Failure to Promptly Reserve Rights on Coverage = Loss of Ability to Disclaim

From the 2nd Circuit Court of Appeal comes a reminder that undertaking defense of a claim without any reservation of rights can bar an insurer from disclaiming coverage nine months later – even if the claim was not within the policy language from the beginning.

An injured subcontractor employee sued the owner and general contractor, who then sought defense and indemnity from the sub’s carrier. The sub’s carrier “undertook the defense and indemnification of the general contractor and property owner without asserting policy defense or reserving the privilege to do so.” Nine months elapsed before the sub’s carrier determined that it did not owe a duty to defend or an indemnity under the circumstances. Per the court, this was too long, and the owner and general contractor had been prejudiced by the delay.

The carrier ultimately argued that the owner was partially responsible for the worker’s injury, and that the general contractor’s insurance should participate per the “other insurance” clause. But the court noted the carrier’s initial statement, that it would “defend and indemnify” the owner and GC, and the nine-month passage of time before the carrier changed its position. This was prejudicial to both owner and GC, and the sub’s carrier would not be allowed to disclaim either coverage or indemnity obligations.

The case is Sparta Ins. Co. v. Tech. Ins. Co., 2018 U.S. App. LEXIS 27165 (2nd Cir., Sept. 28, 2018), and is a good reminder for carriers and insured parties alike.

About Stan Martin

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Stan Martin holds a law degree and an undergraduate degree in architecture. He has been involved with the construction industry for more than 45 years, working in construction prior to law school and beginning his construction law practice. Over the course of his career, he has served on boards and committees for organizations including the Associated General Contractors of Massachusetts, the Boston Society of Architects, and the Massachusetts Building Congress.

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