New Arizona Case - Insurance Reservation of Rights

By Ted Schmidt, Dev Sethi, Matt Schmidt, Burt Kinerk

New Arizona Case - Insurance Reservation of Rights
Penn-America Insurance Company v. Sanchez, 532 Ariz. Adv. Rep. 3 (Ct. App., Div. 1, June 17, 2008) (Justice Gemmill). STANDARD FOR DETERMING WHEN A RESERVATION OF RIGHTS WILL BE CONSIDERED TIMELY.

The insured, Inside Arizona Delivery Leasing, Inc. operates warehouses and serves as a transportation intermediary. One of its drivers on a return to trip to Phoenix was involved in a traffic accident resulting in the deaths of three people on June 30, 2000. A wrongful death action followed. Inside Arizona notified its insurance agent of the claim on December 18, 2001, and the agent tendered the defense to Penn-America, Inside Arizona's commercial liability carrier. The policy in question had an exclusion for bodily injury or property damage arising out of the "ownership, maintenance, use or entrustment to others" of an automobile.
Penn-America's adjuster determined in his investigation, that Inside Arizona had automobile insurance with National American Insurance Company of California. However based on what he saw as alleged independent acts of Inside Arizona, he retained Jones, Skelton & Hochuli to defend the insured without reserving rights. He did not think Inside Arizona could legally be responsible for the acts of the driver whom he thought was an independent contractor ten months later, after additional facts were revealed during discovery and contrary to the advice of counsel, Penn-America issued a reservation of rights letter to Inside Arizona based upon the allegation that the Federal ICC regulations created a vicarious relationship between Inside Arizona and the driver and Inside could be vicariously liable for negligent driving and Penn America excluded coverage for operation of an automobile.

A demand was made by the plaintiffs within policy limits which was not paid timely by Penn America. Ultimately the plaintiffs entered into a Morris agreement with the defendant and accepted a lesser amount in settlement with the automobile insurance company. The Morris agreement was for 4.3 million dollars. A declaratory judgment followed and summary judgment sought by both parties was denied. The trial court found that Penn-America's policy excluded automobile coverage and provided only excess coverage for losses arising out of the use of an automobile. Additional discovery followed, the case was reassigned to a different trial judge and Penn-America renewed its motion for summary judgment which was then granted. The essential argument of the plaintiffs was that although there was no coverage, Penn-America waived the right to assert the coverage defense by waiting ten months to serve a reservation of rights. The trial court found there was no "clear and satisfactory proof that Inside Arizona suffered actual and substantial damages" related to the delay, and that therefore there was no waiver.

The court of appeals noted that insureds are entitled to know "early in the litigation processing" whether or not the insured intends to honor its duty to defend or is asserting coverage defenses. Factors to consider in determining whether or not a reservation of rights has been timely, is whether not the delay caused prejudice to the insured and whether or not the delay was reasonable. In judging reasonableness, the court announced that "ordinary negligence principals" should be applied.

Conversely, unreasonable delay without prejudice to the insured will not cause loss of the insured's coverage defenses. Accordingly, the Court of Appeals found that there were genuine issues of material fact regarding reasonableness and whether or not the insured suffered prejudice due to the delay. Here the original complaint alleged that the driver was a legal agent or employee of Inside Arizona, and that Inside Arizona was vicariously liable for his acts. Despite this, no reservation of rights followed. It wasn't until ten months later that Penn-America received additional information indicating that the accident was in fact the driver's fault and that the facts were being developed by the plaintiffs that Inside Arizona was the lessee of the driver's truck, and therefore the driver was its statutory employer. Whether or not it was reasonable to wait the ten months and ultimately issue the reservation rights is a question of fact for the jury.

Additionally, a jury could reasonably conclude that Inside Arizona had relied on Penn-America's unconditional acceptance of coverage and failed to pursue other potentially applicable coverages. A jury could find that Inside Arizona failed to notify the automobile liability carrier of the case because of this reliance.

Finally the court held that the question of prejudice to the insured caused by a delayed reservation of rights must be measured after the issues of the reservation of rights, but prior to any Morris agreement. An insurer is not relieved of the consequences, if any, of its untimely reservation of rights by virtue of the insured's good fortune in obtaining financial protection as a result of a Morris agreement.

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