When an insurance company feels it has a defense to coverage, it generally issues a “Reservation of Rights” letter advising its insured that it feels it does not provide insurance coverage regarding a particular claim. Its failure to send such a letter to its insured has been held to prevent it from claiming it need not provide coverage. The Wisconsin Supreme Court in Maxwell v. Community Insurance, 2012 WI 58 (May 30, 2012) in a 4-3 decision has now held such failure will not preclude a coverage defense.
In that case, the insurance company elected to defend its insured, but did so unsuccessfully. The insured claimed that because the insurance company failed to issue a Reservation of Rights, it could not claim it had no liability for the judgment against its insured despite the fact that a policy exclusion clearly indicated it would provide no such coverage. The majority held that the failure to issue a Reservation of Rights does not require an insurance company to provide coverage that otherwise would not exist.
This is a significant decision, as when an insurer reserves its right to raise a coverage defense and notifies its insured, the insured is given warning that it may have to pay any judgment rendered against it. Insureds under those circumstances may elect to hire their own attorneys even if the insurance company provides a defense, to decrease the chance of an adverse decision. If insurers need not notify insureds of the existence of policy defenses but may raise them in the future regardless, insureds may be surprised not only by an adverse judgment but by the fact they must pay it themselves.