Missouri Insurance Lawyer Blog

The 8th Circuit Court of Appeals has decided that a dentist who invoked his fifth amendment rights not to testify concerning two patient deaths violated the cooperation clause of his malpractice insurance policy. As a result Medical Protective was not liable under the insurance contract. The Medical Protective Company v. Bubenik, U.S. Court of Appeals 8th Cir., appealed from U.S. District Court, E.D. Missouri. Insured must be careful when asserting rights that may be breaches of the insurance contract. Sometimes invoking the 5th may be helpful to the defense and would not violate the cooperation clause. Insureds need to balance the benefit of invoking the right and whether or not it will cause a breach of the contract.

The insurance company will have a contractual right to control the defense, but no right to prevent the insured from retaining their own counsel. Therefore, it is the wise policy holder who receives a reservation of rights letter, that immediately hires personal counsel to handle not only the issues emanating from the reservation of rights letter, but to keep tabs on and participate in the defense being put on by the insurance company.

The reservation of rights letter also implicates the relationship between the insurer and its' policyholder with respect to the cooperation clause. Insurance companies expect that their insured will abide by the cooperation clause in the policy which mandates that policyholders provide information and comply with reasonable requests of the insurance company in order to evaluate the claim and provide a defense. Once a policyholder receives a reservation of rights letter, the policy holder may not be sure how to proceed or what is required under the cooperation clause. Fortunately, well established contract principles instruct that the policyholder's obligations under the cooperation clause are conditioned upon the insurance company's performance of its own contractual obligations. Therefore, where an insurance company interest diverge from the interest of a policyholder, the policy holder's duty to cooperate logically only runs to the defense of the claim which could terminate liability for both the insured and the insurance company. Such duty to cooperate should not run to the insurance company and the issues raised concerning insurance coverage.

The conflict can be heightened further if the insurance company completes its investigation and decides to rely on its reservation of rights and file litigation against its insured to declare that there is no insurance coverage. Fortunately, Missouri policy holders have the right to reject the insurance company's reservation of rights. This is a valuable right, because it forces the insurance company to choose whether they wish to fight the battle with their own insured, or if they will honor their contract, defend the case and fight liability and damages against the person suing their insured. This right serves policy holders by preventing insurance companies from putting off performance they have contractually obligated to perform, and subjecting the insured to a conflict of interest in which the insured is obligated to cooperate with someone who is looking to dump them and avoid their contractual responsibilities.

It is clearly important that an insurance policy holder understand the full ramifications of denying reservation of rights. If a policy holder denies a reservation of rights, the policy holder has the obligation to simply reject and proceed on their own or they could offer the insurance company the opportunity to continue its performance if the insurance company will withdraw the conditions leading to the reservation. Although individual policy holder situations vary, the choice to reject the reservation of rights is often the soundest choice for policy holders faced with a reservation. This is particularly true if the policy holder or their counsel has acted to appropriately limit claims brought by the plaintiff through the use of an alternative settlement arrangement. If, of course, settlement is not a viable alternative with the plaintiff, then the rejection of the reservation of rights would leave the policy holder with the obligation to defend itself as best it could and then sue for recovery of its costs and any indemnify from its insurer. However, because of the perceived conflict of interest that a policy holder may feel, an adequately financed policy holder may still choose this opinion as the best choice rather than by defended by an insurance company who is ultimately seeking to break its obligations.

Where settlement with the plaintiff is possible, such may be achieved by using a covenant not to sue or by complying with the provisions of Missouri Revised Statute Section 537.065 which allow the contracting parties to limit the collection of their suit to specified assets. Depending upon the nature of the allegations in the petition, the strength of the liability, and the extent and nature of damages suffered by the suing party, such restriction assets may include the policy or the policy in other specified assets. Other specified assets should be included if there is a potential for a bad faith claim for failure to settle a bad faith claim against the insurance company arising out of their handling of the claim or litigation. Nonetheless, a straight rejection or a rejection with an offer to allow continuing performance to an insurance company may provide just the remedy a policy holder needs to a reservation of rights letter.

Where the best interests of a policy holder are served by outright rejection of the reservations they should do so unequivocally and then proceed to defend the suit themselves or enter an appropriate settlement arrangement with the plaintiff to fully protect their own interests.

Where the policyholder is willing to accept the performance of the insurer if the insurer withdraws the reservation of rights, then the policyholder should make the insurer aware of this fact and give the insurance company a deadline within which to meet the demand. Failure of the insurer to meet the demand will result in a rejection of the reservation. It is also advisable that a policyholder who indicates a future willingness to accept performance should inform the company that if such performance is not undertaken by the insurance company within the time period, that a settlement or other arrangement with the claimant will be forthcoming and it's likely that the insurance company will be sued for breach of coverage, garnishment or bad faith as may be applicable to the particular fact situation involved. Such direct threats often motivate an insurance company to rethink their position, particularly if the liability is defendable, or their coverage position is weak.

Despite the distress associated with receiving a reservation of rights letter, policy holders can come out ahead when they receive reservation of rights letters. The key is taking control of the situation by hiring independent counsel, in appropriate situations rejecting the reservation of rights, taking control of the defense, preventing and where appropriate entering settlement agreements that protect the policy holders interests and shifting the conflict from a policy holder facing lawsuits from both the injured party, and its insurance company to absolving itself of both lawsuits and allowing the injured party and the insurance company to become the combatants. This process allows the policy holder who purchased the insurance coverage to obtain their ultimate desired goal when they purchased the insurance, to protect their assets and transfer risks, while at the same time allowing both the aggrieved party and the insurer to fight the battle of coverage at a later date.

Chris Faiella is a personal injury in Missouri with the law firm of Tatlow, Gump & Faiella, www.tgflaw.com

This is a two part blog covering some things Missouri policyholders involved in a personal injury claim and who receive reservation of rights letters from their liability insurance company should understand. There is some good news, a reservation of rights letter means the insurance company is offering to pay your defense costs, but the bad news is that the insurance company is reserving its rights to deny coverage and sue you the policyholder or insured to obtain back the defense costs expended. Insurance companies often send reservation of rights letters to their policyholders because their broad duty to defend is implicated by the filing of a petition against their insured. Because the duty to defend is broader than the duty to indemnify there is a possibility the insurance company may be contractually obligated to pay for the defense even if it is not eventually required to pay for any liability alleged. In addition by asserting a reservation of rights letter, a company can undertake a defense and investigation of the claim and coverage at the same time and preserve its rights to disaffirm coverage without precluding itself from asserting defenses to the coverage at a later date, and managing their exposure to bad faith claims. Generally speaking to avoid waiving defenses, the letter will identify every possible coverage defense. Depending upon the individual facts, the doctrine of estoppel and/or waiver may prevent an insurance company from later asserting a defense that it failed to include in its reservation of rights letter. Unfortunately, reservation of rights letters are favorable for insurance companies, are fraught with danger for the policyholder. The mere issuance of reservation of rights letter indicates that there is a conflict of interest between the policyholder and the insurance company. This conflict of interest alone would advise that a policyholder should hire an independent attorney to represent them and not rely on the attorney appointed by the insurance company to provide a defense. Attorneys hired by insurance companies are often financially dependent upon the insurance company and that they receive much of their work from the company. While appointed defense counsel may diligently represent your interest in the alleged lawsuit, it is difficult to believe that that counsel can ignore their own financial interest, and give independent advice on your dispute with the insurance company. Most defense insurance counsel will defend the allegations in the lawsuit, but advise that you should hire personal counsel on the coverage issues. Unfortunately, there is often interplay between the allegations of liability and the triggers for coverage which are in dispute between the policyholder and the insurance company which lead to conflict of interest issues with insurance defense counsel. Bottom line, you should hire an independant lawyer to protect yourself. In part II, we will discuss the right of control, the duty to cooperate and the right to reject the reservation of rights. Chris Faiella is a personal injury lawyer in Missouri with the law firm of Tatlow, Gump & Faiella.