Failure to Issue a Reservation of Rights, and to Address an Insured’s Affirmative Defenses in a Coverage Dispute, May Preclude Denial of an Otherwise Excluded Claim

A recent Florida state court opinion emphasizes the importance of an insurer’s obligations in the event of a liability claim against an insured and a subsequent coverage dispute with that insured.

In Hurchalla v. Homeowners Choice Property & Casualty Insurance Company, the insured was sued for tortious interference with business contracts. Although her liability policy did not insure against intentional acts, the insurer initially provided the insured with a defense. However, the insurer neglected to inform the insured that the defense was being provided under a reservation of rights. One year later, the insurer initiated a declaratory judgment action against the insured, seeking a declaration that it owed no coverage for the tortious interference claim. In response, the insured asserted several affirmative defenses, including estoppel, waiver, and breach of the duty of good faith and fair dealing. The insurer moved for summary judgment on grounds the policy did not cover the claim, but its motion did not address the insured’s affirmative defenses. The trial court denied summary judgment initially due to disputed issues of fact regarding the affirmative defenses. After a verdict was rendered against the insured, the insurer renewed its summary judgment motion which the court then granted.

On appeal, the insured argued that summary judgment was improper because the insurer failed to negate her affirmative defenses. Specifically, the insured argued that the insurer’s failure to inform her that its defense was provided under a reservation of rights prejudiced her ability to defend the suit. The appellate court agreed, finding that the insurer’s failure to issue a reservation of rights may estop it from denying the claim – even where the policy did not provide coverage for the claim. The case was reversed and remanded back to the trial court for further proceedings.

Section 627.426, Florida Statutes (Florida’s Claim Administration Statute), states in relevant part as follows:

(2) A liability insurer shall not be permitted to deny coverage based on a particular coverage defense unless:

(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured

As the statute indicates, an insurer may be estopped from denying a liability claim unless it first issues a written reservation of rights to the insured within 30 days after it knew or should have known of any defense to coverage—defined under Florida law as a defense to coverage which otherwise exists (i.e. late notice, loss preceding policy inception, etc.). Failure to do so may preclude any disclaimer of coverage and may obligate the insurer to defend the suit to its conclusion, as well as to pay any settlement or judgment. The public policy behind the Claim Administration Statute is to strike fair balance between an insurer’s opportunity to investigate the claim and determine the existence of coverage and to avoid prejudice to the insured should it need to take steps toward self-protection in the event coverage does not exist.

From a procedural standpoint, Hurchalla is also instructive as to a moving party’s burden on summary judgment to disprove the nonmovant’s affirmative defenses. The mere exclusion of coverage for a particular claim, standing alone, may not extinguish this obligation.

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