A carrier that fails to reserve its rights to deny coverage likely properly waives all defenses to coverage. Moreover, if the carrier has been defending its insured without an effective reservation of rights and then revokes the defense based upon a coverage denial, a presumption of prejudice arises in favor of the insured. The necessary steps to reserve rights and the timing of such reservation were at issue in The Cincinnati Insurance Co. v. All Plumbing, Inc. Service, Parts, Installation, et al., U.S.D.C for the District of Columbia, Civil Action No. 12-851 (Memorandum Opinion dated October 18, 2013). In this recent case, The Cincinnati Insurance Co. (“Cincinnati”) filed a declaratory judgment action (the “Dec Action”) seeking a ruling that Cincinnati need not defend its insureds, All Plumbing, Inc. (“All Plumbing”) and Mr. Kabir Shafik (“Shafik”), and need not indemnify FDS Restaurant, Inc. (“FDS”) for damages alleged in a lawsuit filed by FDS (the “FDS Action”).
Prior to institution of the FDS Action, in September of 2010, Love the Beer, Inc. (“Love”) filed a putative class action against All Plumbing and Shafik (the “Love Action”) alleging that All Plumbing and Shafik sent unsolicited faxes in violation of the Telephone Consumer Protection Act (“TCPA”) 47 U.S.C. § 227. FDS was a member of the putative class in the Love Action which was served on All Plumbing and Shafik in November of 2010. Cincinnati claimed All Plumbing and Shafik never notified Cincinnati of the Love Action, but, rather, counsel for Love contacted Cincinnati in November of 2011 (a year after service) and asked Cincinnati to defend its insureds. One month later, Cincinnati informed All Plumbing and Shafik it would defend them in the Love Action but that such defense would be pursuant to a full and complete reservation of rights.
Thereafter, FDS filed a separate putative class action against All Plumbing and Shafik alleging similar violations of the TCPA. Cincinnati received a copy of the complaint from FDS’s counsel, the same counsel that represented FDS in the Love Action. Cincinnati retained counsel for All Plumbing and Shafik to defend against the FDS Action.
Subsequently, Love moved for leave to file an amended complaint in the Love Action eliminating the class allegations and limiting all allegations to only those of the named plaintiff, Love. The motion was granted, and the Love Action never was certified as a class action.
In February of 2012, Cincinnati informed FDS in writing that coverage for the FDS Action may be barred for various reasons including All Plumbing and Shafik’s failure to provide prompt notice of the claim. Cincinnati did not, however, communicate to All Plumbing or Shafik that the defense of the FDS Action was being provided pursuant to a reservation of rights.
In the Dec Action, FDS argued Cincinnati was estopped from denying coverage because it assumed the defense of the FDS Action without properly reserving its rights. Cincinnati argued it reserved its rights in the FDS Action when it provided All Plumbing and Shafik a full and complete reservation of rights in the Love Action; i.e. because FDS was a member of the putative class identified in the Love Action, and the FDS Action involved the same causes of action under the TCPA as those alleged in the Love Action, the December 2011 reservation of rights in the Love Action reserved Cincinnati’s rights as to claims asserted on behalf of every member of the class, including those in the separate FDS Action. Cincinnati also argued that the filing of the Dec Action adequately informed All Plumbing and Shafik of the coverage issues. Finally, Cincinnati argued that because the FDS Action was “still in its infancy” at the time Cincinnati filed the Dec Action, All Plumbing and Shafik sustained no prejudice and, accordingly, Cincinnati could not be estopped from asserting coverage defenses and/or a denial of coverage.
The Court disagreed. Despite the many similarities between the Love and FDS Actions, the Court held they were two distinct lawsuits, and because the Love Action never was certified as a class action, FDS never was a party to the Love Action. Therefore, Cincinnati could not have communicated a reservation of rights in the FDS Action by means of the December 2011 letter pertaining to the Love Action. The Court also noted that the letter sent to FDS’s counsel in the FDS Action stating there likely were notice issues cannot count as a reservation of rights effective against its insureds because the letter was not sent to the insureds.
While the presumption of prejudice which attaches when an insurer assumes the defense of an action without reserving rights can be rebutted, Cincinnati was unable to rebut such presumption because the Court found that Cincinnati took important actions in defense of All Plumbing and Shafik in the five-month period between assuming the defense in the FDS Action and disclaiming liability. These actions included selecting defense counsel, filing an answer, successfully removing the FDS Action to federal court and opposing FDS’s motion for class certification. All Plumbing and Shafik’s inability to engage their own defense counsel for such strategic decisions constituted prejudice, thereby preventing Cincinnati from now denying coverage. Some jurisdictions specifically have found that the filing of a declaratory judgment action preserves an insurer’s defenses to coverage even if the insurer did not send a proper reservation of rights. The Court noted, however, that in each of those cases the underlying lawsuit against the insured was truly in its initial stages.
The lesson of Cincinnati Insurance Co. v. All Plumbing is that carriers should reserve rights early and often; i.e. issue separate reservations for separate lawsuits even if the actions are related or similar; send the reservations before taking any significant defensive actions; and never assume an insured will receive communications sent to others, even if they are affiliated.