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Missouri Appellate Court Rules CGL Insurer's Reservation of Rights Letter Unclear, Untimely and Ineffective

Insurance Coverage Alert | September 10, 2014
By: Sean P. Mahoney

Last week, the Missouri Court of Appeals concluded that a commercial liability insurer was estopped from denying coverage for an underlying multi-million dollar construction defect suit against its insured because its two earlier Reservation of Rights letters – as well as a third letter later explaining its coverage position – were ineffective to preserve the insurer’s right to deny coverage.  Advantage Buildings & Exteriors, Inc. v. Mid-Continent Cas. Co., No. WD 76880, 2014 WL 4290814 (Mo. App. W.D. Sept. 2, 2014). 

The Missouri appellate court held that the CGL insurer’s purported Reservation of Rights letters were neither timely nor clear because they failed to  “clearly and unambiguously explain” how certain provisions of the implicated CGL insurance policy created coverage issues with respect to the claims asserted against the insured and, in fact, did not actually explain anything or identify what coverage issues might exist.  Advantage Buildings, 2014 WL 4290814 at *5.  Moreover, the Court observed that the insurer did not actually inform the insured that most of the claims against it were not covered until nearly two years later, a few days before trial in the underlying case.  Id.  Accordingly, the Court upheld the submission of a bad faith claim to the jury, even though the court had previously found that the CGL policy at issue did not cover the claims in the underlying lawsuit against the insured.

In Advantage Buildings, Mid-Continent Casualty Company insured Advantage Buildings and Exteriors, Inc. under a commercial general liability (CGL) insurance policy with limits of $1 million each occurrence and under a commercial umbrella policy with limits of $2 million.  After a third party sued Advantage Buildings in July 2008 for property damage arising out of construction defects in a building for which Advantage Buildings had supplied exterior wall panels, Advantage tendered the lawsuit to Mid-Continent.  Mid-Continent sent its first purported Reservation of Rights letter to Advantage on August 12, 2008, in which Mid-Continent stated it “would investigate the claim and perform a coverage analysis” but “was reserving its right to assert that there may be no duty to defend or indemnify” against the claims asserted.  Mid-Continent also said it would “promptly advise [Advantage Buildings] of the outcome of [its] coverage analysis.”  Id. At *1.

On September 2, 2008, Mid-Continent sent out a second purported Reservation of Rights letter, stating that it would conditionally defend Advantage Buildings while reserving its rights, that it had hired an attorney to defend Advantage Buildings, and that “if other facts come to our attention, [it] would promptly inform [Advantage] of them.”  Advantage Buildings, supra 2014 WL 4290814 at *1.

By July 2010 – nearly two years later – Mid-Continent had failed to settle the claims against Advantage, even though the attorney Mid-Continent had retained to defend Advantage Buildings had recommended settlement in lieu of trial and there had been several settlement opportunities prior to trial.  A few days before trial, Mid-Continent sent a letter informing Advantage Buildings for the first time that most of the $3 million claim to be tried against it was not covered, and then commenced a parallel declaratory judgment action against Advantage Buildings.  Advantage Buildings promptly reached an agreement with the third party plaintiff to pay it only $500 and to give it the proceeds of any award Advantage Buildings received when it sued Mid-Continent, among other things.  After a bench trial, the court in the underlying case awarded the third party plaintiff in excess of $4.6 million in damages.

Advantage Buildings then asserted a counterclaim in Mid-Continent’s parallel declaratory judgment action accusing Mid-Continent of bad faith for failing to settle the underlying action within policy limits and asked for $4.6 million in compensatory damages as well as punitive damages.  Mid-Continent obtained a summary judgment ruling in its favor that there was no coverage for the $4.6 million judgment, but the trial court permitted Advantage Building’s bad faith claim to go the jury. 

The jury ultimately awarded Advantage Buildings $3 million in damages for its bad faith claim and a further $2 million in punitive damages against Mid-Continent.  Mid-Continent moved in the trial court for judgment notwithstanding the verdict, which the trial court denied.  Mid-Continent appealed, arguing inter alia, that the trial court had erred in denying its post-trial motion because Mid-Continent had properly agreed to defend Advantage Buildings under a reservation of rights while it investigated the lawsuit and because the trial court had already determined that there was no coverage for the lawsuit.

The Court of Appeals rejected Mid-Continent’s argument because Mid-Continent had failed to effect a proper reservation of its rights and was estopped from denying coverage for the claims against Advantage Buildings, regardless of the prior summary judgment ruling that the policy did not explicitly cover the claims asserted in the lawsuit.

In particular, the Court reiterated that “[u]pon proper notice to the insured… an insurer [may] defend its insured but reserve the right to later disclaim [sic] coverage,” and that “an insurer owes the insured a duty to assert a proper reservation of rights that is timely and clear and fully informs the insured of its position.”  Advantage Buildings, supra, 2014 WL 4290814 at *4.  The Court further explained that “a reservation of rights letter should be ‘specific and unambiguous,’ should ‘fully explain the insurer’s position… with respect to the coverage issue[s],’ and ‘must avoid any confusion.’”  Id.

In this case, the Court explained, both of Mid-Continents 2008 attempts to reserve its rights “only vaguely informed the insured that Mid-Continent would investigate and perform a coverage analysis and that it was reserving its right to assert that there may be no duty to defend or indemnify against the claims,” and “[n]either letter clearly and unambiguously explained how [quoted policy] provisions were relevant to Advantage’s position or how they potentially created coverage issues.”  Id. At *5.  Nor did Mid-Continent “promptly” advise Advantage Buildings of its coverage position – it waited nearly two years, and until just before trial, before alerting Advantage Buildings to this circumstance, even though the evidence showed that by late 2009, it was aware that Advantage Buildings was facing the prospect of a judgment exceeding policy limits.  Id. 

“Defending an action with knowledge of non-coverage under a policy of liability insurance without a proper and effective reservation of rights in place will preclude the insurer from later denying liability due to non-coverage,” the Court stated.  Id. At *5.  The Court concluded that Mid-Continent’s two letters were not timely, not clear, and did not fully and unambiguously inform the insured of the insurance company’s position as to coverage.  Id.  Therefore, the Court concluded that the trial court had properly submitted Advantage Building’s bad faith claim to a jury because Mid-Continent’s failed reservation of rights letters estopped it from denying coverage for the underlying lawsuit.  Id.

Advantage Buildings is a good example of why a “boilerplate,” “pro forma” reservation of rights letter, which merely reiterates the allegations against the insured in the underlying action and quotes policy provisions – but never explains how they interact to raise a coverage issue – runs the risk that a court will deem it unenforceable later. Accordingly, when crafting Reservation of Rights letters, CGL insurers should take great care in alerting the insured to potential coverage issues as soon as possible after the coverage issue becomes apparent and clearly and unambiguously explain why specific allegations in the underlying action against the insured, when compared to specific policy provisions, create coverage issues of which the insured needs to be aware.

For additional information on these matters, please contact Sean Mahoney ( | 215.864.6342).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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