NEW DECISION IMPOSES BAD FAITH LIABILITY IN MISSOURI DESPITE THE ABSENCE OF COVERAGE

The Western District's Advantage Buildings decision arises from a construction defect claim and focuses on the insurer's reservation of rights. Shortly after receiving notice of the claim, the insurer sent two lengthy reservation of rights letters to its insured, appointing defense counsel and advising the insured that the insurer would promptly inform the insured of the outcome of its coverage investigation. Attached as an appendix to the Court's opinion are the two reservation of rights letters. These letters warrant reading. They are not untypical of the reservation of rights letters issued by many insurers in Missouri.

The Western District, in subjecting the insurer to bad faith, held the insurer had failed to reserve its rights to deny coverage because neither reservation of rights letter timely, fully, or unambiguously explained the insurer's coverage position or how the cited policy provisions affected the insured's position. The Western District observed that only after the insurer filed its declaratory judgment action five days before trial did the insurer unambiguously advise the insured that its policy did not cover "most" of the underlying claim. At that time, the insurer also notified the insured that it was withdrawing its defense. Previously, the insurer had failed to respond to any settlement offers made within the policy limits.

According to the Western District, the insurer's insufficient reservation of rights vitiated its successful declaratory judgment action, holding the trial court did not err in submitting the bad faith claim to the jury despite the declaratory judgment that the insurer's policy "did not expressly provide coverage" for the claim. Indeed, the Western District held the trial court did not err in barring the insurer from admitting evidence of its successful declaratory judgment action during the trial of the bad faith claim in defense of the claim. The Western District explained, under the case's circumstances, that the insurer was estopped from denying coverage to the extent of its policy limits because the insurer had failed to effect a proper reservation of rights. Taken to its logical conclusion, the Western District's decision suggests that an insurer may not consider covered versus non-covered damages in evaluating a settlement demand for the policy limits.

The Western District also criticized the insurer for failing to "split the file" by having separate adjusters handle the coverage issues and the liability claim until two years into the claim, even though the insurer recognized early in the case that separate adjusters should be appointed to the file.

The Western District's decision is not final. It will be several months before the post-opinion review process runs its course and the Missouri Supreme Court decides whether to hear the case.

But for the present, the Advantage Buildings decision must be on the forefront of the minds of every insurer doing business in Missouri. The lessons to be drawn from the decision are important and far reaching; the consequences of ignoring them are dire. Insurers must now take even greater care in investigating coverage and issuing timely reservation of rights letters to their insureds. The Western District's decision raises the bar for the detail that must be incorporated by an insurer into a reservation of rights letter and demonstrates that an insurer should make the decision to file a declaratory judgment action sooner than later. Further, the Advantage Buildings decision makes plain that the avoidance of bad faith requires an insurer to promptly divide its claim file between coverage and liability and appoint separate adjusters for each aspect of the claim.