Nationwide Properly Withdrew Defense of Pollution Claim, 3rd Circuit Rules

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PHILADELPHIA, May 27  — The Third Circuit last week ruled that  Nationwide Insurance properly terminated its defense of a group of insured homeowners, finding that it had properly reserved its rights to do so.

Randy and Erin Shearer sued a group of homeowners, claiming that the owners permitted sewage to leak onto the Shearer’s property, an 18 acre parcel of land they intended to develop.  Nationwide defended the homeowners under a reservation of rights, and eventually cancelled coverage and withdrew its defense.

The insurer issued several reservation communications to its insureds, stating that  coverage was subject to a reservation of rights,  and pointing out pollution exclusions in the policy, and exclusions for biological deterioration.

Nationwide filed suit in 2014 claiming it owed the homeowners no defense, citing the pollution exclusion. The homeowners did not contest the exclusion, but rather claimed prejudice from Nationwide’s decision to terminate their defense.  The U.S. District Court  for the Eastern District of Pa. found in favor of Nationwide, ruling that the reservation of rights letters entitled Nationwide to withdraw its defense.

In affirming the district court, Circuit Judge Thomas Hardiman wrote:

“While they were understandably disappointed by Nationwide’s decision to withdraw its defense, the fact that it was entitled to do so under the terms of the insurance contracts means that the defense it did tender was a temporary benefit to the policyholders. . . The fact that Nationwide defended the case for some time before citing an exclusion and denying coverage does not somehow turn the defense it did provide into fraudulent inducement. . . Nor does it turn the policyholders’ decision to allow Nationwide to provide them with a defense into detrimental reliance.”

Nationwide Insurance Company v. Shearer, et. al., (3rd Circuit, 2016)(Hardiman, J.)