Becker v. The Bar Plan Mutual Insurance Company
Claim Notification and Reservation of Rights: The Sooner The Better Essential Guidance for Both Sides of an Insurance Contract.
The Kansas Supreme Court’s recent ruling in Becker v. The Bar Plan Mutual Insurance Company1 revived an investor’s shot at recovering a $3.9 million judgment for legal malpractice against his former attorney’s insurer. Although the bottom line of this decision may easily grab the attention of an insurer (not to mention an attorney), the case offers essential guidance to both sides of the insurance contract.
An investor hired an attorney to represent him in a series of loans to a commercial cleaning services company. The attorney failed to perform a UCC search on the collateral the company owner provided to secure the investor’s loans. As a result, the investor was unaware that the collateral was already subject to another lender’s security interest. Had the investor known, he would not have made the loans.
Shortly after discovering the other lender’s superior position, the investor sent the attorney an email firing her as counsel. The email, sent in February 2012, asserted that she had committed “monumental errors,” including the failure to check on the encumbered collateral. 2 The investor concluded his email with a request that the attorney inquire with her insurance carrier based on his expectation of “very large damages.”3 Despite the implications of this email, as well as the blatant request, the attorney did not notify her legal malpractice insurance carrier, The Bar Plan Mutual Insurance Company.
In September 2012, the attorney renewed her policy with The Bar Plan. She did not, however, mention the situation with the investor. Two months later, the investor sent the attorney a demand letter. The attorney notified The Bar Plan of the demand the following week. Ten days later, The Bar Plan discovered the attorney’s failure to notify it of the investor’s February 2012 email.
The Coverage Litigation
On January 10, 2013, the investor filed suit for legal malpractice against the attorney and her law firm. The Bar Plan provided the attorney’s defense. On March 11, 2013—four months after notice of the demand and two months after the filing of suit—The Bar Plan sent the attorney a reservation of rights letter. One month later, it denied the attorney’s claim for coverage based on her untimely notice of the claim.
The investor and the attorney ultimately settled for $3.9 million in exchange for the attorney’s rights to sue The Bar Plan. Within the week, the investor filed suit against The Bar Plan for insurance bad faith, and both parties moved for summary judgment.
The investor argued that The Bar Plan was estopped from denying coverage because it had undertaken the attorney’s defense without a timely reservation of rights. Furthermore, the attorney detrimentally relied on The Bar Plan’s assumption of her defense.
The Bar Plan responded that no coverage was owed under the policy because of the attorney’s late notification of the claim. Because no coverage was owed, the “expansion of coverage” rule prohibited the investor from asserting estoppel to create otherwise nonexistent coverage under the policy.
The district court granted The Bar Plan’s motion for summary judgment relying on the expansion of coverage rule. The district court found that the attorney was entitled to no coverage under the contract because of her late notification to The Bar Plan. The district court concluded that, because no coverage was owed, “application of waiver or estoppel would functionally ‘expand’ the coverage” in contravention of the expansion of coverage rule.4 The court of appeals affirmed, citing the same decisions as the district court.
Then the Kansas Supreme Court reversed. The court observed that, in the line of cases relied upon by the lower courts, “attempts were made to gain coverage—either of property value or of factual situations—where none existed,” and, “perhaps more importantly, the insurer’s conduct did not induce the insured’s detrimental reliance.”5 The court further stated that the expansion of coverage rule contradicts the longstanding “reservation of rights” rule, that an insurer who undertakes a defense without a reservation of rights is thereafter estopped from disclaiming coverage. The lower courts, therefore, should have continued their analysis to see if estoppel was appropriate under the reservation of rights rule.
The Bar Plan’s reservation of rights letter, issued four months after notice of the claim and the grounds for noncoverage, was arguably inadequate. The court remanded, holding that “the determination of adequacy, e.g., timeliness of that reservation is a particular question of fact making this issue unsuitable for summary judgment.”6 Whether the investor’s estoppel claim or The Bar Plan’s noncoverage defense will prevail is yet to be determined.
The Bar Plan Takeaway
The key takeaway from this decision is the same for both sides of the insurance contract—timeliness is essential. An insured should provide notice to their insurer of a potential claim as soon as practicable. The failure to do so may result in the loss of coverage, depending of course on other factors, including the terms of the policy, the jurisdiction and the particular circumstances of the claim. Notwithstanding these variables, the sooner the better approach will help protect the insured from accusations of insufficient notice.
Likewise, an insurer should promptly send a reservation of rights notice to its insured. The insurer should avoid assuming the insured’s defense without first issuing this notice. Otherwise, the insurer runs the risk of waiving crucial noncoverage defenses or creating an issue of material fact that will later preclude success on summary judgment.
In sum, prompt action by both the insured and the insurer can help avoid the issues at play in The Bar Plan. Delay, on the other hand, only tends to cultivate them.
1 Becker v. The Bar Plan Mut. Ins. Co., 429 P.3d 212 (Kan. 2018).
2 Id. at 215.
4 Id. at 217.
5 Id. at 218.