Court Opinion

ID: 9741383
Source: CourtListenerOpinion
Date Created: 2023-08-26 20:54:34.438143+00
Date Added: 2024-06-11T07:24:19.876731
License: Public Domain

O’Connor, J.
(dissenting in part, with whom Lynch, J., joins). The policies provide Sarnafil with liability coverage for damage to property. Coverage does not extend, however, to damage to Sarnafil’s products arising out of those products in whole or in part. Sarnafil supplied, and Taylor installed, roofing membrane and adhesive to attach the membrane to an airport roof. As a result of the membrane’s coming loose on September 7, 1984, Taylor wrote to Sarnafil on September 20 that Taylor intended to hold Sarnafil responsible for unspecified, unidentified “damage and repairs at the airport.” Taylor also sent Sarnafil a copy of a letter from an architect in which the architect opined that Taylor and Sarnafil would be responsible for unidentified repairs, including repair of “damage to the existing building.” On September 27, Sarnafil sent copies of those letters to Barnes (the agency) and requested that coverage be acknowledged.
*308Regardless of when those letters were received by Peerless, the information contained in them may have suggested the possibility or even probability that specific claims of detailed damage would be forthcoming, but the letters did not tell Sarnafil or Peerless whether Taylor’s claims would relate in whole or in part to items of property that had not been furnished by Sarnafil and would therefore probably be within the policies’ liability coverage. In those circumstances, several options were available to Peerless. Peerless could have categorically denied (disclaimed) all coverage of Sarnafil’s losses due to airport damage and announced its decision not to defend Sarnafil with respect to any claim that might be made against Sarnafil. Had Peerless done so, it would have run the risk of breaching its contractual duty to cover Sarnafil’s liability for damage to property other than Sarnafil’s product, and its duty to defend Sarnafil. Also, Peerless would have forfeited its contractual right to control the investigation and resolution of claims that it, as insurer, might ultimately have to pay. See Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677, 682 (1964), and cases cited. In the alternative, Peerless could have remained silent, allowed time to pass, and in the meanwhile conducted extensive investigation, thereby running the risk that ultimately a judge, based on principles of estoppel or waiver, would rule that, having led Sarnafil to rely exclusively on Peerless’s protection at a time when Sarnafil could have protected itself, Peerless, in fairness, should not later be permitted to withdraw that protection even if and when it has become clear that Sarnafil’s losses in whole or in part were not within the coverage of the policies. See Salonen v. Paanenen, 320 Mass. 568, 572 (1947). Neither of those options would or should have been satisfactory to an insurer in the circumstances of this case.
Peerless, therefore, chose a third alternative. On October 4, 1984, Peerless wrote to Sarnafil as follows:
“Based on the limited information presently available to us, it is possible your policy with our Company may not provide coverage or protect you from or against any *309claims or expenses incurred in connection with the situation outlined in your [September] letter.
“We are reserving our rights under the policy because there are many unanswered questions pertaining to the scope and nature of coverage afforded a liability assured under the policy.
“We will promptly and diligently attempt to ascertain factual information to help us resolve these questions.”
That kind of letter, generally known as a reservation of rights letter, avoids the aforementioned risks and has been approved by this court on several occasions. See Three Sons, Inc. v. Phoenix Ins. Co., 357 Mass. 271, 276 (1970); Magoun v. Liberty Mut. Ins. Co., supra; Salonen v. Paanenen, supra at 572-573. As the court said in Salonen, supra at 573, “Where an insurer seasonably notifies its insured that it is continuing to [investigate or] defend the case subject to its right to disclaim later, the insured is in no position to say that he has been misled, and can take necessary steps to protect his rights. In this situation the basis for an estoppel is lacking.” Peerless’s October 4 letter in no way implied a refusal to defend Sarnafil, should a defense become necessary. Indeed, the very purpose of a reservation of rights letter, approved by this court in numerous cases, is to allow an insurer to investigate and to defend its insured without running the risk of misleading its insured and then being es-topped from disclaiming coverage.1
*310In response to Peerless’s October 4 reservation of rights letter, Sarnafil wrote to Peerless on October 15 conveying no new information concerning the airport damage but insisting there was coverage, and on October 24, Sarnafil’s counsel sent Peerless’s counsel a copy of a “proposal to the airport for repair of the roof damage. The proposed repairs included items, that had not been furnished by Sarnafil.” Ante at 299. In the October 24 communication, therefore, Sarnafil for the first time identified some items of damage which, if ultimately established, would result in liability covered by the policies. Finally, on November 1, Sarnafil’s counsel wrote to Peerless’s counsel that the airport’s architects had concluded that there was “damage to the structure itself’ which presumably was in addition to damage to items that had been furnished by Sarnafil. Having reserved its right to disclaim at a later date by its October 4 letter, Peerless did not communicate with Sarnafil in writing again until November 20, 1984, when it wrote that it was studying the coverage question. Significantly, nothing Peerless did or failed to do between October 4 and November 20 reasonably communicated to Sarnafil that Peerless had abandoned its reservation of the right to disclaim in the future and that instead it was disclaiming coverage or was refusing to defend Sarnafil. Peerless said or did nothing that would release Sarnafil from its contractual duty to notify Peerless of any claims made against it.
Peerless’s next written communication with Sarnafil was on December 18, 1984. On that date, Peerless was totally unaware that on November 14, without having sought Peerless’s authorization, Sarnafil had filed a demand for arbitration of its dispute with Taylor as to liability for airport damage. Peerless was also unaware that on December 7, Taylor had counterclaimed that Sarnafil’s adhesive had been defective, entitling Taylor to damages. On December 18, Peerless *311wrote Sarnafil a letter containing the following relevant paragraphs:
“Based on the information presently available to us, it is our position that no coverage is afforded under either of the . . . policies for any of the claims which have thus far been made against your client. As further developments regarding this matter occur and more specific claims are made against [the insured], we will be pleased to review the question of coverage under these policies.
“We wish to advise you that no action taken by this company [in] the course of investigating any of these matters is to be construed as a waiver of any rights it may have under the . . . policies. We also wish to advise you that we reserve any and all rights we may have to disclaim coverage, for any of the above-mentioned reasons or for any other reason. Finally, nothing set forth in this letter is to be construed as a waiver or relinquishment of any rights of this company under the . . . policies whether specified herein or not, and no act or acts of this company, its agents, servants or attorneys is to be so construed.”
Peerless’s assessment of the coverage was described as being based on several factors, the most significant of which were the policies’ exclusion of coverage for damage to Sarnafil’s own products (materials furnished by Sarnafil) and the policies’ lack of coverage for loss prevention measures.
Like Peerless’s October 4 letter, Peerless’s December 18, 1984, letter was a reservation of rights letter. Furthermore, like the October 4 letter, the December 18 letter in no way implied a refusal to provide a defense to Sarnafil. Sarnafil could not reasonably have construed that letter either as a disclaimer of coverage or as a refusal to defend Sarnafil with respect to any claim and especially with respect to Taylor’s counterclaim in arbitration, about which, as Sarnafil knew, Peerless was totally ignorant. The letter did not simply state *312that “no coverage is afforded under either of the . . . policies” as the court implies. Ante at 303. Instead, the letter expressly stated that Peerless’s position was “[b]ased on the information presently available to [it],” that is, that it was not premised on the specific claims contained in Taylor’s counterclaim of which Peerless was unaware. Indeed, the letter made clear that Peerless’s position as to coverage related only to “any of the claims which [Peerless knew] ha[d] thus far been made against [Sarnafil].” In addition, the December 18 letter clearly notified Sarnafil that “as . . . more specific claims are made,” which would include Taylor’s counterclaim in arbitration, Peerless “will be pleased to review the question of coverage.” Yet, as the summary judgment materials demonstrate, Peerless was not informed of Sarnafil’s demand for arbitration until months later, in April, 1985, after Peerless had brought a declaratory judgment action seeking a determination as to coverage and defense costs. Sarnafil did not send Peerless a copy of Taylor’s counterclaim until after the arbitration proceeding was completed in 1986.
Any obligation that Peerless might have to reimburse Sarnafil for its expenses of preparation for, and participation in, the arbitration proceedings, and for its expenses related to the commencement of an action to confirm the arbitrator’s award, could only derive from an unfulfilled obligation on Peerless’s part to provide representation in connection with those proceedings, including prehearing investigation. The critical question, then, is whether Peerless owed Sarnafil a duty to represent Sarnafil in the arbitration proceedings because, if Peerless did not breach such a duty, there is no basis on which an obligation to reimburse Sarnafil’s defense costs may be posited.
Both policies provide that “[i]f a claim is made or suit is brought against [Sarnafil], [Sarnafil] shall immediately forward to [Peerless] every demand, notice, summons or other process received by [it] and [its] representative.” The court acknowledges that “Sarnafil was contractually obligated to notify Peerless of the initiation of arbitration and the filing of Taylor’s counterclaim.” Ante at 302. The court also states,. *313however, that “the violation of a policy provision should bar coverage only where the breach frustrates the purpose underlying that provision,” and concludes that it is apparent from materials in the record that, in this case, a reasonable fact finder could find that Sarnafil’s secrecy about the arbitration proceeding, including Taylor’s counterclaim, did not frustrate the purpose of the policies’ notice of claim provisions. Ante at 303. The court is correct in saying that coverage is barred only when the insured’s breach of policy provisions frustrates their purpose, but the court is wrong when it says that, here, a reasonable fact finder could find that Sarnafil’s policy violations did not frustrate the purpose of the provisions.
A manifest purpose of a notice of claim provision is to give the insurer an opportunity to analyze specific claims against its insured in order that it fairly might determine whether it is obliged under its policy to. provide a defense to its insured. A second purpose is to give the insurer an opportunity, if it decides it is obliged to defend, not only to defend effectively but also to do so in the most cost effective way, perhaps utilizing the services of its own employees. As a matter of law, those objectives were frustrated in this case by Sarnafil’s reserving its defense to itself rather than tendering its defense to Peerless, and by Sarnafil’s maintaining silence concerning even the existence, let alone the progress, of the arbitration proceeding involving Sarnafil and Taylor. No fact finder could rightly find an absence of prejudice to Peerless, due to Sarnafil’s failure to notify Peerless of Taylor’s counterclaim, if Peerless was to be held responsible for this payment of Sarnafil’s legal expenses over which Peerless had no control.
The court’s conclusion that a fact finder could find that Peerless was not prejudiced by Sarnafil’s breach of its notice obligations is not the court’s only error. The court also seems to reason that a trial is necessary because, based on materials in the record, a fact finder would be warranted in finding that Peerless acted in bad faith because of its “failure to investigate the facts or inform Sarnafil of its decision on coverage by December 7, 1984 [the date Taylor filed its counter*314claim — unknown to Peerless] . . . justifying Sarnafil in regarding Peerless’s silence, in all the circumstances, as the equivalent of a disclaimer of coverage [which] disclaimer could be found to have been unjustified if in fact there was coverage under the policies, and if Peerless knew or should have known that to be so.” Ante at 303-304, quoting Sarnafil, Inc. v. Peerless Ins. Co., 34 Mass. App. Ct. 248, 255 (1993). The court also reasons that “[a] fact finder could reasonably conclude that Peerless’s December 18 letter, couched as it was in terms of ‘no coverage is afforded,’ amounted to an actual disclaimer of coverage, a conclusion which had been reached by Peerless by December 7, 1984, when Taylor filed its counterclaim.” Ante at 304. No worthwhile purpose would be served by a protracted discussion in this dissenting opinion of these several assertions in support of the court’s conclusion that summary judgment for Peerless on counts I and VI should not have been ordered. It should be noted, however, that the court points to no authority, and I am aware of none, for the proposition that an insurer’s failure to investigate a claim beyond reviewing materials submitted by its insured before it has been made in a court or similar forum, or an insurer’s failure to make a decision on coverage within two months after sending the insured a reservation of rights letter, without more, warrants a finding of bad faith which, in turn, warrants either the insured or a fact finder in concluding that the insurer disclaimed. By its decision, unsupported by authority, the court seriously confounds insurance law by blurring the long-recognized and very important distinction between a present disclaimer of coverage and an insurer’s reservation of the right to proceed with investigation and the defense of its insured and to disclaim coverage thereafter if further developments establish that the loss is not within the coverage.
When an insurer seeks to defend its insured under a reservation of rights, and the insured is unwilling that the insurer do so, the insured may require the insurer either to relinquish its reservation of rights or relinquish its defense of the insured and reimburse the insured for its defense costs. Three *315Sons, Inc. v. Phoenix Ins. Co., 357 Mass. 271, 274-277 (1970). In the present case, however, Sarnafil gave no such option to Peerless. Instead, in violation of its contractual duty, Sarnafil decided, unilaterally and without notice, to conduct its own defense, thereby relieving Peerless of any duty to defend Sarnafil or reimburse it for its defense related costs. It is true, as the court says, ante at 304, that “the reservation of rights would not have excused Peerless’s duty to protect Sarnafil while Peerless investigated to determine whether coverage existed.” However, Peerless’s duty to protect Sarnafil was contingent on Sarnafil’s notifying Peerless of specific claims having been made, such as Taylor’s counterclaim, from which Sarnafil sought protection. Because there was no notice, there was no duty. I dissent from the court’s reversal of the judgment as to counts I and VI. This opinion is a “dissent in part” because I agree with the court that the judgment of the Superior Court should be affirmed as to counts II, IV, and VII.

The court states, ante at 303, “Peerless had, on October 4, 1984, written to Sarnafil reserving its rights on the coverage issue, and had promised that it would ‘promptly and diligently attempt to ascertain factual information* to resolve what a fact finder could reasonably conclude were both the coverage and defense questions” (emphasis added). Contrary to the court’s assertion, the October 4 letter made no reference to defense questions. The words contained in the letter, “or protect you from or against any claims or expenses incurred in connection with the situation outlined in your letter” was an obvious reference to the expenses incurred or anticipated by Sarnafil in connection with emergency loss prevention measures. The existence of coverage for such expenses was in dispute. The sole focus *310of the letter was the preservation of Peerless’s right to disclaim responsibility to indemnify Sarnafil for losses Sarnafil might suffer despite any investigation Peerless might make into the “unanswered questions pertaining to the scope and nature of coverage afforded [Sarnafil] under the policy.”