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Britton v. Smythe9/21/2000
which it volun- tarily relinquishes a known right or induces another into changing his position based upon reliance on the insurer's conduct when the insured is prejudiced by such reliance. In cases of the insurer's misrepresentation made at the policy's inception, the insured has been prohibited from procuring the coverage he desired. In cases where the insurer represents the insured without a reservation of rights, the insured may be prejudiced by the legal strategy adopted by the insurer. Absent a reservation of rights, the insurer should not be able to terminate its representation of the insured regardless of when it concludes it is not required to defend its insured. To ignore the actions of the insurer would be an "unfortunate triumph of form over substance." Harr [v. Allstate Ins. Co. (1969), 54 N.J. 287] at 307, [255 A.2d 208] at 219.
The same concerns apply here. Although Smythe, Cramer claimed that plaintiff had not been truthful at the time she requested retroactive coverage under the legal defense plan, the facts show that Smythe, Cramer had reason to know long before it rejected coverage that plaintiff may have misstated certain facts about her possession of the engineering report. Instead of taking prompt action to reserve its rights at the time, it waited until four weeks before trial -- more than two years later -- to reserve its rights. If Smythe, Cramer is "saddled with coverage it may not have intended or desired, it is of its own making." Turner Liquidating Co. v. St. Paul Surplus Lines Ins. Co., 93 Ohio App.3d at 299.
Finally, we must determine whether Smythe, Cramer's late reservation of rights caused plaintiff prejudice. 7C Appleman, Insurance Law and Practice (1979), 313-319, Section 4693, states:
Factors that may result in prejudice include the loss of a favorable settlement opportunity, inability to produce all testimony existing in support of a case, inability to produce favorable witnesses, loss of benefit of any defense in law or fact through reliance upon the insurer's promise to defend, or withdrawal so near the time of trial that the insured is hampered in the preparation of its defense. (footnote omitted).
Whatever chance plaintiff had to control her own destiny in the Lamb litigation passed after Smythe, Cramer's delay in reserving its rights. Particularly troubling to us is evidence that in pretrial settlement discussions Lamb offered to settle his case against both Smythe, Cramer and plaintiff for $100,000. The jury ultimately awarded $150,000 in total damages against both plaintiff and Smythe, Cramer. Other evidence, which will be discussed shortly, was that counsel warned Smythe, Cramer against going to trial and that there was an exposure to punitive damages.
Smythe, Cramer argues that no prejudice has been shown because it did not abandon the defense plaintiff chose to obtain her own counsel. This argument misses the point. Smythe, Cramer's failure to raise the coverage issue in a timely manner created a conflict of interest. As we have said, Smythe, Cramer's late reservation of rights created a situation where it could defend the Lamb action, but leave open the possibility that plaintiff's conduct could be shown as intentional, thus foreclosing coverage under the legal defense program. Under these circumstances, plaintiff did not make the choice to obtain independent counsel, but rather had no choice but to obtain independent counsel in the face of this conflict of interest. So while it is factually true that Smythe, Cramer did not refuse provide plaintiff's defense, its late reservation of rights created a conflict of interest which left plaintiff no choice but to protect her own interests.
As we note
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