Reservation of Rights Letters: Lack of Specificity Proves Fatal To CGL Insurer In South Carolina

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COLUMBIA, S.C. – Law360.com recently featured the South Carolina Supreme Court Ruling in Harleysville Group Insurance vs. Heritage Communities Inc. as one of the five most important but potentially overlooked insurance rulings in the first quarter of this year.  The Harleysville case points up  the peril insurers face for issuing general, non-specific reservations of rights letter.

In Harleysville, the South Carolina Supreme Court held that a reservation of rights letter which did not clearly state why a carrier believed a CGL policy may not provide coverage for a loss could bind the insurer to cover the loss.  The  Court affirmed a special referee’s decision that Harleysville was obligated to insure a prorated share of large verdicts entered against developers of two Myrtle Beach condominium complexes for a series of construction defect cases.

Harleysville agreed to defend the developer,  Heritage Communities Inc. and related companies in the underlying litigation under the CGL policies, but issued several reservation of rights letters during the defense which were used later to question the insurer’s coverage obligations.    A special referee ruled that the insurer had failed to properly reserve its right to dispute coverage for the actual damages verdicts against Heritage because the letters included only “generic denials of coverage” accompanied by verbatim copies of policy provisions.

The South Carolina high court agreed  that the reservations of rights letters were insufficient, as they did not adequately place the insureds on notice  of the insurer’s specific concerns and arguments against coverage.  Writing for the Court, Justice John W. Kittredge held:

“It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage…At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and-paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement,  Harleysville’s duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage… Here, except as to punitive damages, Harleysville’s reservation letters gave no express reservation or other indication that it disputed coverage for any specific portion or type of damages.”

(emphasis added).  Justice Kittredge went out to point out, for example, that Harleysville did not identify the basis on which it intended to contest that no “occurrence” took place, as defined in the policy.  On that basis, the Court affirmed the referee’s finding that Harleysville could not contest coverage under the CGL policies based on the reservation of rights letters it issued.

Editor’s Note:  The obvious takeaway here is that insurers should not skimp when it comes to the drafting of reservation of rights letters.  The better practice is to have inside or outside counsel prepare specific reservation letters as part of the coverage analysis or coverage opinion, if and when reservation letters are indicated. 

This ruling cautions against any conventional view that reservation of rights letters are merely “cookie cutter” documents that can be generated primarily by word processors.  Reservation of rights form letters may be used as a starting point, but never an ending point — the letters must ultimately contain specific gounds supporting any reserved claim, and wherever possible include citation to facts and information tending to suggest a reasonable dispute as to the terms of the policy on which reservation is being made.  CJH

Harleysville Group Ins. v. Heritage Communities, Inc., No. 2013-001291 (South Carolina, 2017)

Re-Purposing The Free Initial Consultation For The Benefit of Insurers and Corporate Clients

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Alternative fee arrangements are out of the bag by now.  They are being tried and used by insurers as part of ongoing efforts to bring cost-certainty to outside legal fees.  Badfaithadvisor.com has a complete survey of alternative fee options here.

But that is not the end of the leverage in favor of  insurers and corporate clients.  And to that end,  I am going to let you all in on a very big secret.  Not only that, I am going to invite — no — I’m going to dare, you to take advantage of it, and here it is:   I would rather my clients and prospects talk to me for free about matters of concern to them ,  than to let them  talk to any of my competitors.  Under any terms.

And so, the free initial consultation, long a staple of the plaintiff’s bar, has been co-opted and re-purposed for my insurance company and other corporate clients.

Insurance and corporate clients, and prospective clients who are interested in testing the waters, are given  free initial consultations of anywhere from 30 minutes to 2 hours (and sometimes more)  to review documents, and to discuss cases they are considering assigning to outside counsel.  But I offer the same thing to the same clients and the same prospects who are actually looking to AVOID sending a matter to outside counsel, too.  This provides value to them in the form of an informal first or second opinion which will give them early clarity on a matter, and peace of mind on potential action plans for handling those claims or matters.

The free initial document review / consultation is a win – win for clients and prospects.  If they do decide to retain me, on either en alternative or conventional fee basis, they have familiarized me with the matter they will be assigning and brought me up to speed at no cost to them, thereby reducing their overall legal expense on the matter.   If they decide to keep the matter in-house, they have received the value of an outside look for free, and I have hopefully created good will my clients will remember when the next matter comes up for consideration.

There are and will always be major coverage matters and bet-the-company litigation which insurers and corporate clients on which clients will seek outside representation.  Free initial consultations on both these matters and matters which clients never assign to outside counsel is another way to provide value to clients in business environments encouraging the limitation and reduction of outside legal expense.

C.J. Haddick

Water, Water Everywhere: Water Damage Exclusion Bars Coverage, Florida Judge Rules

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MIAMI, March 28 — A commercial property insurance policy’s water exclusion barred recovery for water related damage and  repair costs arising from a backed up pipe, a Florida judge has ruled.

In Ken Cameron and Michelle Cameron v. Scottsdale Insurance Co., No. 16-21704, S.D. Fla., 2017 U.S. Dist. LEXIS 45474, U.S. District Judge Marcia Cooke  granted Scottsdale’s motion for summary judgment in a coverage suit filed by the Camerons.  Scottsdale had previously denied coverage on a claim the Camerons made under a commercial property policy insuring their apartment complex after a pipe collapsed in the internal plumbing system and caused water and property damage.

Ken and Michelle Cameron originally filed suit in the 11th Judicial Circuit Court for Miami-Dade County, Fla., against Scottsdale Insurance Co., seeking a declaration that coverage was owed for water damage which occurred on one of their apartment properties. Scottsdale removed the action to federal court, and after losing an initial motion to dismiss, prevailed on a motion for summary judgment.

According to the suit, a  plumber found an “acute pipe failure” when the pipe collapsed.  Scottsdale denied coverage pursuant to an exclusion  for water – related losses.   Scottsdale argued that the policy in question did not cover damage from water originating from a drain.  The exclusion applied to  “water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment.”

The Camerons opposed the summary judgment motion claiming that the exclusion applied only to water backups or overflows deriving outside their property’s premises.
Judge Cooke held that the policy contained no definition of “drain” but that the term ordinarily refers to a “conduit for draining liquid, as a ditch or a pipe.”  She further held:

“Though the parties dispute whether the collapsed pipe was a ‘sewer’ and refer to the pipe by different names—a ‘sewer line’ for Respondent, a ‘sanitary line’ for Petitioners—it was, at the very least, a ‘drain.’  Parties do not seriously dispute this point or that there was a back up and overflow from the pipe.  More importantly, the [water exclusion] does not differentiate between drains found inside or outside the Petitioners’ property line or their plumbing system.  By its very terms, then, the [water exclusion] bars payment for the water damage and other repairs stemming from the Petitioners’ collapsed and backed up pipe… Because I find the [water exclusion] bars recovery for Petitioners in this case, it is unnecessary to analyze the other Policy provisions parties raise.  The lack of coverage for underground pipe damage is inconsequential, since it does not cover any purported water damage Petitioners allege.  The water damage exception does not impinge on the [water exclusion], as discussed above.  And I need not analyze the deterioration exclusion since the [water exclusion] undergirds my decision.”

Ken Cameron and Michelle Cameron v. Scottsdale Insurance Co., No. 16-21704, S.D. Fla., 2017 U.S. Dist. LEXIS 45474

No Bad Faith Claim Where UIM Claim Not Covered Under Antique Auto Policy

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PITTSBURGH, March 13 – U.S. District Magistrate Judge Cynthia Reed Eddy has dismissed both a bad faith and breach of contract claim against an issuer  of an antique auto policy where the alleged injury occurred in a vehicle not covered under the UM/UIM portion of the policy.

Bish v. Am. Collectors Insurance, Inc., et. al., (W.D. Pa., March 13, 2017)(Eddy, U.S.D.M.J.)

Disagreement Over ACV Estimate Insufficient To Support Bad Faith Claim, Judge Rules

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PITTSBURGH, March 2  —  An ACV basis estimate upon which a homeowners’ claims offer was made by State Farm Insurance  did not lack a reasonable basis, a federal judge ruled in dismissing the homeowners bad faith claim.  In Randy Gowton v. State Farm Fire and Casualty Co., U.S. District Judge Cathy Bissoon dismissed Gowton’s bad faith claim against State Farm, finding that the  insured  failed to show that his insurer’s offer to settle “was not supported by a thorough and even-handed investigation.”

Gowton sustained damage to his home in a fire, and submitted an estimate from his contractor to State Farm for a replacement cost benefit of $293,911.80.  After performing its own inspection, State Farm offered just $112,694.50, based on a replacement cost estimate of $187,874.50, less  depreciation of $75,180.15.  Gowton’s policy was payable on an “actual cash value benefits” basis.

Gowton sued State Farm in the Fayette County Court of Common Pleas, and after removing the case to federal court, State Farm moved to dismiss the bad faith count.  A breach of contract count had previously been dismissed by Judge Bissoon on statute of limitations grounds.

Judge Bissoon held that mere disagreement on the value of a claim following a reasonable investigation could not support a claim for bad faith:

“Gowton has failed to allege any facts to suggest that State Farm’s settlement offer lacked a reasonable basis or was not supported by a thorough and even-handed investigation… Significantly, Gowton’s response brief reiterates that he is not alleging that State Farm was dilatory, failed to communicate, performed an unsatisfactory or biased investigation or unreasonably delayed in considering his claim.  Rather, Gowton simply alleges that State Farm’s estimate was per se unreasonable for no other reason than that it differed from his own.. In the absence of any supporting facts from which it might be inferred that the company’s investigation was biased or unreasonable, this type of disagreement in an insurance case is ‘not unusual,’ and ‘cannot, without more, amount to bad faith.”

“This conclusion is bolstered by an examination of the exhibits referenced throughout Gowton’s Amended Complaint.  State Farm performed an initial inspection of the property only two days after the damage occurred and provided a detailed, 38-page estimate within a month thereafter.  State Farm’s estimate contains a room-by-room assessment of the damage; detailed measurements; design drawings; materials analysis; and line by line estimates of the cost and depreciation of the construction materials necessary to rebuild the home.  This is precisely the type of thorough and adequate investigation that vitiates a claim of bad faith.”

Randy Gowton v. State Farm Fire and Casualty Co., et al., No. 15-1164, W.D. Pa., 2017 U.S. Dist. LEXIS 29390 (Bissoon, J.)

UM/UIM Rejection Form Need Not Comply Verbatim With Statute, State High Court Rules

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HARRISBURG, Feb.22 – In a 5-2 decision, the Pennsylvania Supreme Court ruled that a UM/UIM rejection form which did not comply verbatim with the statutory requirements for rejection was valid, finding the differences between the form and the statutorily required language “inconsequential.”

In Ford v. Am. States,  the Plaintiff rejected UM/UIM coverage in her auto policy by signing a form which, according to the opinion, was identical to the statutorily required waiver in 75 Pa.C.S.A. sec. 1731 except for the following:  1.) the form referenced “motorists” instead of “motorist” in its title line and first sentence, and 2.) it injected the word “motorists” between  Underinsured” and “coverage” in the second sentence.

The American States form read, therefore, as follows:

REJECTION OF UNDERINSURED MOTORISTS PROTECTION

By signing this waiver I am rejecting underinsured motorists coverage under this policy, for myself and all relatives residing in my household. Underinsured motorists coverage protects me and relatives living in my household for losses and damages suffered if injury is caused by the negligence of a driver who does not have enough insurance to pay for all losses and damages. I knowingly and voluntarily reject this coverage.

In affirming summary judgment in favor of American States, Justice Max Baer rejected Ford’s argument that the form she signed violated Section 1731, and cited to Robinson V. Travelers Indemnity Co., 520 Fed. Appx. 85 (3d Cir. 2013).  In Robinson, the identical language used by American States was found to be in compliance with the Pa.M.V.F.R.L.:

“the Third Circuit observed that the MVFRL does not define the phrase “specifically comply” and that courts have not been uniform in their treatment of UIM coverage rejection forms that add language to the statutory form. Robinson, 520 Fed.Appx. at 88. As to the specific circumstances in the case, the court reasoned that the addition of the word “motorists” into the rejection form did not introduce any ambiguity and, in fact, made the form consistent with the rest of the MVFRL. Id. While the court opined that it is a better practice for  insurance companies not to supplement the statutory language of the MVFRL’s rejection form, the court nonetheless concluded that the insurer’s rejection form was valid because: it included the entirety of the statutory text; the addition of the word “motorists” did not introduce ambiguity into the form and did not alter the scope of the coverage.”. .  when a UIM rejection form differs from the statutory form in an inconsequential manner, the form will be construed to specifically comply with Section 1731 of the MVFRL.”

Justice Baer did caution, however, that the safer practice for insurers was to replicate the statutory language to avoid any question of non-compliance of UM/UIM rejection forms.

Ford. v. American States Ins. Co. (Pa., Feb. 22, 2017) (Baer, J.)

Pennsylvania Federal Judge Finds Condo Policy Vacancy Exclusion Ambiguous; Rules Cincinnati Insurance Owes Water Loss

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SCRANTON, Pa., Feb. 10 — A Pennsylvania federal judge ruled Feb. 10 that a vacancy exclusion in a policy was ambiguous, and obligated Cincinnati insurance to reimburse its insured for water related losses.

In Village Heights Condominium Association v. The Cincinnati Insurance Co., No. 16-554, M.D. Pa., 2017,  U.S. Middle District John Jones granted the Condominium Association’s motion for summary judgment, holding that the sum total of the Condominium’s buildings were more than 31% occupied, and therefore not vacant within the meaning of the vacancy exclusion in the Cincinnati policy, and exclusion which the Court found ambiguous.

The Village Heights is  a community comprising 50 units consisting of stand-alone homes, and apartment units. Mr. and Mrs. Herb Graves, owners of  stand-alone Unit 205 were not living in their unit and had it up for sale.  In March 2015, while on vacation, a pipe burst occurred inside the Graves unit causing significant water damage to common areas owned by the Condominium Association.

Cincinnati declined coverage, claiming that the “Vacancy Provision,” precluded indemnity because the Graves’ unit was vacant for more than 60 days.  The Association filed suit against Cincinnati, and the case was removed to the U.S. District Court for the Middle District of Pennsylvania.

The parties in their cross-motions for summary judgment disputed whether “the policy was intended to insure the separate buildings, apart and distinct from each other, or whether the Policy meant to cover the nineteen buildings as one, making up a single ‘blanket building.’”  The policy defined a building as vacant “unless at least 31% of its square footage” is rented or used.

In finding for the Association, Judge Jones held that the exclusion was ambiguous on the issue of whether the policy provided blanket building coverage to the condominium association as a unified building or as separate buildings:

 “‘Simply put, the Policy’s Declarations do not define any terms, they merely identify the coverages available under the Policy.  Thus, the Declarations do not define a “Blanket Building,” but rather indicate that the Policy provides Blanket Building Coverage.  . . .’  Finally, the Vacancy Provision, which appears in Section Six (6) of the Policy, appears to contain its own separate definitions of the term ‘building,’ which differ according to whether the Covered Property is owned by an owner or general lessee, or is leased to a tenant and is with respect to that tenant’s interest in the property.  Where, as here, the Policy is issued to an owner, the Vacancy Provision defines ‘building’ as ‘entire building.’  In a subsequent paragraph, the Vacancy Provision then refers to “the building where ‘loss’ occurs” to further specify its terms, including a requirement that the building be vacant for sixty (60) days.”

Editor’s Note:  The Court’s ruling points to a potentially unintended exposure for property and casualty insurers.  Caution should be exercised by insurers regarding both  the wording of vacancy exclusions, and how units and buildings are defined when the policy in question insures Homeowners and Condominium Associations, as opposed to individual home or unit owners.

For a copy of  the opinion in Village Heights Condominium Association v. The Cincinnati Insurance Co., No. 16-554, M.D. Pa., 2017 (Jones, J.), email me at chaddick@dmclaw.com.