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Liability Insurers receive $25.5 million reminder about the importance of Reservation of Rights letters

Liability Insurers receive $25.5 million reminder about the importance of Reservation of Rights letters.

“This insurance,” the policy clearly stated, “does not apply to . . . punitive damages. . . .” And yet the carriers will be paying the entire judgment entered in Lompe v. Sunridge Partners, LLC, 54 F. Supp. 3d 1252, 1271 (D. Wyo. 2014), including the punitive portion: $25.5 million. They will be paying because they undertook to defend the insured unconditionally, and didn’t mention the punitive damages exclusion until nearly nineteen months later – just eleven calendar days before trial.   The case is Interstate Fire and Casualty v. Apartment Management Consultants, LLC, Case 2:13-cv-00278-ABJ (D. Wyo.) (Document 131 Filed 09/01/15).

What about the principle that “the doctrines of estoppel and waiver cannot be employed to expand policy coverage”? The Apartment Management Court, relying on Cornhusker Cas. Co. v. Skaj, 786 F.3d 842, 852 (10th Cir. 2015) (Wyoming law) (“rules applied by courts are frequently subject to exceptions, and we conclude that the same holds true here”), brushed this principle aside: “Giving effect” to the eleventh-hour ROR letter, it opined, “would be, and is, manifestly unfair and egregious,” because the insureds “were lulled into a false sense of security when [the insurance company] defended without a reservation of rights. . . .”

The Court so found notwithstanding that (a) long before the ROR letter, counsel for the insureds declared that his clients — the insureds– “are the ones at risk for a punitive damage and an excess judgment in this case”; and (b) the insureds made no serious attempt to prove prejudice or detrimental reliance.

One suspects that the carriers are feeling a bit like Adlai Stevenson after being crushed in the 1952 Presidential election: “It hurts too much to laugh, but I’m too old to cry.”

Robert ("Bob") M. Frey

certificate of insurance