In March, a federal court in New York held that an insurer thatfailed to assert a late-notice defense in its reservation of rightsletter waived late notice as a ground for denying coverage.

As illustrated in the decision of the U.S. District Court forthe Southern District in Olin Corp. vs. Insurance Co. of NorthAmerica (March 2, 2006), insurers must pay careful attention todrafting letters involving reservations of rights or risk theconsequences of waiving obvious coverage defenses.

Plaintiff Olin Corp., owner of a chemical manufacturing facilityin Alabama, was insured for environmental remediation and cleanupliability under a policy issued by the defendants, certainunderwriters at Lloyd's of London and certain London MarketInsurance Companies (collectively "the London Underwriters").

The policy required Olin to provide notice of any covered"occurrences" and "accidents" to the London Underwriters as soon aspracticable once Olin received information from which it couldreasonably conclude that such an event had occurred.

In February 1984, Olin sent a letter notifying the LondonUnderwriters of certain cleanup liabilities incurred at itsfacility. Specifically, the letter explained the followingdevelopments:

o In December of 1980, Olin initiated a groundwater samplingprogram in partnership with the Alabama state authorities to testfor possible contamination originating from Olin's premises.

o Tests conducted in 1981 and 1982 indicated the presence ofcertain toxic materials believed by Olin to have originated frommanufacturing operations that took place on the premises severaldecades earlier.

o As a result of this discovery, Olin was now required by stateand federal law to incur remediation costs to prevent furthercontamination.

o Olin's remediation plan was approved by the relevantauthorities in 1983 and was set to commence in early 1984.

o Total cleanup costs were projected by Olin to be $1,300,000,including $50,000 already incurred.

In response to this communication, the London Underwriters sentOlin a letter in March of 1984 stating: "Underwriters reserve theirright re coverage and punitive damages." The letter did not mentionany reservation of rights based upon Olin's late notice of claim,nor did any subsequent correspondence between the LondonUnderwriters and Olin raise this specific issue.

The London Underwriters eventually denied coverage on variousgrounds, prompting Olin to file suit in the U.S. District Court forthe Southern District of New York. In response to Olin's SecondAmended Complaint in the action, the London Underwriters raised theissue of late notice for the first time as an affirmativedefense.

The Olin case was decided by U.S. District Judge Thomas Griesa,who began by emphasizing a "well-settled principle of New Yorklaw," citing a 1991 Second Circuit decision in State vs. AmroRealty Corp:

"[O]nce an insurer specifies the particular grounds upon whichit disclaims coverage, the insurer waives its right to subsequentlydisclaim based on other unspecified grounds, provided the insurerpossessed sufficient knowledge of the circumstances regarding theunasserted ground."

In Amro, when an insurer responded to its insured's late noticeof environmental cleanup liability by explicitly disclaimingcoverage on a variety of grounds, not including late notice, theinsured's failure to mention late notice was deemed "conclusiveevidence" of the insurer's intent to waive that unasserteddefense.

Applying this principle to the case at hand, the Olin courtfound TIG Ins. Co. vs. Town of Cheektowaga, a 2003 ruling in theWestern District of New York to be "directly on point." TIGinvolved the responses of two insurers to an insured's late noticeof cleanup and remediation liability. The first insurer respondedby "reserving... the right to disclaim coverage entirely in theevent that this claim is ultimately determined to be outside thescope of coverage." The second insurer responded by reserving "allrights under the alleged policies."

The TIG court found that the first insurer waived its right todisclaim on late notice grounds because its reservation "specifiedas a defense only the scope of coverage, and not the condition oftimely notice." Thus, the first insurer explicitly outlined thebasis for its disclaimer while omitting other legitimatedefenses.

In contrast, the second insurer's reservation did not "specifyany particular disclaimer ground," and therefore could not bedeemed waiver of other coverage defenses.

Relying on TIG and Amro, the Olin court found that the LondonUnderwriters in this case reserved their rights in a manneranalogous to the first insurer in TIG. By reserving "their right recoverage and punitive damages," the Olin court found the LondonUnderwriters to have chosen specific grounds for denial of coveragewhile clearly omitting mention of Olin's failure to provide timelynotice.

Unlike the second insurer in TIG, the London Underwriters failedto reserve "all" of their rights, and instead chose to reservespecific rights regarding coverage and punitive damages. Thus, theOlin court held, the London Underwriters waived their right todisclaim on late notice grounds.

The London Underwriters argued that waiver could only applywhere an insurer actually denied coverage on certain grounds to theexclusion of others, but not where an insurer merely reserved itsrights with respect to certain defenses. In making this argument,the London Underwriters relied on U.S. Underwriters Ins. Co. vs.A&D Maja Constr. Inc. (S.D.N.Y. 2001), which made a distinctionbetween a reservation of rights and an actual disclaimer in thecontext of an insured's late notice of claim. In that case, theinsurer's reservation of rights was held insufficient to satisfyits obligation to disclaim coverage in a timely manner.

The issue in U.S. Underwriters, however, was not whether aninsurer's reservation in response to an insured's late notice hadthe same effect as an actual disclaimer, but whether the insurer'sreservation was itself timely. Thus, as noted in the Olin decisionby Judge Griesa, who actually decided U.S. Underwriters, that case"involved an entirely different theory of waiver" in which theinsurer was alleged to have waived its coverage defense by waitinga year before issuing a reservation of rights.

In contrast, where "an insurer actually asserts certain policydefenses, whether by disclaimer or by reservation of rights, theinsurer is deemed to have waived any unasserted grounds forrefusing coverage.

The London Underwriters further argued that Olin's initialnotice letter failed to disclose that Olin knew about its remedialcleanup liability for a substantial period of time. Thus, theLondon Underwriters contended, Olin's notice failed to provide"sufficient knowledge of the circumstances regarding the unasserted[late notice] ground," a prerequisite for waiver under Amro.

The court rejected this argument, finding that the LondonUnderwriters were placed at least on constructive notice,sufficient for a finding of waiver. Olin's February 1984 letterexplained that the groundwater testing program at Olin's facilitybegan in 1980, that state authorities had been aware of the programsince that time, and that Olin had submitted plans for remediationin 1983.

Finding it unnecessary for an insurer to "have actual knowledgeof every fact bearing upon a defense in order to waive it," thecourt held that Olin's letter sufficiently notified the LondonUnderwriters of a potential late notice defense.

The Olin decision is significant because it encourages insurersto assert all known grounds for disclaimer of coverage, as well asa comprehensive reservation, in a reservation of rights lettergoverned by New York law. Without such, the Olin court made itclear that an insurer may be found to have waived all rights on aground not mentioned in the letter.

Judge Griesa found no noteworthy distinction between lettersdenying coverage and merely reserving rights for the purpose ofapplying waiver for failure to assert a particular ground for lackof coverage.

Thus, for the purpose of protecting a right to deny coverage,insurers should clearly and carefully assert all of their knowncoverage defenses, as well as a comprehensive reservation, whenreserving their rights, just as they would when actuallydisclaiming coverage.