Insurer Not Estopped from Denying Coverage for Failing to Send Second Coverage Letter

Applying Massachusetts law, the United States District Court for the District of Massachusetts has held that an insurer is not estopped from denying coverage for a subsequent claim when it already issued a coverage letter for litigation based on the same facts and involving the same coverage issues. American Guar. & Liab. Ins. Co. v. Lamond, 2016 WL 1312008 (D. Mass. Apr. 4, 2016). In addition, the court held that the insurer did not act in bad faith by failing to settle the litigation.

The insured lawyer represented a client in the purchase of real property and made certifications to the mortgagor that the land was free of any encumbrances. He made this certification despite knowledge that the land was the site of a burial ground and was subject to a preservation restriction. After the purchase, the client learned of the development restriction and defaulted on the mortgage. The mortgagor foreclosed on the property but was unable to develop or sell the land because of the restriction. The mortgagor then filed suit against the lawyer and the client, which the insured lawyer tendered to his insurer. The insurer agreed to defend the lawyer under a complete reservation of rights and appointed defense counsel. Later, the client filed a third-party claim against the lawyer, which the insurer’s appointed counsel defended, but the insurer did not issue a reservation of rights for the third-party claim. After the client’s third-party claim against the insured went to trial and resulted in an adverse judgment, the insurer filed suit seeking a declaration that its policy did not provide coverage for the judgment in the third-party claim based on coverage defenses raised in the reservation of rights letter issued with respect to the original mortgagor suit.

First, the court held that the insurer was not estopped from denying coverage for the judgment in the third-party claim. The court held that a second reservation of rights letter was unnecessary because the third-party claim was based on the same allegations of misconduct as the mortgagor’s complaint and involved the same coverage issues. In addition, the court reasoned that the insured’s purported reliance that the insurer was not reserving rights was unreasonable because he made no effort to obtain assurance or clarification from the insurer concerning the absence of a second coverage letter.

Second, the court held that the insurer did not act in bad faith as a matter of law by failing to settle the client’s claim. It held that the insurer could not be held vicariously liable for the acts of retained defense counsel because the conduct of the litigation was the responsibility of defense counsel. It also held that the insurer had no duty to settle the litigation because it was never “reasonably clear” that the policy covered the claim.