Steadfast Insurance did not have coverage under its CGL policy for a collision involving a utility boat owned by its insured Harvest Oil because of a watercraft exclusion. Steadfast is a Zurich company, and Zurich also had policies covering Harvest. Zurich handles claims for the Zurich companies, including Steadfast.
After the lawsuit naming Harvest, Zurich sent a reservation letter that cited the Steadfast policy, quoted the watercraft exclusion, and said it might apply. The letter said that Zurich would investigate the case subject to a reservation of rights. Harvest filed for bankruptcy, and Steadfast appointed counsel to represent Harvest. A subsequent suit named Steadfast, but not Harvest (because of the bankruptcy), and Steadfast appointed the same counsel to represent Steadfast. Steadfast did not assert a defense based on the watercraft exclusion at that time. Three adjusters for Steadfast did not realize the watercraft was a defense. Later, when an adjuster discovered the watercraft exclusion, new counsel was appointed for Steadfast in the subsequent suit. The district court then granted summary judgment to the plaintiff that Steadfast had waived its right to assert the watercraft exclusion as a defense.
Did Steadfast Ins. Co. Properly Reserve Its Rights under Louisiana Law?
The first question is whether Steadfast reserved its rights because under Louisiana law, because the waiver of noncoverage defenses is automatic without any necessity of establishing prejudice if the insurer assumes the defense of the insured without first issuing a reservation letter. Although the reservation letter did not state that Steadfast reserved its rights, it did quote the provision of the Steadfast policy. As Louisiana follows a functional approach, technical language is not necessary, and the letter was sufficient.
Did Steadfast Ins. Co. Waive Its Right to Assert the Watercraft Exclusion As a Defense?
The second question is whether Steadfast waived its right to assert the watercraft exclusion as a defense. The court first discusses the effect of the bankruptcy on the direct action proceeding. As the proceeds of the policy are not the property of the insured’s bankruptcy estate, the automatic stay did not apply to the direct action. The court adds that collateral estoppels, claim preclusion, and issue preclusion will not prevent the insured from relitigating any issues decided in the suit against Steadfast in the first action against the insured that was still stayed because of the insured’s bankruptcy.
Turning to waiver, the court concludes that Steadfast did not waive its coverage defense by its delay in asserting the defense in the direct action suit. There are two components to waiver: (1) misleading conduct on the part of the insurer and (2) prejudice to the insured. In its Steptore decision, the Louisiana Supreme Court held that the insurer must either have “an actual intention to relinquish the right” or the conduct must be “so inconsistent with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished.” The court does not resolve the “close question” whether Steadfast’s actions are sufficiently inconsistent with asserting the defense to satisfy the objective test because there was no subjective intent of waiver. It was just careless reading of the policy, and the court finds no evidence of prejudice to Harvest (depriving the insured of the opportunity to assume and manage its own defense or actual harm to the insured from the insurer’s inconsistent conduct).