Seventh Circuit Takes a Dim View of "Mend the Hold" In Insurance Litigation: A Welcome Development for Insurers
|May 30, 2012|
Previously published on Spring 2012
Drafting a coverage denial letter is not an inconsequential, ministerial task. Denial letters frequently end up as a plaintiff’s Trial Exhibit No. 1 in breach and bad faith trials, and insured’s attorneys focus upon them heavily in framing their case and presenting it to the judge and jury. The wording of denial letters must be precise and the basis for the denial must be clear. When denial letters fall short, insurers can end up embarrassed at trial, or worse, estopped from relying upon available policy defenses.
Insured’s attorneys have been known to raise doctrine of “mend the hold” in their attacks upon the sufficiency of denial letters. The mend-the-hold doctrine provides generally that in a breach of insurance policy dispute, an insurer may not assert one basis in denial of a claim and then change its position materially by asserting an entirely new and unrelated basis in defense of the litigation. Insureds will raise this doctrine when an insurer’s affirmative defenses in litigation assert policy defenses that it did not state in the denial letter.
The weight of recent case law on this issue is not considerable, and consequently, courts may not be familiar with the mend-the-hold doctrine. Fortunately, the U.S. Court of Appeals for the Seventh Circuit addressed the doctrine in a recent decision and in so doing reached a decision favorable to insurers. Insurers should have it at the ready for all future breach of policy disputes.
The facts and primary holding of Ryerson, Inc. v. Federal Insurance Company , 212 U.S. App. LEXIS 7372 (April 12, 2012) are straightforward: The appellate court (applying Illinois law) upheld Federal Insurance Company’s denial of Ryerson, Inc.’s claim for reimbursement of a settlement sum and associated defense costs arising from litigation in which another company accused Ryerson of fraudulent concealment of material information in the sale subsidiaries. When Ryerson settled with that company and then sought reimbursement of those sums under the liability insurance policy Federal issued to Ryerson, Federal denied the claim. In litigation, it defended its denial by arguing that fraudulent concealment was not a covered loss under the policy. The appellate court agreed and vindicated Federal’s interpretation of the policy.
But Ryerson also asserted the mend-the-hold doctrine in the case, and the court addressed that argument as well. The definition of loss defense apparently was not a basis Federal asserted in denial of the claim prior to litigation, although the appellate decision does not identify what policy defense Federal did assert at first. At any rate, once litigation commenced, Federal pled the definition of loss as an affirmative defense, and Ryerson took exception and sought to estop Federal from relying on that defense under the mend-the-hold doctrine.
The appellate court rejected the argument for two reasons. First, and in a most welcome development, the court may have rejected mend the hold as a viable doctrine in insurance disputes (although it made no such explicit declaration). It reasoned that an insurer cannot reasonably be expected to articulate all potential defenses to all potential accusations in subsequent litigation when denying a claim. The court reasoned that such a requirement would be “unreasonable to the point of absurdity” and would result in insurers refusing, out of an abundance of caution, to offer any explanation for claim denials until the insured sued. An insurer should not be forced to incur the time and expense of identifying and articulating all possible legal defenses to a suit until a suit is filed. Insurers raise this argument routinely in response to “mend the hold” attacks in litigation, and so it is reassuring to see the Court embrace that reasoning here.
Secondarily, the court reasoned that because the denial contained an explicit reservation of rights by which the insurer asserted its right to raise additional policy defenses in the future, Ryerson could not be prejudiced by the new policy defense Federal raised in the litigation. This, too, is a standard response to mend-the-hold attacks, and once again, insurers should welcome the court’s endorsement of the argument.
Ultimately, Ryerson, Inc. v. Federal Insurance Company probably is not a watershed moment in insurance law jurisprudence. But it is a welcome decision nonetheless, and an arrow worth keeping in the proverbial quiver for future litigation. Assuming that an insurer does what it must when denying a claim and articulates clear claim denials with accompanying reservation language, this new decision echoing insurers’ longstanding arguments in opposition to the doctrine will be powerful ammunition by which to fend off “mend the hold” attacks the next time insureds raise them.
The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
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