IN MICHIGAN, POLICY DEFENSES MAY BE PRESERVED BY TIMELY FILED DECLARATORY JUDGMENT
In Cincinnati Ins Co v Hall, No. 297600, 2011 Mich App LEXIS 1048 (June 14, 2011) (unpublished), a panel of the Michigan Court of Appeals reversed the judgment of the trial court and remanded the plaintiff Cincinnati Insurance Company's ("Cincinnati") declaratory action for further proceedings. The court held that Cincinnati's failure to issue a reservation of rights letter to its insured-defendant Social Resources, Inc. ("SRI") will not preclude its right to assert defenses to coverage under the policy if the declaratory judgment action in fact provided adequate notice of Cincinnati's intent to reserve its rights. Id. at *8.
This case arose from an underlying personal injury action alleging that SRI was liable for a permanent eye injury sustained by a developmentally disabled adult while under its care. Prior to undertaking SRI's defense in this underlying action, the parties executed a "non-waiver" agreement. Id. at *1-2. Thereafter, Cincinnati filed this action seeking a declaration that it had preserved its right to assert coverage defenses under the policy. The trial court dismissed this action, concluding that Cincinnati was estopped from asserting coverage defenses because it had failed to issue a reservation of rights letter. Id. at *2.
On appeal, the court's determination of this issue turned on whether an insurer is required to issue a formal reservation of rights letter as a prerequisite to raising policy defenses in a subsequent action. According to the court, in a case of potential coverage, an insurer must either defend "under a reservation of rights or seek a declaratory judgment that there is no coverage; if an insurer fails to exercise one of these two options, it is estopped from raising policy defenses in a later action." Id. at *3. A "reservation of rights" letter "must provide timely and specific notice of [the insurer's] intention" and "explain the policy provisions upon which it bases its opinion that coverage may not be afforded." Id. at *3-4. A reservation of rights letter, or non-waiver notice, is not adequate if it simply informs the insured that the insurer reserves "any defense" or "waives none of its rights." Id. at *4. Because the non-waiver agreement at issue in this case merely reserved "any" defenses, the court concluded that it was inadequate to reserve Cincinnati's right to raise any defenses under the policy. Id. at *5.
Nevertheless, the court explained that issuance of an adequate reservation of rights letter is unnecessary where an insured is notified of the insurer's intention to reserve its right to deny coverage and the policy provisions upon which it the reservation is based by filing a "timely" declaratory judgment action. Id. at *5. Determination of whether Cincinnati's declaratory action was timely turned on whether SRI was "actually prejudiced by the delay." Id. at *7-8 (emphasis added). For example, actual prejudice may exist if SRI in any way relied on Cincinnati initially appearing to provide a defense and coverage. Id. at *8. Accordingly, the court reversed the trial court's judgment of dismissal and remanded this case for a factual determination of whether Cincinnati's declaratory judgment action was "timely."