Reservation Of Rights Letter

Dallas insurance attorneys need to be able to understand “reservation of rights” letters. A 1999, Dallas Court of Appeals opinion discusses an issue with these letters. The opinion is styled, Aetna Casualty & Surety Co. v. Naran.
On July 28, 1986, Naran’s home, garage and two cars were destroyed in a fire. The fire was caused by a catalytic converter installed on Naran’s 1984 Mercedes. It was installed by a franchisee of Village Imports. Naran sued Village Imports alleging negligent installation, breach of warranty, and DTPA violations. Village forwarded the lawsuit with a notice of loss to Aetna, their insurer. Aetna issued four different policies to Village, but all policies expired prior to the date of the fire. However, when the notice of loss was sent to Aetna, it mistakenly indicated that the date of loss was July 28, 1985 instead of 1986. Aetna hired an attorney to defend Village. Subsequently, Aetna learned of the actual date of the fire, and Village agreed to allow the withdrawal of the attorney hired by Aetna. A judgment was entered against Village, and Naran sued Aetna directly as a judgment creditor. The trial court granted Naran’s motion for summary judgment, and denied Aetna’s motion for summary judgment and this appeal was filed.
This Dallas Court of Appeals reversed the trial court. Naran had the burden of proving that the damages occurred during the Aetna policy period. Naran contended that the damage to Naran’s car commenced in March of 1985 when Naran began to drive the car with the defectively installed catalytic converter. Naran introduced expert testimony that the heat of the converter caused the moisture to be removed from the carpet in the car thereby lowering the ignition temperature of the carpet. The carpet was then eventually ignited from the heat. Naran argued that the continued heating was a continuous process of damage to the car, and he took the position that the court should apply the exposure theory or the continuous exposure theory to determine if property damage occurred during the policy period.
The Texas Supreme Court has never addressed the coverage trigger issue. The only theory ever applied in Texas has been the manifestation theory. The manifestation theory is dispositive here. There is no evidence in the record that the continuous heating caused property damage. Additionally, even if the heating caused property damage, there is no evidence that any damage was manifested during the policy period.
In an Austin Court of Appeals case, the court ruled that an insurer may be estopped from raising non-coverage defenses, when with knowledge of the facts indicating non-coverage, it assumes an insured’s defense without obtaining a reservation of rights or non-waiver agreement. In this case, Aetna claims representative first became aware of the actual date of the fire one month after the attorney it hired had filed an answer on Village’s behalf. Unlike the Austin Court of Appeals case, a reservation of rights letter would have been inappropriate in these circumstances because the record reflects that Aetna had no intention of continuing to defend Village. In addition, Naran failed to demonstrate that Village was prejudiced by Aetna’s failure to reserve its rights regarding potential coverage defenses. This Court concluded that to prevail on an estoppel theory, the insured must show that he was prejudiced by the insurer’s conduct. In this case, there is no evidence to support a claim of prejudice. Therefore, the carrier is not estopped to deny coverage.