SC Supreme Court holds reservation of rights letters must be specific to be effective

by Dentons
Contact

Dentons

The Supreme Court of South Carolina has issued a decision that could have a great impact on how insurers issue reservation of rights letters. In Harleysville Group Ins. v. Heritage Group Communities, Inc., No. 27698, 2017WL105021 (S.C. Jan. 11, 2017), the Court held that Harleysville Group Insurance (Harleysville) failed to properly reserve its right to contest coverage of an underlying construction defect case because, even though Harleysville issued “reservation of rights” letters to the insured, these letters were ineffective because they "included no discussion of Harleysville’s position as to the various [policy] provisions or explanation of its reasons for relying thereon” and “failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage.” Id. at *6.

The letters issued by Harleysville included much of the stock language used by insurers in issuing reservation of rights letters. They identified the insured and the lawsuit at issue, summarized the allegations in the complaint, identified the policy numbers and policy periods for policies that potentially provided coverage and, “through a cut-and-paste approach,” incorporated excerpts of various policy terms, provisions relating to the insuring agreement and Harleysville’s duty to defend, and policy exclusions and definitions. However, the letters failed to make any connection between the cited policy provisions, the facts of the claim and how coverage may not apply.

Added the Court:

"Specifically, Harleysville did not expressly put its insureds on notice that it intended to litigate the issues of whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy periods, what damages were attributable to non-covered faulty workmanship, and whether certain damages resulted from intentional acts by the insured and were thus excluded. And in no way did the letters inform the insureds that a conflict of interest may have existed or that they should protect their interests by requesting an appropriate verdict. As the Fifth Circuit found in Duke v. Hoch, Harleysville’s reservation of rights “was no more than a general warning” and “too imprecise to shield [the insurer].” 468 F.2d 973, 979 (5th Cir. 1972).

Id. at *7.

In finding the letters ineffective to properly reserve the insurer’s right to contest coverage, the Court explained,

“It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage. … [G]eneric denials of coverage coupled with furnishing the insured with a verbatim recitation of all or most of the policy provisions (through a cut-and-paste-method) is not sufficient.” Id. at *5.

The Court provided a lengthy and helpful examination of case law across the country concerning insurers’ reservation of rights to contest coverage. Some of the highlights are:

  • “A reservation of rights letter must give fair notice to the insured that the insurer intends to assert defenses to coverage or to pursue a declaratory relief action at a later date.” United Nat’l Ins. Co. v. Waterfront N.Y. Realty Corp., 948 F.Supp. 263, 268 (S.D.N.Y. 1996).
  • “If the insured does not know the grounds on which the insurer may contest coverage, the insured is placed at a disadvantage because it loses the opportunity to investigate and prepare a defense on its own.” Desert Ridge Resort LLC v. Occidental Fire & Cas. Co. of N.C., 141 F.Supp.3d 962, 967 (D.Ariz. 2015).
  • Where the insurer undertakes and exclusively controls the insured's defense under a reservation of rights, the insurer, prior to undertaking the defense, must specify in detail any and all bases upon which it might contest coverage in the future since “[g]rounds not identified in the reservation of rights may not be asserted later by the insurer.” Id. at 966-68.
  • Where the insurer fails to adequately reserve the right to contest coverage, the insurer may be precluded from doing so. See World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 695 S.E.2d 6, 10-11 (Ga. 2010).
  • “For a reservation of rights to be effective, the reservation must be unambiguous; if it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured.” Id. at 10.

Harleysville, at *5-6.

While Harleysville is a significant decision for insurers covering losses in South Carolina, the Court's approach is not a novel one, as courts across the country have issued similarly reasoned decisions. Osburn, Inc. v. Auto Owners Ins. Co., No. 242313, 2003 WL 22718194, at *3 (Mich. Ct. App. Nov. 18, 2003) (“[W]e conclude that, because Auto Owners’ reservation of rights letter was not sufficiently specific to inform plaintiffs of the policy defenses the insurer might assert, the letter did not constitute ‘reasonable notice.’”); Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012)(holding “[a] reservation of rights letters is not valid if it does not fairly inform the insured of the insurer’s position); Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., 449 S.W.3d 16 (Mo. Ct. App. 2014)(finding reservation of rights letters ineffective where the letters did not adequately explain why the defendant may not have owed coverage to its insured). Therefore, insurers need to make sure that their reservation of rights letters comply with these stricter standards.

Following are some tips to keep in mind when drafting reservation of rights letters to ensure that the letter effectively and adequately informs the insured of the insurer’s coverage positions.

  1. Use the words “reservation of rights.”
  2. Identify the policy at issue.
  3. Quote relevant policy provisions and identify any terms, conditions or exclusions that may apply.
  4. Specifically refer to the relevant allegations in the complaint.
  5. Identify which claims may not be covered.
  6. Explain in detail the basis for the insurer’s coverage position.
  7. Advise the insured of any actual or potential conflicts of interest between the insurer and the insured.
  8. Depending on the situation and jurisdiction, advise the insured of its right to independent defense counsel.
  9. Set forth the proposed arrangement for providing a defense.
    1. Default language (e.g., “If you do not object, then we will deem you agree with this approach”).
    2. Identify the counsel selected to defend, along with the counsel's contact information.
    3. If the insured has selected counsel, advise that that insurer will pay up to the hourly rate that it would have paid to its own panel counsel.
  10. Reserve the right to withdraw from the defense should there appear to be no coverage.
  11. Reserve the right to file a declaratory judgment action to determine rights and obligations.
  12. Reserve the right to recoup defense costs pertaining to the claim (or some claims) if not covered.
  13. Reserve the right to allocate payment of settlement or judgment that is partially covered.
  14. End with a general reservation of rights, including"
    1. Right to amend position upon learning new facts; and
    2. Right to amend position if claim or litigation change.

Other Considerations

  1. All letters, like all actions, should be adapted to the particular circumstances of the claim.
  2. Be aware of the particular risks of reserving rights in the applicable jurisdiction.
  3. All letters must be clear whether the insurer is:
    1. Accepting coverage without reservation; or
    2. Defending and/or investigating under reservation; or
    3. Denying coverage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!