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(Article from Insurance Law Alert, September 2015)

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A Wyoming federal district court ruled that an insurer waived the right to deny coverage based on a punitive damages exclusion by failing to issue a timely reservation of rights.  Interstate Fire & Cas. Co. v. Apartment Mgmt. Consultants LLC, 2015 WL 5165858 (D. Wyo. Sept. 1, 2015).

A tenant sued a management company for injuries arising out of carbon monoxide exposure.  The suit sought compensatory and punitive damages.  The insurer agreed to defend without reserving its right to deny coverage.  More than a year later, the insurer issued a reservation of rights based on the policy’s punitive damages exclusion.  At the conclusion of the underlying litigation, a jury awarded the tenant more than $22 million in punitive damages.  The management company then argued that the insurer was estopped from denying coverage for the punitive damages based on its failure to timely issue a reservation of rights.  The court agreed and granted the management company’s summary judgment motion.

Under Wyoming’s “default rule,” the doctrines of estoppel and waiver cannot be used to expand coverage beyond that provided in the policy.  However, an exception exists when an insurer assumes full control of the underlying defense with knowledge of a ground of non-coverage, without disclaiming liability or giving notice of a reservation of its right to deny coverage.  Under such circumstances, the unconditional defense of the underlying action constitutes a waiver of the right to assert policy defenses.  The court further noted that the policyholder need not establish prejudice from the late reservation because prejudice is assumed by the insurer’s assumption of the defense.  Here, because the insurer was on notice from the outset as to the punitive damage claims, its failure to disclaim coverage on that basis prior to assuming full control of the defense constituted waiver of its right to deny coverage based on the punitive damages exclusion.