Page 63 - Reservation of Rights - Special Edition

consider to be timely.
In Paradigm Insurance Co. v. Texas Richmond Corp., there was no genuine issue of material fact as to prejudice
where the insurer sent a reservation of rights letter fifteen days after an answer was filed on the insured›s behalf. 942 S.W.2d 645, 652 (Tex. App.—Houston [14th Dist. 1997, writ denied).
In Stonewall Ins. Co. v. Modern Exploration, Inc., the primary insurer notified Stonewall that the insured had made a claim against the primary insurer arising out of the Modern Exploration claim by letter dated July 20, 1982. 757 S.W.2d 432, 436 (Tex. App.—Dallas 1988, no writ). Stonewall sent a reservation of rights letter to the insured four months after receiving notice. The court held Stonewall’s actions were adequate to prevent Stonewall from waiving or be estopped from asserting its policy defenses.
In Columbia Casualty Co. v. Georgia & Florida RailNet, Inc., the insurer’s reservation of rights letter to the insured was sufficient to reserve the insurer’s right to affirm or deny coverage of the indemnity claim, but not its duty to defend, given that the court proceedings in the underlying case against the railroad by the railroad employee had not yet started at the time the letter was sent. 542 F.3d 106, 113 (5th Cir. 2008) (applying Texas law).
In Pennsylvania National Mutual Casualty Insurance Co. v. Kitty Hawk Airways, Inc., the insurer assumed and continued the defense of the insured for one year and two months before obtaining an effective reservation of rights letter. 964 F.2d 478, 480-481 (5th Cir. 1992) (applying Texas law). The insurer was still able to rely on its reservation of rights letter because the insured could not demonstrate an affirmative showing of prejudice. Id. at 483.
In Ideal Mut. Ins. Co. v. Myers, the insurer was allowed to
rely on its reservation of rights letter, delivered two years after the accident took place, because the insureds failed to demonstrate that a delay between the insurer’s discovery of a possible basis for non-coverage and its delivery of the letter prejudiced the insured. 789 F.2d 1196, 1201 (5th Cir. 1986) (applying Texas law).
Content
Any defects in the contents of the reservation of rights let- ter will not result in estoppel without a showing of actual prejudice to the insured. That notwithstanding, the provi- sions of a reservation of rights letter will be construed strictly against the insurer and will not be extended by implication beyond their exact terms. W. Cas. & Sur. Co. v. Newell Mfg. Co., 566 S.W.2d 74, 76 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.). The reservation of rights letter must be suf- ficient to inform the insured of the insurer’s position. Am. Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169, 174 (Tex. App.— El Paso 1996, writ denied). Accordingly, the letter should
detail specific coverage problems that the insured might face, inform the insured that a conflict of interest exists, and inform the insured that they have the right to seek outside counsel. The letter should set out the policy provisions or exclusions that the insurer is relying on to disclaim cover- age. See, e.g., Nguyen v. State Farm Lloyds, Inc., 947 S.W.2d 320, 322 (Tex. App.—Beaumont 1997, writ denied). The let- ter should also identify the name of the insurer reserving its rights under the policy at issue. Canal Ins. Co. v. Flores, 524 F. Supp. 2d 828, 835 (W.D. Tex. 2007) (applying Texas law).
In Ideal Mutual Insurance Co., the Fifth Circuit, applying Texas law, found that the insurer’s reservation of rights letter was adequate and noted the following qualities:
1. The letter specifically identified the policy in ques- tion;
2. The letter specifically informed the insured that an attorney had been retained to defend the case;
3. The letter specifically apprised the insured of the initial results of the insurer’s investigation;
4. 4. The letter specifically identified the insurer’s reser- vation of rights under the policy, i.e., policy exclu- sions and exceptions relied upon;
5. The letter specifically identified the insurer’s reserva- tion of its right to withdraw from the defense of the Plaintiff’s cause of action;
6. The letter specifically advised the insured that they were at liberty to secure counsel of their own choice, at the insured’s expense, to represent the insured in regard to the amount sued which is in excess of the insured’s insurance coverage;
7. The letter specifically advised the insured that as to such excess there could be a conflict of interest between the insurer and the insured; and
8. The letter specifically advised that if the negligence of the insurer causes a judgment to be rendered against the insured in excess of the insurance limits, it could be that the insurer might be responsible for the excess judgment.
Ideal Mut. Ins. Co., 789 F. 2d at 1201.
Lastly, the reservation of rights letter may provide the insurer with the right to seek reimbursement for defense costs it pays if it later establishes that those costs were incurred in defending non-covered claims. If the insurer intends to seek reimbursement, it should give notice in the reservation of rights letter that it intends to seek reimbursement from the insured for defense costs of uncovered claims to avoid be- ing precluded from later pursuing such a claim against the insured. See Alliance Gen. Ins. Co. v. Club Hospitality, Inc.,
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