Coverage Action Limited to Reasons Stated in Denial Letter

The United States District Court for the District of Rhode Island, applying Rhode Island law, held that when an insurance company denies coverage, it should be held to the reasons given to its insured in its denial letter and later barred from introducing into evidence or arguing for any grounds that do not appear in its denial letter.

Optical Works and Logistics, LLC (“OWL”), a supply-chain management services company, built out a property that was suitable for its specifications, including a “clean room.”  OWL purchased an all-risk property and business interruption insurance policy from Hartford Insurance Group (“Hartford”) to cover OWL’s continuing normal operating expenses, physical damage to business personal property, extra business expenses incurred, and damage to valuable papers, computer, and media in the case of a covered event.

Hurricane Irene and Tropical Storm Lee caused damage to the property, business documents, a laptop computer, and infiltrated the “clean room,” damaging some of the replication equipment.  OWL cleaned the building to mitigate damages and hired a trucking company to move its equipment.  It then moved its business to a new location, but it soon faced insolvency, which it blamed on Hartford’s failure to quickly provide coverage so that it could move, retrieve its equipment, and get its business back up and running.

OWL tendered the claim to Hartford.  Hartford issued a reservation of rights letter informing OWL that it was investigating coverage issues, including late notice, the cause of the water damage, and whether OWL needed to leave the property.  Ultimately, Hartford denied coverage because it determined that the equipment was not water damaged and that OWL Did not need to move out of the building.  

OWL sued Hartford for breach of contract and bad faith, alleging among other things that Hartford did not communicate its no-coverage position for a month, assigned an unqualified adjuster, and failed to tell OWL what was covered.  The district court bifurcated the bad faith claims from the breach of contract claims.  Both parties filed motions in limine before the trial on breach of contract. 

OWL’s motion sought to prevent Hartford from introducing evidence and arguments at trial in defense of OWL’s breach of contract and bad faith claims other than those specifically set forth in Hartford’s denial letter.  Rhode Island law provided that an insurer that denies coverage to “promptly provide a reasonable and accurate explanation of the basis for those actions” and that “[n]o insurer shall deny a claim on the grounds of a specific provision, condition, or exclusion unless reference to such provision, condition, or exclusion is included in the denial.”  Thus, in conjunction with the “mend the hold” doctrine, the district court found that when an insurance company denies coverage and is defending against a breach of contract claim, it should be held to the reasons given to its insured in a denial letter and barred from introducing into evidence or arguing any grounds that do not appear in its denial letter.  The Court reasoned that “[i]nsurance companies know how to reserve rights while they investigate claims.  Insureds have a right to rely on the facts and reasons given by the insurance company in the denial letter after it has thoroughly investigated the claim.”  Thus, the court granted OWL’s motion. Hartford’s motion sought to prevent OWL from introducing certain evidence at trial as not relevant to the claims under the insurance policy.  Hartford asserted that OWL should not be able to present evidence at trial that it did not provide to Hartford at the time of the loss, but the Court disagreed, finding that “[a]n insurance company is always required to consider new or supplemental information it receives in deciding whether it should pay a claim and how much it should pay – this obligation does not end with a denial letter or litigation.”  However, the Court agreed with Hartford that the plain and unambiguous policy language allowed OWL to recover only amounts actually incurred and thus limited OWL’s evidence to such.  Optical Works and Logistics, LLC v. Sentinel Ins. Co., Ltd. and The Hartford Ins. Group, C.A. No. 15-163-JJM-LDA (D.C. RI Mar. 11, 2021).