Cases addressing the effectiveness of reservation of rights letters are, by far, the ones I most enjoy addressing in Coverage Opinions.  I try to read every reported reservation of rights case handed down nationally.  I don’t know if I succeed, but I probably come close.  As the backbone to the handling of liability claims, the importance of reservation of rights decisions cannot be overstated for providing guidance to insurers. 

In Integris Ins. Co. v. Tohan, No. HHD CV21-6141816 (Super. Ct. Conn. Nov. 8, 2023), the court addressed whether an insurer, following a judicial determination that it no longer had a duty to defend, had drafted a reservation of rights letter sufficient to now enable it to withdraw its defense. 

The Connecticut court’s decision especially caught my attention as it addressed a reservation of rights drafting point that I discuss in my “50 Item Reservation of Rights Checklist” webinar that I have been doing for ages.  [If you are an insurer, interested in having me put on the ROR Checklist webinar, drop me a note.]

At issue in Tohan was coverage for an insured-fertility doctor, under a medical professional liability policy, sued for using his own sperm to impregnate two of his patients.  The insurer undertook the insurer’s defense under a reservation of rights. Even if had nothing to do with reservation of rights letters, the case has enough interesting coverage issues that I would have discussed it in CO.

The issues addressed by the court were not surprising – whether the doctor’s conduct qualified as a professional service (Marx v. Hartford was addressed), an exclusion for intentional conduct and whether the actions of the doctor fit within the policy’s sexual misconduct exclusion. 

In the end, the court concluded that the sexual misconduct exclusion applied, no defense was owed and the insurer sought to cease defending its insured.  However, the physician objected, arguing that the insurer had promised to provide a defense and the reservation of rights letter did not carve out any exceptions to such agreement.

Faced with this argument, the court, as you would expect, placed the insurer’s reservation of rights letter under a microscope to study its effectiveness at allowing the insurer to withdraw its defense.  The court concluded, for various reasons, that the insurer had adequately reserved its rights to do so.  In reaching this decision, the judge made a point that the insurer’s letter did “not explicitly list the right to withdraw its defense as one of the rights reserved.”  Nonetheless, the court was satisfied that the right had been sufficiently reserved, as the letter stated “our rights include but are not limited to.”  This, the court concluded, implied that the rights reserved in the letter were not exhaustive.     

I have long included, in the “50 Item Reservation of Rights Checklist” webinar, a recommendation that letters specifically make mention of the insurer’s right to withdraw its defense if, at any time, it is determined that a defense is no longer owed.
     
While the insurer here did not do so, it was not fatal as the court decided that it was an implied right based on the terms of the letter.  But the Tohan court’s decision certainly supports a reservation of rights letter drafting tip: specifically include the right to withdraw a defense.

Interestingly, this same issue arose earlier this year in U.S. Underwriters Ins. Co. v. Kenfa Madison, LLC, No. 20-2761 (E.D.N.Y. Mar. 30, 2023), where an insurer sought to withdraw its defense.  The insured took issue, noting that, nowhere in the reservation of rights letter did the insurer state that it could withdraw its defense.   However, based on the totality of the language in the letter, the court concluded that the insurer had reserved such right.

As in Tohan, the omission in Kenfa, of express defense withdraw language in the reservation of rights letter, was not a mortal wound for the insurer.  Nonetheless, both decisions provide sound advice to insurers to include such language in their reservation of rights letters.  While it may prove acceptable to have relied on a general catch-all reservation of rights – following perhaps avoidable litigation -- it takes just seconds, when drafting the letter, to include a specific reservation of the right to withdraw a defense.