Missouri Court Finds That 'Ineffective' Reservation Of Rights Letters May Support Bad Faith Recovery Even In The Absence Of Coverage

All too often, instead of sending reservation of rights letters that unambiguously inform the insured of the insurer's coverage position, insurers send longwinded, generic letters with a cursory discussion of the claim's facts, minimal (if any) coverage analysis, extensive policy quotations, and boilerplate reservation language. When presented with this type of ambiguous and vague insurer "reservation of rights," many courts conclude that the insurer fails to properly preserve some or all of its coverage defenses. See, e.g., Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240, 1242 (Ill. App. Ct. 1991) ("[b]ased on the equivocal nature of Royal's [reservation of rights] letter, we find that Royal did not reserve all its rights and defenses, particularly its professional liability defense"). See also Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (reservation of rights was invalid because it failed to "unambiguously inform [the insured] that [the insurer] intended to pursue a defense based on untimely notice of the claim"). Recently, a Missouri Court of Appeals found that an insurer's "ineffective" reservation of rights estopped the insurer from using a court's finding of no coverage to avoid a bad faith judgment.

In Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., the Missouri Court of Appeals affirmed the lower court's bad faith judgment against an insurer on the basis that, among other things, the insurer failed to provide a "proper and effective" reservation of rights letter. Case No. WD76880, 2014 Mo. App. LEXIS 975, at *13-15 (Mo. Ct. App. Sept. 2, 2014). In that case, the insured, Advantage, was sued in a construction defect case and tendered the claim to its insurer, Mid-Continent, which had sold it primary and umbrella CGL policies. Mid-Continent sent letters to Advantage asserting that it was reserving its rights and that it would "promptly" inform Advantage of its coverage analysis. Mid-Continent, however, failed to inform Advantage of its internal conclusion that there was no coverage and subsequently ignored Advantage's demands for coverage. Advantage was ultimately found liable in the underlying construction defect case. In the coverage litigation, the trial court confirmed that Advantage's claim was not covered but nonetheless returned a bad faith judgment against Mid-Continent. Mid-Continent appealed.

On appeal, Mid-Continent claimed that there was no basis for the bad faith judgment...