Page 62 - Reservation of Rights - Special Edition

payable under its policy as if the risk had been covered if an insurer’s actions prejudice its insured, it appears a reserva- tion of rights letter is no longer essential to protect an insurer from waiving defenses against claims not covered under
a policy. Thus, «the question on which the insurer›s liability should turn is whether an insured is prejudiced as a result of the conflict, an inadequate or absent disclosure, or other actions of the insurer.» Id. at 786-787.
Actual Prejudice
Prejudice is no longer presumed from an apparent conflict of interest between the insurer and the insured. See id. at 782. Rather, the insured must show he is actually preju- diced by the insurer›s actions. Id. at 785 (emphasis added).
The Texas Supreme Court offers Tilley as an illustration of actual prejudice. See id. Tilley involved a suit in which the insurer, Employers, sought a declaratory judgment that it did not have coverage for a personal injury suit in which its insured, Joe Tilley, was a defendant. Emp’rs Cas. Co. v. Tilley, 496 S.W.2d 552, 554 (Tex. 1973). When Tilley reported that he had been sued, Employers and Tilley entered into
a standard non-waiver agreement and Employers retained an attorney to defend him. Employers questioned whether Tilley had timely reported the accident on which the suit was based, but it did not specifically advise Tilley that a conflict of interest existed because of the late notice issue. Also, the defense attorney did not advise Tilley that the attorney had
a conflict of interest in that he was simultaneously defend- ing Tilley and gathering coverage information favorable to Employers. Employers later denied coverage, in part, on the basis of evidence developed by the defense attorney. The Court held, largely on public policy grounds, that Tilley was prejudiced by Employers’ actions and Employers was estopped to deny coverage. Id. at 561.
In 2010, the Texas Supreme Court applied the Til-
ley standard for prejudice in Gilbert and distinguished Gil- bert as being a case where no actual prejudice
occurred. See Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 137 (Tex. 2010). First, unlike the insurer in Tilley, the insurer, Underwriters, did not retain the defense attorney for its insured, Gilbert. There was no claim by Gilbert that the defense attorney simultaneously defended Gilbert and represented Underwriters in regard to coverage, had a conflict of interest with Gilbert, developed and provided evidence to Underwriters that harmed Gil- bert’s coverage position without advising Gilbert, or in any other way breached his duty to Gilbert. To the contrary, the defense attorney advised Gilbert to obtain coverage counsel and Gilbert knew the defense attorney was not involved in coverage issues. Second, Underwriters consistently advised Gilbert during the pendency of the case that coverage would be based on the actual facts underlying the plaintiff’s claims as they were determined to exist. Thus, the Court held there was no evidence of actual prejudice in this case. Id. at 138.
The Texas Supreme Court also refers to Acel as an
example of actual prejudice. See Ulico, 262 S.W.3d at
786. Acel involved a declaratory judgment action to determine liability coverage for an airplane accident. Pac. Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169, 1171 (5th Cir. 1973). The incident was not covered by the policy. However, the court found that the insurer was estopped from denying coverage for the judgment because it as- sumed defense of the suit without a valid non-waiver agree- ment or reservation of rights when it had knowledge of facts indicating possible lack of coverage and the insured was prejudiced. Id. at 1176. The court determined the insured was prejudiced in several ways:
1. The insurer failed to notify the insured of possible lack of coverage so it could take measures to defend itself;
2. The defense was conducted poorly before the insurer withdrew. For instance, the insurer failed to ad- equately answer Plaintiff’s interrogatories, resulting in sanctions detrimental to insured’s case;
3. Defense counsel withdrew just before trial; and
4. The insurer failed to notify the insured of the appar- ent conflict of interests that arose when the insurer assumed the defense with doubts as to coverage.
Id. at 1175-1176.
In sum, recent Texas Supreme Court decisions do not ap- pear to require an insurer to send a reservation of rights letter to avoid waiving or being estopped from using policy defenses as long as the insurer does not actually prejudice the insured by its actions. However, sending a reservation
of rights letter is still an effective method to avoid actual prejudice and protect against estoppel. Therefore, the best practice for an insurer to protect against estoppel is to send a proper reservation of rights letter.
Timeliness
The Texas Insurance Code requires an insurer to submit a reservation of rights to a policyholder within a reasonable time. Tex. Ins. Code Ann. § 541.060(a)(4)(B). The statute does not define “reasonable,” and Texas has not imple- mented any rules providing specific timelines for issuing a coverage position. Texas courts have demonstrated that each case will be resolved based upon its specific set of facts as to whether the issuance of a reservation of rights letter is timely.
As discussed above, the main consideration in determin-
ing timeliness is whether a delay in sending a reservation of rights letter actually prejudices the insured. Accordingly, it is best practice for the insurer to send a reservation of rights letter as soon as possible after receiving notice of the lawsuit. However, a handful of Texas state and federal cases decided before Ulico provide some guidance as to what Texas courts
2018 ReseRvation of Rights - special edition
58