In 2008, three men were passengers on a chartered fishing boat that collided with a utility boat. The fishing boat’s insurance company was St. Paul Fire and the utility boat’s insurance company was Steadfast. Harvest Oil owned the utility boat. Normally, the insurance companies would fight about who was at fault and may eventually make it to court. However, this case was more complicated because the men in the fishing boat did not own the boat, and the owner of the utility boat filed for bankruptcy shortly after the passengers drug them into the lawsuit as a third party. The issue of waiver of a coverage defense while the insured is in a bankruptcy proceeding is one that has not been considered in Louisiana previously.
Harvest received a letter from their insurance company shortly the parties filed suit. The letter explained that the insurance company was “reserving their rights,” but it was signed by Zurich American Insurance Company, Harvest’s automotive insurance provider. Zurich North America owned both Steadfast and Zurich American Insurance Company, and Harvest had insurance policies with both of these carriers. Despite the fact that Zurich American Insurance Company signed the letter, the Steadfast policy was mentioned by name and policy number in the letter. In fact, the letter quoted a portion of the Steadfast policy that excluded watercrafts such as the one that was involved in the accident in 2008. The letter explained that the insurance company would be investigating the case, but reserved all of its rights in action. Essentially, when an insurance company reserves its rights, it means that wants the option of asserting a defense that may not be in the insured interests.
When the passengers sued the insurance company their initial answer did not mention that Steadfast had a watercraft exclusion. When the passengers asked to review the relevant insurance policies, Steadfast gave them copies of their standard primary and umbrella policies. Three separate insurance claims agents thought that Harvest’s claim would be covered because they overlooked the watercraft exclusion. Finally, in 2011, an insurance adjustor finally noticed the exclusion. As a result, Steadfast changed their defenses and asserted that they would not cover Harvest’s claim because of the watercraft exclusion. Steadfast also, understandably, changed their attorneys shortly after this discovery.
The passengers argued that Steadfast could not assert this defense so late in the litigation. They argued that Steadfast waived their coverage defense by proceeding with the lawsuit, and even if they did not waive the defense, they did not assert that right to begin with. The court in this case explained that the insurance company needed to have reserved their right to use this defense at the beginning of the litigation, so they analyzed the initial letter that Harvest received at the beginning of the lawsuit.
The passengers argued that Steadfast did not reserve its rights through the letter because the letter was very confusing. It was signed by another insurance company and confused the insured. The insured thought that Zurich, their automotive insurance company, was asserting its rights; not that Steadfast was asserting its rights. In addition, the letter only referred to investigation and did not mention anything relating to a defense.
Generally, if the insurance company assumes a defense of the insured without first reserving its rights, that constitutes a waiver. However, the court found that Steadfast did reserve its rights in the letter sent to Harvest. The court points out that the letter specifically referred to the policy with Steadfast and quotes language from it. The fact that the insured did not read the letter carefully, the court concluded, should not inhibit Steadfast from reserving its rights. Since Louisiana does not require technical language to reserve its rights to a defense, the insurance company was not required to describe which rights in particular they were reserving.
However, the insurance company can still waive their rights even where they have reserved their rights. The court pointed out that under Louisiana law, an insurance company can waive any provision of an insurance contract, even if that waiver has the effect of extending coverage. Waiver requires misleading conduct on the part of the insurer and a prejudice to the insured.
Louisiana law requires that the insurance company induce their insured to belief that they were waiving their rights. In this case, although Steadfast mistakenly thought that Harvest was covered, they did not communicate that mistake to Harvest. Steadfast did not act with the intention of misleading their insured; they acted because of a mistake regarding coverage, so Steadfast did not deliberately mislead Harvest.
Waiver also requires that the insured be harmed because of the misleading conduct. Due to the bankruptcy proceedings, Harvest was not harmed by the delay and confusion because they were not actually a party in the case involving the passengers. The court explained that they could not have been harmed in a case where they were not a party.
As a result, the court concluded that Steadfast asserted and reserved their rights properly and did not waive their coverage defense. But, how does that affect the bankruptcy proceeding? Look for part two to find out.
In the meantime, if you have questions about personal injuries and insurance law, contact The Berniard Law Firm and we will be happy to address your legal questions.