From time to time liability insurers may agree to begin defending a claim for an insured while reserving their rights to deny coverage because investigations are not yet complete.
Sometimes the policy wording provides expressly for that situation. Or insurers may reserve their rights on an ad hoc basis
While there is no South African legislation or case law dealing with the issue it is preferable and good practice if the insurer at least includes some detail about the potential reasons for denying the indemnity that could apply, and for a decision to be made as soon as possible whether to deny the coverage. That is important bearing in mind the inherent conflict of interest which arises when the insurers and their attorneys need unfettered access to the insured, its witnesses and evidence in order to defend the third-party action and simultaneously having access to that information which may found or support a basis for denial of cover.
In appropriate circumstances an insurer may be estopped from denying cover in due course if it did not timeously, expeditiously and properly investigate and rely on the basis for rejection and the insured is prejudiced.
Recently a United States Pennsylvania Appeals Court, in a split-decision, held that while an exhaustive analysis of potential coverage defences when reserving the right to deny coverage is not required, at least some detail is necessary.
The US insurer had agreed to conditionally defend the insured, which was exclusively in the business of snow and ice removal, from claims relating to a slip-and-fall incident at a shopping centre.
The insurer used a boilerplate reservation of rights clause and made no reference to the policy exclusion for claims related to snow and ice removal. Eighteen months after commencing the defence of the claim, the insurer sought to rely on that exclusion in circumstances where a complete review of the policy would have immediately revealed the existence of the relevant exclusion which the insurer belatedly relied on.
The US court held that the insured had been prejudiced to the point that the insurer would not be allowed to rely on the exclusion although a dissenting judgment was satisfied that the insurer had ‘clearly communicated its reservation of rights’ by virtue of the specific reference to the policy in reserving its rights with the insured.
It will be a factual enquiry in each case whether the insurer failed to conduct an adequate investigation following the notification of the claim, whether there was an appropriate communication with reservation of rights, and whether the insured has been prejudiced.
The case is Selective Way Insurance Company v MAK Services Inc.