Reinsurer’s Denial Letters Doom Insurer’s “Equitable Estoppel” Argument for Coverage

November 30, 2013 | Insurance Coverage

A federal district court in Florida has rejected an insurance company’s argument for coverage under a reinsurance treaty on the basis of equitable estoppel.

The Case

A contractor entered into a contract with a city in Florida to relocate utilities within the right-of-way along Florida State Road 50. At the completion of the project, the city withheld money that the contractor claimed was due under the terms of the contract. The contractor sued.

The insurance carrier that had issued a public officials’ errors and omissions policy to the city funded the city’s defense. The case settled, with the city agreeing to pay the contractor an additional $1.35 million.

The insurer had obtained reinsurance that covered losses under the policy it had issued to the city. After the settlement between the contractor and the city, the insurer sued the reinsurer, contending that the reinsurer had to reimburse it for the $286,941.07 in defense costs in excess of its $200,000 retention. Among other things, the insurer asserted a claim for equitable estoppel as a basis for insurance coverage.

The reinsurer moved to dismiss.

The Court’s Decision

The court granted the reinsurer’s motion to dismiss.

The court noted that the insurer based its claim for equitable estoppel on the interactions between it and the reinsurer following the initiation of the contractor’s lawsuit. In particular, the insurer based its estoppel argument on a letter from the reinsurer to the insurer denying that the contractor’s action was covered (the “Denial Letter”) and a supplement to the Denial Letter that reasserted the denial of coverage but, based on the insurer’s request, said that the reinsurer would proceed under a reservation of rights to determine if the contractor’s action was covered (the “Reservation Letter”).

The court pointed out that the Reservation Letter expressly stated that the reinsurer did not believe that the contractor’s action had implicated the reinsurance treaty. The court added that the reinsurer said that it understood that the insurer thought that the contractor’s action was covered, but “repeatedly stated that it did not share this view.” The court concluded that the reinsurer’s “analysis and express statements” that the contractor’s action was not covered under the insurer’s policy precluded a finding that the reinsurer should have expected that any alleged affirmative representations in the Reservation Letter would induce the insurer into “action or forbearance.”

The case is Public Risk Management of Florida v. One Beacon Ins. Co., No: 6:13-cv-1067-Orl-31TBS (M.D.Fla. Oct. 18, 2013).

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