In Wellons, Inc. v. Lexington Insurance Co. (May 16, 2014), the Eleventh Circuit rejected the insured’s argument that Lexington assumed and conducted its defense of the underlying lawsuit without adequately reserving its rights to disclaim coverage, affirming the district court’s finding that Lexington was not estopped from asserting its coverage defenses under the subject policies.
The Eleventh Circuit focused on interpreting the requirements for reservation of rights letters set forth by the Georgia Supreme Court in World Harvest Church, Inc. v. GuideOne Mutual Insurance Co., 695 S.E.2d 6 (Ga. 2010). The Eleventh Circuit concluded that reservation of rights letters need not specify “each and every potential basis for contesting coverage” so long as they fairly inform the insured that the insurer does not waive its coverage defenses. The Eleventh Circuit explained that the Georgia Supreme Court’s reference to informing the insured of the specific bases for the reservation of rights is merely a recommendation, not a requirement.
Applying this test of adequacy of Lexington’s reservation of rights, the court found with respect to Lexington’s written correspondence that they sufficiently identified the particular policy provisions that could preclude coverage and provided a detailed analysis as to why they may apply. It distinguished these letters from other letters from insurers that merely cut and paste large chunks of the policy with minimal explanation or analysis. The court also found persuasive that the insured did not object to the nonwaiver clause in the reservation of rights letter, i.e., “The letter is not to be construed as a waiver of any of the terms, conditions, or provisions of the … policy …,” which meant that the insured consented to Lexington’s broad reservation. Further, the court refused to examine the reservation of rights letters in a vacuum, taking them together with Lexington’s other oral communications about its reservation of rights, in order to find the entire reservation adequate.
In sum, while courts may be tempted to parse reservation of rights letters to find their imperfections, the Eleventh Circuit here used a balanced and reasonable approach to find that all of the insurer’s correspondence regarding its coverage position, taken together, sufficiently apprised the insured of the bases for the insurer’s coverage defenses. Insurers should encourage other courts to take a similar approach.