim, and understand – a threat to file a law suit against you constitutes a claim, regardless of whether you take it seriously. Don’t wait for someone threatening a suit to file it. You want the insurer on notice as soon as possible, so there is no question about whether you have met the requirement for timely notification of a claim.
Read the Fine Print. Reservation of rights letters and insurance policies contain a lot of fine print – clauses, footnotes, whereases and wherefores, that make the eyes glaze and the heart rate slow. You ignore these details, or fail to understand them, at your peril. They describe the circumstances under which your policy will provide coverage and when it will not. Even if you think you understand the fine print….
Ask if the Claim is Covered. When you send notice of a claim, ask the insurer to provide a coverage determination letter, either affirming that the claim (or potential claim) is covered or concluding that it is not. And insist that the insurer provide this determination in writing. “They told me it was covered” won’t provide the evidence you will need of a coverage promise on which the board reasonably relied.
By: Seth Barnett