Four-Month Delay in Sending Reservation of Rights Letter Creates Issue of Fact

The Supreme Court of Kansas has held that a four-month delay in sending a reservation of rights letter created an issue of fact as to whether the insurer timely reserved its rights.  Becker v. The Bar Plan Mut. Ins. Co., 2018 WL 5304671 (Kan. Oct. 26, 2018).

A client sent his lawyer an email asserting that the lawyer erred in a UCC security filing.  The client requested that the lawyer forward the letter to his insurance carrier, but the lawyer did not do so.  The lawyer then renewed his E&O policy with the same carrier.  During the period of the renewal policy, the lawyer received a demand letter from the same client, which he promptly reported to his E&O carrier.  About two months later, the insurer learned of the letter received by the lawyer in the prior policy period.  About four months later, the insurer sent a reservation of rights letter to the lawyer.  About three weeks after that, the insurer sent a letter denying coverage because the first letter was never reported to the insurance company.

In the ensuing coverage litigation, the claimant (standing in the shoes of the insured, which had assigned its rights under the policy) argued that the insurance company was estopped from denying coverage.  The trial court granted summary judgment to the insurer, and the Kansas Supreme Court reversed.  The Kansas Supreme Court noted that an insurer that undertakes a defense without a reservation of rights is thereafter estopped from disclaiming coverage.  It also noted that the timeliness of an insurer’s reservation of rights is a question of fact that the lower court had not considered.  It therefore remanded the case for the lower court to determine whether the four-month delay in sending the reservation of rights letter was timely.

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