Insurer Is Not Estopped from Raising New Coverage Defenses When It Reserves Its Right to Rely on Other Policy Terms

Applying Nebraska law, the Nebraska Supreme Court has held that an insurer is not estopped from raising new coverage defenses where it repeatedly reserves its right to rely on other policy terms, conditions, and exclusions, and does not assume the defense of the underlying lawsuit.  Breci v. St. Paul Mercury Ins. Co., 2014 WL 3686856 (Neb. July 25, 2014). 

In June 2007, a federally chartered credit union that had been placed under conservatorship filed suit against its former directors, alleging that the directors had breached their fiduciary duties and caused the credit union to suffer loss.  The former directors promptly sought coverage from the credit union’s management liability insurer.  In January 2008, the insurer sent a general reservation of rights letter that discussed certain definitions in the policy; stated that the insurer was continuing to investigate and evaluate coverage; and specifically reserved the insurer’s right to rely upon other policy terms, conditions, and exclusions to disclaim coverage.  In February 2009, the insurer sent the former directors a letter disclaiming defense and indemnity coverage for the underlying lawsuit based on the policy’s insured versus insured exclusion.

In April 2009, the former directors filed a declaratory judgment action against the insurer, in which the credit union later intervened.  On April 20, 2010, the trial court entered an order denying the insurer’s motion for summary judgment and granting the directors’ “motion for declaratory judgment” based on the court’s conclusion the insured versus insured exclusion did not apply because the credit union was not an “insured” under the D&O coverage part of the policy.  The insurer timely filed a motion to alter or amend the judgment.

Separately, the credit union and the directors reached a settlement of the underlying action.  On April 26, 2010, the directors filed a confession of judgment and assigned their rights against the insurer to the credit union.  On May 5, 2010—while the insurer’s motion to alter or amend the judgment was still pending—the insurer moved for leave to file an amended answer based on its position that the settlement raised new issues and new coverage defenses that were not previously known to the insurer.  The trial court granted the motion for leave to amend and partially granted the motion to alter or amend the judgment, concluding that it had erred by granting judgment to the directors (but not by ruling that the insured versus insured exclusion did not apply).

In April 2012, the insurer filed a second motion for summary judgment that raised a number of coverage defenses, including that the underlying action constituted a claim that was first made prior to the policy period and that coverage was barred pursuant to the policy’s regulatory exclusion.   In September 2012, the trial court granted the insurer’s second motion for summary judgment, holding that (1) the insurer was not estopped from raising additional coverage defenses in its amended answer; (2) the claim arose prior to the policy period; and (3) even if the claim had fallen within the policy period, the regulatory exclusion would bar coverage.

On appeal, the Nebraska Supreme Court rejected the credit union’s argument that the insurer should have been estopped from raising new coverage defenses in its answer.  The appellate court held that the doctrines of estoppel and “mending one’s hold” did not apply because the insurer specifically reserved its rights to rely on other terms, conditions, and exclusions in the policy, both in its original answer and its initial reservation of rights letter—precluding a finding of detrimental reliance by the directors.  Although the court recognized that the doctrine of estoppel can be used to “expand the scope of insurance coverage” where an insurer defends a claim without a reservation of rights agreement and the insured suffers some prejudice or harm, the court held that this “exception to the general estoppel rule” did not apply because the insurer never indicated to the directors that there was coverage for the credit union’s lawsuit, nor did the insurer assume or control the directors’ defense.   The appellate court also held it was not an abuse of discretion to grant the insurer’s motion to amend given that the settlement of the underlying action constituted a “newly discovered” development warranting leave to amend.