Recent Courts Limit Insurers’ Broad Reservation of Rights Tactics
Recent rulings restrict insurers' broad reservation of rights and post hoc denial justifications.
Why it matters: These rulings affect how insurers handle claims and defend coverage disputes, influencing risk management and litigation strategies for policyholders and insurers alike.
- In Cook Brothers Construction v. Frankenmuth Insurance, the insurer issued four differing denials over a year, each with distinct legal theories.
- The New Jersey Supreme Court upheld an insurer’s denial based on a capacity exclusion in Mist Pharmaceuticals v. Berkley Insurance.
- Minnesota Court of Appeals ruled insureds can select independent counsel if a reservation of rights creates a conflict, as in Fabyanske v. Western National.
- Shift from post hoc justifications to consistent, clear reservation of rights letters is critical to avoid bad faith claims.
Several recent court decisions are challenging broad reservation of rights letters and post hoc rationales insurers use in coverage denials, signaling increased scrutiny of insurers' claims handling practices.
In Cook Brothers Construction, LLC v. Frankenmuth Insurance Co., the insurer issued four materially different coverage denials over a year. Initial denial invoked a 'Your Work/Your Product' exclusion, later shifting to lack of property damage, non-recognized damages, and policy breach claims. The policyholder argued these shifting denials were a “post hoc search for justifications” rather than a good faith evaluation of the policy and law.
More recently, the New Jersey Supreme Court in Mist Pharmaceuticals, LLC v. Berkley Insurance Company upheld an insurer’s coverage denial based on a capacity exclusion in a D&O policy. The insurer preserved its right to deny coverage by issuing a comprehensive reservation of rights letter upfront, demonstrating the importance of clear early communication.
The Minnesota Court of Appeals in Fabyanske, Westra, Hart & Thomson, P.A. v. Western National Mutual Insurance Company ruled that when an insurer defends under a reservation of rights and coverage depends on the same facts, the insured is entitled to independent counsel at insurer expense to resolve conflicts of interest.
These decisions underscore a legal trend toward limiting insurers’ broad or shifting reservation of rights tactics and post hoc denials. For insurers and policyholders, this trend highlights the need for precise, consistent claims evaluations and transparent communications early in claims handling to minimize disputes and manage risks effectively.
By the numbers:
- 4 — different denial theories issued over a year in Cook Brothers Construction v. Frankenmuth Insurance
- $600,000 — amount sought by the general contractor in Cook Brothers dispute
- May 11, 2026 — NJ Supreme Court's Mist Pharmaceuticals ruling date
- June 1, 2026 — Minnesota Court of Appeals decision date in Fabyanske case
Yes, but: While courts limit untimely and broad reservations of rights, clear and early reservation of rights letters remain valid and critical for preserving insurer defenses.
What's next: Expect increased focus on insurer claims handling procedures and potential new guidance on reservation of rights use in coverage counsel.