Late Notice Defense Must Be Asserted In Reservation Letter, Court Contends

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

As illustrated in the decision of the U.S. District Court for the Southern District in Olin Corp. vs. Insurance Co. of North America (March 2, 2006), insurers must pay careful attention to drafting letters involving reservations of rights or risk the consequences of waiving obvious coverage defenses.

Plaintiff Olin Corp., owner of a chemical manufacturing facility in Alabama, was insured for environmental remediation and cleanup liability under a policy issued by the defendants, certain underwriters at Lloyd's of London and certain London Market Insurance Companies (collectively "the London Underwriters").

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

In February 1984, Olin sent a letter notifying the London Underwriters of certain cleanup liabilities incurred at its facility. Specifically, the letter explained the following developments:

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

o Tests conducted in 1981 and 1982 indicated the presence of certain toxic materials believed by Olin to have originated from manufacturing operations that took place on the premises several decades earlier.

o As a result of this discovery, Olin was now required by state and federal law to incur remediation costs to prevent further contamination.

o Olin's remediation plan was approved by the relevant authorities 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 sent Olin a letter in March of 1984 stating: "Underwriters reserve their right re coverage and punitive damages." The letter did not mention any reservation of rights based upon Olin's late notice of claim, nor did any subsequent correspondence between the London Underwriters and Olin raise this specific issue.

The London Underwriters eventually denied coverage on various grounds, prompting Olin to file suit in the U.S. District Court for the Southern District of New York. In response to Olin's Second Amended Complaint in the action, the London Underwriters raised the issue of late notice for the first time as an affirmative defense.

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

"[O]nce an insurer specifies the particular grounds upon which it disclaims coverage, the insurer waives its right to subsequently disclaim based on other unspecified grounds, provided the insurer possessed sufficient knowledge of the circumstances regarding the unasserted ground."

In Amro, when an insurer responded to its insured's late notice of environmental cleanup liability by explicitly disclaiming coverage on a variety of grounds, not including late notice, the insured's failure to mention late notice was deemed "conclusive evidence" of the insurer's intent to waive that unasserted defense.

Applying this principle to the case at hand, the Olin court found TIG Ins. Co. vs. Town of Cheektowaga, a 2003 ruling in the Western District of New York to be "directly on point." TIG involved the responses of two insurers to an insured's late notice of cleanup and remediation liability. The first insurer responded by "reserving... the right to disclaim coverage entirely in the event that this claim is ultimately determined to be outside the scope of coverage." The second insurer responded by reserving "all rights under the alleged policies."

The TIG court found that the first insurer waived its right to disclaim on late notice grounds because its reservation "specified as a defense only the scope of coverage, and not the condition of timely notice." Thus, the first insurer explicitly outlined the basis for its disclaimer while omitting other legitimate defenses.

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

Relying on TIG and Amro, the Olin court found that the London Underwriters in this case reserved their rights in a manner analogous to the first insurer in TIG. By reserving "their right re coverage and punitive damages," the Olin court found the London Underwriters to have chosen specific grounds for denial of coverage while clearly omitting mention of Olin's failure to provide timely notice.

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

The London Underwriters argued that waiver could only apply where an insurer actually denied coverage on certain grounds to the exclusion of others, but not where an insurer merely reserved its rights 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 distinction between a reservation of rights and an actual disclaimer in the context of an insured's late notice of claim. In that case, the insurer's reservation of rights was held insufficient to satisfy its obligation to disclaim coverage in a timely manner.

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

In contrast, where "an insurer actually asserts certain policy defenses, whether by disclaimer or by reservation of rights, the insurer is deemed to have waived any unasserted grounds for refusing coverage.

The London Underwriters further argued that Olin's initial notice letter failed to disclose that Olin knew about its remedial cleanup liability for a substantial period of time. Thus, the London 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 London Underwriters were placed at least on constructive notice, sufficient for a finding of waiver. Olin's February 1984 letter explained that the groundwater testing program at Olin's facility began in 1980, that state authorities had been aware of the program since that time, and that Olin had submitted plans for remediation in 1983.

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

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

Judge Griesa found no noteworthy distinction between letters denying coverage and merely reserving rights for the purpose of applying waiver for failure to assert a particular ground for lack of coverage.

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