After two years of writing Coverage Opinions I know when a case resonates with readers. A case in the last issue of CO resonated. Really resonated. The case was Advantage Builders & Exteriors v. Mid-Continent Casualty Co., No. WD 76880 (Mo. Ct. App. Sept. 2, 2014). In a nutshell, Mid-Continent’s insured, Advantage Builders, was sued for construction defects. Mid-Continent undertook its defense, under a “reservation of rights,” filed a declaratory judgment action, and a Missouri trial court found that Mid-Continent owed no coverage. It sounds like a textbook case in claim handling. But a Missouri appeals court held that Mid-Continent was liable for $3 million in compensatory damages for bad faith failure to settle and $2 million in punitive damages. [Although those damage numbers need to be re-tried because of a problem with how they were split.]

How could this be? The answer is this: Even though Mid-Continent provided two reservation of rights letters to its insured, the appeals court held that the reservation of rights letters were not “effective.” It didn’t matter that the letters contained a lot of pages, setting out the facts at issue and voluminous policy language and that Mid-Continent stated that it was reserving its rights. Despite all those words, the court concluded that the letters did not adequately explain why Mid-Continent may not have owed coverage to its insured.

The last issue of CO came out on September 8. Little did I know, but that at the same time that I was putting the finishing touches on the issue, an Illinois appeals court was issuing an opinion that could also be described as an “ineffective reservation of rights case.” While EAN Services, LLC v. Brunson, No. 2-14-118 (Ill. Ct. App. September 8, 2014) is nowhere near the same as Advantage Builders & Exteriors when it comes to the impact that an ineffective reservation of rights played in the outcome, the court did address the issue. Given how significant the issue is, the response that Advantage Builders & Exteriors generated and the coincidental timing, it bears a discussion here.

EAN Services is a lengthy and very complex case involving coverage for damages to an automobile rented from Enterprise, the driver’s personal auto insurance and a collision damage waiver. Any case involving a rental car and a collision damage waiver is never going to be easy. The decision is eye-glazing and I couldn’t tell you a single thing about it.

But one issue in the case was whether Progressive Insurance defended its insured under a reservation of rights. The court held that it did not. The court’s decision was not because the letter that Progressive sent to its insured failed to adequately link the facts at issue to the policy language, as was the situation in Advantage Builders. Nonetheless, when discussing what is a “proper reservation of rights,” the EAS Services court sounded a lot like the court in Advantage Builders:

“Such a reservation of rights [a proper one] must, therefore, adequately inform the insured of the rights which the insurer intends to reserve, for it is only when the insured is adequately informed of the potential policy defense that he can intelligently choose between retaining his own counsel or accepting the tender of defense counsel from the insurer. Accordingly, bare notice of a reservation of rights is insufficient; the notice must make specific reference to the policy defense which ultimately may be asserted and to the potential conflict of interest. If the insurer has adequately informed the insured of its election to proceed under a reservation of rights, and the insured accepts the insurer’s tender of defense counsel, the insurer has not breached its duty of loyalty and is not estopped from asserting policy defenses.” (quoting Royal Insurance Co. v. Process Design Associates, Inc., 221 Ill.App.3d 966 (1991)).

EAS Services is another example of a court’s observation that, for a reservation of rights letter to be effective, it must meet an “adequately inform” standard. Just because a long reservation of rights letter is sent, setting forth oodles of policy language, may not make it effective.