Can Coverage Be Expanded By Waiver?

What if someone with the insurance company does something to cause you to believe you have coverage that you do not have?  Mason County lawyers should read this 2008, Texas Supreme Court opinion.  It is styled, Ulico Casualty Company v. APA.

In this case, the court considered what has become known as the “Wilkinson exception” to the general rule that coverage cannot be created by estoppels or waiver.  The Wilkinson exception stated that if a carrier undertook to defend an insured without issuing a proper reservation of rights that identified all policy defense then known to the carrier, and the insured was prejudiced, then the carrier was estopped to deny coverage and had waived its policy defenses.

In Ulico, the insured reported a claim after the claims-made-and-reported policy had expired.  The carrier mistakenly agreed to defend the insured.  The carrier issued two reservation of rights, sent the insured’s counsel litigation guidelines, and stated that Ulico agreed to reimburse the insured for reasonable defense expenses.  The attorney submitted his invoice of $635,000.00.

Ulico filed a declaratory judgment action seeking a determination that it did not have a duty to defend the insured.  The insured counterclaimed and won at trial and on appeal.  The Court found that the carrier had waived its rights and was estopped from denying coverage.

This Court held that Ulico’s policy coverage was not expanded by either the doctrine of waiver or the doctrine of estoppel.  If there is no coverage, then neither estoppels or waiver can be used to expand coverage which is non-existent.  The Court specifically rejected the holding in Wilkinson.

However, the Court went on to hold that if an insured is prejudiced by a carrier, the carrier can be liable.  The Court stated that “Under the circumstances, insurer’s who take control of the insured’s defense without a valid reservation of rights or non-waiver agreement can and should be prevented from denying benefits that would have been payable had the claim been covered because the insured is actually prejudiced by the insurer’s actions.  …  But the possibility that an apparent conflict of interest might arise under the circumstances is insufficient justification for judicially rewriting the parties’ agreement.

When an insurer’s defense of or controlling the defense of the insured prejudices an insured, as happened in Tilley and Acel, the insurer cannot escape liability for the detriment its actions caused its insured.  In those cases, the insurer was estopped from refusing to pay the damages its actions caused, but there was no rewriting of the insurance contract.  We think Tilley’s rule, ethical rules applicable to attorneys defending insureds, and the doctrine of estoppel all work to protect an insured without the necessity of remolding the doctrines of waiver and estoppel to create an anomaly in the law by judicially rewriting agreements between insurers and insureds.”

In sum, if an insurer defends its insured when no coverage for the risk exists, the insurer’s policy is not expanded to cover the risk simply because the insurer assumes control of the lawsuit defense.  But, if the insurer’s actions prejudice the insured, the lack of coverage does not preclude the insured from asserting an estoppel theory to recover for any damages it sustains because of the insurer’s actions.