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The District Court for the Southern District of New York last year granted partial summary judgment in Olin Corp. vs. Insurance Co. North America et al., reaffirming the rule that the insurers must state with specificity all grounds upon which they reserve their rights. Justice Thomas P. Griesa held that the insurer, certain Lloyd's of London underwriters, had waived its late-notice defense.
The insured, Olin Corp., had discovered in the early 1980s that one of its manufacturing sites was contaminating groundwater as a result of activities that occurred in the 1950s and 1960s. On Feb. 15, 1984, Olin notified the Lloyd's underwriters of potential environmental damage liability.
In the notification letter, Olin stated that tests had been conducted since 1980, the Alabama Division of Solid and Hazardous Waste was informed and involved in the tests, Olin had submitted a plan to Alabama to remediate in September 1983, and Alabama approved the plan in November 1983. Olin's notice letter also estimated remediation costs.
On March 26, 1984, the insurer responded with a reservation-of-rights letter, stating, "Underwriters reserve their right re coverage and punitive damages." Significantly, the letter did not assert any reservation of rights with respect to a late-notice defense. Nor did the Lloyd's underwriters follow up with a broader reservation-of-rights letter for possible late notice until November 1993, when it was made part of an affirmative defense in litigation.
The court took a rigid stance on the underwriters' deficient reservation-of-rights letter. The court reminded the underwriters that an insurer's assertion of certain defenses to coverage is deemed conclusive evidence of the insurer's intent to waive other unasserted grounds. The court held that the Lloyd's underwriters in their 1984 letter fatally omitted any mention of a defense based upon the failure of plaintiff to provide timely notice.
The court further found that Olin's notice letter contained enough facts to place the Lloyd's underwriters on "constructive notice" of a potential late-notice defense. For the court, the "fact that evidence later emerged that may have lent additional support for that defense does not affect the London Underwriters' waiver."
As this decision illustrates, courts have little sympathy for insurers that do not properly follow through and reserve their rights. It is a testament that when a bona fide issue exists, courts may attempt to maximize coverage based on whether a carrier has properly reserved its rights to disclaim coverage.
It is therefore important that insurers prepare reservation-of-rights letters that are specific enough to cover all possible defenses in anticipated coverage litigation. Generally, the letter must, among other things, be timely, be addressed to the right entity or person, fairly inform the insured of the insurer's coverage position by including potential defenses to coverage that the insurer has developed in its preliminary analysis, cite specific policy references that may be the grounds for disclaiming coverage and explain the need for further factual development if necessary.
Bennett Katz (above) is a partner at law firm Ohrenstein & Brown L.L.P. in New York.
Blaise Chow is an associate at the firm, also in New York.