Harleysville Lake States Ins. Co. v. Granite Ridge Builders, Inc., No. 1:06-CV-00397, 2008 WL 4935974 (N.D. Ind. Nov. 17, 2008) (Cosbey)
Applying Indiana law the court found that the insurer’s botched communications with its insured as part of a purported reservation of rights, which it never articulated on a timely basis in writing, estopped it from contesting coverage where
the insured was only provided counsel by the insurer even though a right to independent counsel might otherwise have arisen had the reservation of rights letter been promptly sent with respect to a potentially covered copyright infringement lawsuit. Insurers must avoid ambiguity in reservations of rights since this will be resolved against them.
An alleged reservation of rights letter sent to the wrong ZIP code or wrong state was not effective to protect the insurer’s rights in this respect. Moreover, that letter lacked sufficient detail to constitute an effective reservation of rights and was never supplemented. These gaps in communication cannot be remedied by oral communications, which purportedly arose. As respects email communications that were cursory, and did not advise the insured of the full range of coverage issues, the court reasoned:
[C]learly Berklich’s two e-mail communications fall short of adequately informing Granite Ridge of the potential policy defenses and Harleysville’s potential conflict of interest given its likely control over Clancy’s representation, so that Granite Ridge could “intelligently choose” between retaining its own counsel or accepting the tender of defense counsel from Harleysville. Olivares, 894 N.E.2d at 594 (citing Royal Ins. Co., 582 N.E.2d at 1239).
Id. at *8.
A bare notice of a reservation of rights is inadequate information to inform the insured of a potential policy defense so that it can “intelligently choose” between retaining its own counsel and accepting the tender of defense counsel from the insurer. Id. at *9.
Estoppel arose under applicable Indiana law because the insurer never properly communicated its reservation of rights.
“[A]n insured suffers prejudice as a matter of law where an insurer, without reserving its rights and giving the insured an opportunity to determine whether to accept the tender of defense, assumes a complete defense of the underlying suit against the insured and controls the litigation for an extended period of time after becoming aware of a coverage defense.”
Id. at *10.
The court found estoppel, which precluded Harleysville from asserting any coverage defenses against Granite Ridge. Id. at *12.
