Faulty Workmanship Not Occurrence, Travelers No Duty to Defend / Indemnify Real Estate Investment Companies, Federal Judge Rules

con3

PHILADELPHIA,  September 1 — A Pennsylvania federal judge granted summary judgment Travelers Insurance last week, ruling it had no duty to defend insured real estate developers who were sued for claims of defective community living infrastructure construction.

In the breach of contract suit over coverage (bad faith claims had been dismissed earlier in the case), U.S. District Judge Mitchell Goldberg said that no coverage existed under the applicable Travelers insurance policies because the defective workmanship issues were not “occurrences” under well-established Pennsylvania precedent.

The insured plaintiffs, Northridge Village LP and Hastings Investment Co. Inc., bought and subdivided lots in Chester County, Pa., subsequently selling them to a builder.   Northridge built roads, storm water and runoff  management and other infrastructure for the planned community.

The community  association alleged defects with the construction of roads, drainage ponds, utility boxes, and other items, later suing Northridge and Hastings in Pennsylvania state court in 2013.  Northridge and Hastings then sought defense and indemnity for the suits under a commercial general liability policy with a $1 million occurrence limit, $2 million aggregate limit and $2 million products-completed-operations aggregate limit, as well as excess coverage of $2 million.  When Travelers denied the claims, Northridge and Hastings brought a coverage and bad faith suit against Travelers  in 2015.

Judge Goldberg dismissed the coverage suit, relying on what he called well-settled precedent stemming from a 2006 case, Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006).  Judge Goldberg held that under Kvaerner, construction workmanship issues did not constitute “occurrences”‘ within the meaning of the CGL policies, as they were not accidental, fortuitous events which the instrument of insurance is designed to cover:

 “Courts in this circuit have consistently applied Kvaerner and held that claims based upon faulty workmanship do not amount to an ‘occurrence,’ and thus do not trigger an insurer’s duty to defend … The same conclusion has been reached in this circuit in cases where the faulty workmanship results in foreseeable damage to property other than the insured’s work product…Given the weight of Pennsylvania and Third Circuit precedent, I conclude that the term ‘occurrence’ in defendants’ CGL policies and excess policies does not include faulty workmanship. Further, the definition of ‘occurrence’ excludes negligence claims premised on faulty workmanship.”

Judge Goldberg further held that even if a duty to defend were potentially triggered, that was mooted by a ‘Real Estate Development Activities’ exclusion which also appeared in the applicable policies.

Northridge Village LP and Hastings Investment Co. Inc. v. Travelers Indemnity Co. of Connecticut et al., (E.D. Pa 2:15-cv-01947)(Goldberg., J.)

Third Circuit: Insurers May Have Easier Time Keeping Coverage Litigation In Federal Court

Witness_stand_in_a_courtroom

PHILADELPHIA, Aug. 22 – In a recent ruling, the U.S. Court of Appeals for the Third Circuit may well have made it easier for insurers to litigate coverage in federal court regardless of whether there is an existing underlying proceeding pending in state court.

In Kelly v. Maxum Specialty Insurance Group,  the Third Circuit Court of appeals reversed a ruling by U.S. District Judge Joel Slomsky, who  had opted to abstain from exercising jurisdiction over the removal of a declaratory judgment action filed by a dram shop  liability personal injury plaintiff against the tavern defendant’s insurance agent  and the agent’s liability insurer.  The Plaintiff sought a ruling that the insurer, Maxum, had an obligation to defend and indemnify the insurance agent Carman, in an underlying state suit against Carman relating to the agency’s failure to advise the tavern’s insurer of notice of the original dram shop suit, which led to a default judgment against the tavern.

Judge Slomsky remanded the insurance coverage suit, filed under the Federal Declaratory Judgment Act, on the grounds that the underlying state proceeding against the insurance agent, Carman, was a prior, parallel proceedinging.  Judge Slomsky ruled that the insurance coverage issues could be resolved in the state court action filed by the dram shop plaintiff against the agent, Carman, because Maxum could conceivably be added as a party to that suit.

Last week, however,  a three-judge panel of the Third Circuit disagreed with Judge Slomsky’s reasoning and ruled instead that that a federal action brought under the Declaratory Judgment Act is not parallel to a state case “merely because they have the potential to dispose of the same claims.”

Circuit Judge Michael Chagares wrote on behalf of the panel that “[Defining] ‘parallel state proceeding’ so broadly balloons a court’s discretion to decline a [Declaratory Judgment Act] action beyond the measured bounds we set forth in our prior decisions.”  The appeals panel further ruled that while the presence of related state court proceedings was a factor to consider, the district judge failed to consider a number of other factors, including Maxum’s argument that it was not even a party to the underlying civil errors and omissions case  against its insured, Carman.

 

 

Judge Chagares wrote:

“We hold that the mere potential or possibility that two proceedings will resolve related claims between the same parties is not sufficient to make those proceedings parallel; rather, there must be a substantial similarity in issues and parties between contemporaneously pending proceedings.”

Using that standard, the Third Circuit found that the state negligence action against Carman  and the federal declaratory judgment suit which included Maxum were  clearly not parallel, as they involved different parties and distinct claims.

The Third Circuit remanded the federal declaratory judgment  case to Judge Slomsky with the instruction that he proceed to confirm complete diversity of citizenship of the parties to the federal declaratory judgment action.

Kelly v. Maxum Specialty Ins. Grp._ 2017 U.S. App. LEXIS 15824.

Editor’s Note: The opinion issued by the Third Circuit in Kelly should be given close attention by insurers wishing to maintain declaratory judgment litigation in generally more favorable federal forums.  Those insurers often have to defend their federal coverage suits from remand motions in which state court plaintiffs make enticing arguments to federal trial judges presenting them with an opportunity to clear an active case off of their dockets through exercise of the abstention doctrine.  The rule set forth in Kelly may allow insurers to effectively respond to such remand claims, by pointing out to the federal court that an underlying personal injury proceeding which does not involve a defendant’s insurer and a federal declaratory judgment suit on coverage which does, are hardly “parallel” proceedings.  CJH

Disability Insurer Prevails: Pre-Existing Condition Justifies Denial, Federal Judge Rules

Witness_stand_in_a_courtroom

HARRISBURG, June 21 — A Pennsylvania federal judge has granted a disability insurer’s summary judgment motion, finding that a refusal of long term disability (LTD) benefits was neither arbitrary nor capricious, because the denial properly relied on a pre-existing condition exclusion in the policy.

In Yvonne Hilbert v. The Lincoln National Life Insurance Co., 15-471, M.D. Pa., 2017 U.S. Dist. LEXIS 93424), U.S. District Judge Sylvia Rambo ruled that Lincoln National Life Insurance Co., did not violate or abuse its discretion under the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. (1974) (ERISA), when it found that Ms. Hilbert’s claim was not covered under a LTD policy it issued to Delta Dental, covering her as an employee.
Hilbert worked at Delta Dental and received benefits under the company’s short term disability policy (STD) for back and leg pain, and depression, claiming she was unable to work.   When Lincoln reviewed her claim for LTD status, the LTD policy in question barred coverage for any condition for which the employee was treated within 3 months of her hire.  Lincoln determined that Hilbert received treatment for depression  during her “look back” period of  Aug. 1, 2011 to Nov. 1, 2011, and eventually denied Hilbert’s claim for LTD benefits pursuant to the pre-existing condition exclusion.  Lincoln contended that Hilbert did not prove she was unable to work independent of her depression.
Following the denial of her administrative appeals, Hilbert sued Lincoln in the Eastern District of Kentucky, but the case was moved by Lincoln to the Middle District of Pennsylvania on grounds that  that it was a more convenient forum.
Following transfer, the parties filed cross motions for summary judgment..Judge  Rambo granted Lincoln’s motion and denied Hilbert’s motion , ruling that Lincoln’s denial of LTD benefits was not arbitrary and capricious.  She rejected Hilbert’s argument that the grant of STD benefits undercut the denial — the STD policy did not have a pre-existing condition exclusion.  She also found that Hilbert failed to prove her inability to work was wholly divorced from her depression:
“[the record] demonstrates that Lincoln considered the relevant medical evidence and supports Lincoln’s decision that Plaintiff was not totally disabled due a physical condition as of September 18, 2012…Lincoln did not act in an arbitrary and capricious manner in characterizing the principal duties and responsibilities of Plaintiff’s occupation…Significantly, although Plaintiff treated with several medical providers, not a single physician — not even her primary care physician or her pain physician — supported her claim… Here, Lincoln’s decision to deny Plaintiff LTD benefits is supported by substantial evidence in the record, and without substituting the court’s judgment for that of the defendant in determining eligibility for plan benefits, the court concludes that Plaintiff is not entitled to benefits under the terms of the LTD Policy and that Lincoln’s decision was neither arbitrary nor capricious.”
The judge also found that Hilbert’s receipt of Social Security disability benefits did not entitle her as a matter of course to LTD benefits under the Lincoln policy, observing that SSDI rules do not bar coverage for pre-existing conditions.

Federal Judge Rules Pollution Exclusion Ambiguous; Orders Insurers To Defend School District In Copper/Lead Class Action

copperpipe

Pittsburgh, June 9 – A U.S. District Judge in Pittsburgh has granted a motion for judgment on the pleadings in favor of a school district, ordering a primary and excess insurer to defend the district in a pollution class action case.  In The Netherlands Ins. Co., et. al. v. Butler School District, et. al., U.S District Judge Arthur Schwab interepreted pollution exclusions in the involved insurance policies as ambiguous because they did not specifically exclude pollution claims arising out of copper becoming “bioavailable.”

The school district had a  general liability policy issued by Netherlands and an umbrella policy written by Peerless.  The insurers sought a declaratory judgment in the Western District of Pa. that they had no duty to defend the district because the claims were within exclusions for “pollutants” and lead exposure.

Judge Schwab ruled that both The Netherlands Insurance Co. and Peerless Insurance Co. had to defend Butler Area School District and a prior superintendent, Dale Lumley,  from parents’ claims against the district for concealing hazardous levels of lead and copper in one of the district’s elementary schools.  The Court found the insurance policies’ general pollution exclusions were ambiguous enough to allow coverage and that the specific lead poisoning exclusions did not specifically reference copper.

In ruling on the parties’ cross-motions for summary judgment, Judge Schwab looked to prior decisions in lead paint cases which held that exclusions “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’” did not sufficiently address the gradual chemical process by which the paint caused lead poisoning.

“These findings are similar to the facts, as here, where lead and copper are essentially components of the water system at Summit Elementary, which have degraded over time, thereby allegedly rendering the lead and copper bioavailable.”

The judge also held that without a specific copper exclusion, the insurers were bound  to provide a defense in the underlying case, as there has been no factual decisions made as to whether the alleged injuries were caused by the lead, copper or both.  He also ruled that the duty to indemnify would have to await those factual determinations in the underlying case.

Judge Schwab emphasized the bedrock premise that the duty to defend was broader than the duty to indemnify, and then concluded:

“The court will not countenance the insurers’ invitation to turn Pennsylvania law relative to the duty to defend on its head, so as to allow the potential exclusion of a single type of claim to relieve them of their duty to defend, when the law actually requires a defense when a single potentially covered claim is alleged.”

The Netherlands Ins. Co., et. al. v. Butler School District, et. al., (W.D. Pa., June 9, 2017)(Schwab, J.)

 

W.Va. Supreme Court Finds Earth Movement Exclusion Unambiguous

shutterstock_852782921

WEST VIRGINIA,  June 2  – The West Virginia Supreme Court  ruled that Erie Insurance was not liable to provide coverage to an insured business which claimed landslide damage, in part because the earth movement exclusion in the policy made no distinction between natural and artificial earth movement events.

In Erie Property and Casualty Ins. Co. v. Chaber, the Chabers’ motorcycle shop leased property and insured it with a policy issued by Erie Insurance Property and Casualty Co.  A Feb. 19, 2014, landslide caused damages to the property, including broken windows.  Erie engaged an expert who opined the damage was the result of seasonal climate change.  The insureds disputed the claim, and engaged an expert who said the loss was the result of improperly excavated ground.

The W.Va. Circuit Court granted judgment in favor of the Chabers in February 2016, holding that the insuring agreement did not unambiguously exclude manmade landslides.  The state Supreme Court reversed, however, and held that manmade landslides and natural events were both excluded from the Earth Movement Exclusion in the policy.  They also held that that an exception for glass breakage to the exclusion could  not be extended to cover all aspects of the loss.

Judge Margaret Workman wrote:

“A provision in an insurance policy that excludes a loss regardless of whether such loss is ‘caused by an act of nature or is otherwise caused’ is not ambiguous and excludes coverage for the loss whether it is caused by a man-made or a naturally-occurring event.”

The Court also found that while ensuing loss involving breakage of glass was covered via an exception to the Earth Movement Exclusion, the lower court misapplied that exception when it used it to require Erie to pay for the entire claim, calling the circuit court’s interpretation “unjustifiable.”

Erie Insurance Property and Casualty Ins. Co.  v. Chaber, No. 16-0490, W.Va. Supreme Court (Workman, J.)

 

Insured’s Claims Conduct Dooms Bad Faith Claim, Federal Judge Rules

CSCC-Lawsuit-Dismissed

SCRANTON, May 30 – In Turner v. State Farm Fire & Cas. Co., No. 3:15-CV-906, 2017 U.S. Dist. LEXIS 81922 (M.D. Pa. May 30, 2017), U.S. District Judge Richard Conaboy dismissed the plaintiff’s bad faith case, finding that the insured, who was already paid nearly $350,000 for a fire property loss by State Farm, delayed and frustrated a disputed additional payment amount.

The parties disputed that the insured was entitled to more than $17,000 in landscaping charges.  The insurer had already paid $347,000 for other property loss.  And while the contract dispute over the landscaping fees was not resolved at summary judgment, the bad faith claim made by the insured was dismissed, Judge Conaboy finding it unthinkable” on the facts that a jury could find State Farm acted in bad faith.

The Court ruled that the issue of delay could be analyzed first by a review of the insuring agreement itself.  Judge Conaboy found that the policy placed a duty on the insured to advance his claim by providing information supporting the claim.  The insured in this case, the Court observed, delayed production of supporting documentation for over a year:

“To succeed on a bad faith claim, a Plaintiff must demonstrate “(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis.” Verdetto v. State Farm Fire and Casualty Company, 837 F.Supp 2d. 480, 484 (M.D.Pa. 2011), affirmed 510 Fed. Appx. 209, 2013 W.L. 175175 (3d. Cir. 2013)(quoting Klinger v. State Farm Mutual Insurance Company, 115 F.3d 230, 233 (3d. Cir. 1997). In addition, a Plaintiff must demonstrate bad faith by clear and convincing evidence. Polselli v. Nationwide Mutual Fire Insurance Company, 23 F.3d 747, 751 (3d. Cir. 1994). For an insurance company to show that it had a reasonable basis to deny or delay paying a claim it need not demonstrate that its investigation yielded the correct conclusion, or that its conclusion more likely than not was accurate. Krisa v. Equitable Life Assurance Company, 113 F.Supp 2d. 694, 704 (M.D.Pa. 2000). The insurance company is not required to show that ‘the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.’ Id. Instead, an insurance company must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. Id. ‘The ‘clear and convincing’ standard requires that the Plaintiff show ‘that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction without hesitation, about whether or not the defendants acted in bad faith,’  citing J.C. Penney Life Insurance Company v. Pilosi, 393 F.3d 356, 367 (3d. Cir. 2004)…. In short, Plaintiffs’ failure to perform their reporting duty under the contract impeded, wittingly or unwittingly, [the insurer’s] investigation of their claim. Thus, the delay in payment for the value of their personal property was a direct result of Plaintiffs’ failure to perform their contractual duties and, as such, may not serve as an appropriate basis for a finding of bad faith on Defendant’s part. Stated another way, Plaintiffs may not now seek to profit due to their lack of action.”

Turner v. State Farm Fire & Cas. Co., No. 3:15-CV-906, 2017 U.S. Dist. LEXIS 81922 (M.D. Pa. May 30, 2017) (Conaboy, J.)

 

 

Insurer’s Failure To Obtain Stacking Waiver On Added Vehicle Results In Stacked Benefits, Pa. Judge Rules

insurance%20coverage-x

 

STROUDSBURG, May 30 –  A Pennsylvania state court judge has decided that a driver was entitled to $400,000 in stacked coverage because the driver did not sign stacking waivers when adding the most recent vehicles to his policy.

In Newhook v. Erie Ins. Exchange, Monroe County Court of Common Pleas Judge David J. Williamson granted declaratory relief sought by  Kenneth Newhook when he filed a complaint against Erie seeking entitlement  to the stacked coverage.   Newhook was involved in a rear end accident when he was struck by a drunk driver, and he alleged he sustained severe injuries in the collision.

Erie paid $100,000 in single-vehicle coverage but denied Newhook’s claim for $300,000 in additional stacking benefits based on 3 other vehicles listed on the policy.  Newhook neither selected nor waived stacking  when adding the most recent vehicles, Williamson noted in his opinion.

Williamson declined to follow Erie’s argument that it had no duty to obtain new stacking waivers for the recently added vehicles after the insured initially declined stacking on the former vehicles:

“It appears that the existing case law varies regarding availability of stacked UM/UIM coverage when it is not selected by an insured, but also not specifically waived in writing…From a pure public policy standpoint, and in conformity with the intent of Section 1738 of the [Motor Vehicle Financial Responsibility Law], it would seem that when more benefits are available, a written waiver of those benefits should be given…Clearly, a significant change was made when the Ford Fusion was added to the policy. No stop-gap insurance was needed because Erie was informed and issued a new declaration and also renewed the insurance policy prior to the accident. No new waiver was executed.”

Williamson ruled in favor of stacking despite the fact that the vehicle in the accident, a Ford Fusion, was a replacement for an automobile on which stacking had originally been rejected.  The judge ruled that acquisition of the new cars was akin to the purchase of a new vehicle, on which a stacking waiver would be required.

A link to the opinion appears below.

Newhook v. Erie Ins. Exchange (Monroe C.P., May 30, 2017)(Williamson, J.)

Judge Rules IME Policy Provision May Violate Pa. Motor Vehicle Law

discovery

SCRANTON, May 15  — A Pennsylvania federal judge  dismissed  bad faith and other claims against Allstate Insurance Co.  in a class action, but permitted claims brought under the Pennsylvania Motor Vehicle Financial Responsibility Law (MVFRL)  by a woman injured in a car accident.

In Sayles v. Allstate Insurance Co., No. 16-1534, M.D. Pa., 2017 U.S. Dist. LEXIS 71760),  Sayles filed suit after the company denied her claim for medical benefits for injuries she sustained following an automobile accident.  According to Sayles, Allstate denied her claim  because she did not first obtain a physical examination, as required in the insuring agreement.  The suit, originally filed against Allstate in Pike County,  was removed to federal Court.

Sayles claimed Allstate’s policy requirement of a mandatory medical examination violated provisions of the MVFRL which permit medical examinations by court order.  She also advanced claims under the Unfair Trade Practices and Consumer Protection Law, and for bad faith under 42 Pa,C.S.A. section 8371.  Sayles also sought class certification for Allstate policyholders denied medical benefits where Allstate had not first obtained a court-ordered physical examination

Allstate moved to dismiss all claims relating to its policy’s examination requirement, which permits it to require  insureds to undergo an independent medical examination (IME) by a physician of Allstate’s choosing as a condition precedent to payment of medical expenses.  Allstate claimed the provision was enforceable notwithstanding Section 1796 of the MVFRL, because Section 1796 relating to court-ordered IME’s  was permissive in nature, not mandatory.

U.S. Middle District Judge Richard Caputo granted the motion to dismiss as to the bad faith claims, but denied the motion regarding Sayles’ claims that the policy provision requiring IME’s violated the MVFRL:

“[T]he Court predicts that the Pennsylvania Supreme Court would find Allstate’s examination requirement, as alleged, in conflict with § 1796 of the MVFRL and thus void as against public policy.  The examination requirement conflicts with the plain language of the statute and is inconsistent with the twin purposes of § 1796.  Moreover, the Court is not persuaded by the ‘implication’ of the Superior Court’s decision in Fleming and, consequently, departs from the conclusion reached by the district court in Williams.  Instead, the Court finds it appropriate to rely on the opinion of the district court in Scott, as well as the opinions of Judge [R. Stanton] Wettick [Jr.] in Erie and Hoch.  Additionally, the Court finds the analogous case law from the Commonwealth of Kentucky addressing a similar statutory provision under similar factual circumstances compelling.  Accordingly, in light of the above discussion, Allstate’s Motion to Dismiss will be denied with respect to Counts I and II of Sayles’s Complaint.”

In dismissing both statutory and common law bad faith claims against Allstate, Judge Caputo recognized that the law regarding mandatory IME’s in Pennsylvania was not fully settled, and that Allstate was not unreasonable in relying on some lower court precedent which had approved of similar mandatory examination provisions.  He wrote, therefore:

“It was reasonable for Allstate to rely on [precedent] which supported Allstate’s decision to deny Sayles’s medical benefits based on her failure to submit to an IME per the terms of the Policy.  Because Sayles’s bad faith claim is predicated entirely on the examination requirement, the Court finds that the Complaint alleges only that Allstate made a ‘reasonable legal conclusion based on an area of the law that is uncertain or in flux.’ . . .  Accordingly, the Court will grant Allstate’s Motion to Dismiss with respect to Count IV of Sayles’s Complaint.”

The judge also dismissed Sayles’ claims for violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, unjust enrichment and intentional misrepresentation.

Sayles v. Allstate, No. 16-1534, M.D. Pa., 2017 U.S. Dist. LEXIS 71760) (Caputo, J.)

 

Pa. Judge: Bad Faith Case Severed, Jury To Hear Common Law Bad Faith Claims

Witness_stand_in_a_courtroom

Pennsylvania’s  Westmoreland County Court of Common Pleas has denied a motion to stay of discovery in a  bad faith case pending completion of a UIM case, but has also ordered severance of trial of the bad faith claims under which common law bad faith claims will be tried by a jury, and statutory bad faith claims will be tried by the judge.

In Madeja v. State Farm Mutual Automobile Ins. Co., No. 5493 of 2016 (C.P. Westmoreland Co. April 11, 2017 Scherer, J.), the plaintiffs advanced both common law bad faith claims and statutory bad faith claims,  The trial court ordered those claims severed from the underlying UIM claim.  In a bit of a quirk, however, the court ruled that depending on the verdict returned on the UIM claim,  the common law bad faith claims would be heard with the same jury that determined the UIM claim while the court would hear the statutory bad faith claim on a non-jury basis.

A copy of the trial court order can be found here.

Editor’s note:  The trial court order in this case points out the somewhat unique nature of bad faith law in Pennsylvania — it is a two-headed creature with both a common law component and a statutory law component.  In this writer’s experience, trials of both statutory and common law bad faith claims is not the norm — statutory bad faith claims are usually singly tried to the bench in state court.  The court order in question sets up for a potentially unruly and cumbersome bad faith trail, given the likelihood of overlapping evidence presented on the common law and statutory bad faith claims.   The Court might streamline the process by simply taking evidence in a single bad faith proceeding, and then letting the jury render a verdict on the common law claims, with the Court issuing a decision on the statutory bad faith claims. 

The ruling could serve as an incentive to the plaintiffs’ bar to not only plead common law bad faith claims, but seek trial of those claims in an effort to work around what has traditionally been the province of the trial judge in bad faith cases. 

 

 

.

 

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

DearInsured_Image-279x300

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)

%d bloggers like this: