No. 1 coverage case of 2017: When a reservation of rights letter is not

Editor’s note: The recent decision in Harleysville Group Insurance v. Heritage Group Communities should be a wake-up call for insurers of the need to draft proper reservation of rights (ROR) letters. The consequences of getting it wrong can be severe. Hear about the case, and get a 50-Item ROR checklist, by attending the webinar on May 18: “The Definitive Reservation of Rights Checklist: 50 Things That Every ROR Needs.”

I have lost track of the number of times that I’ve explained at client seminars, in webinars and to the guy next to me in line at Trader Joe’s, that for a reservation of rights letter to be effective it must fairly inform the insured of the reasons why the insurer may not be obligated to provide coverage for certain claims or damages in a suit — even though the insurer is providing a defense. The only other reminder I’ve given more often is to my 10-year-old daughter — that she not talk to strangers.

We have all seen reservation of rights letters that set forth a brief factual summary of the claim, followed by several pages of policy language — some completely irrelevant — and then a concluding statement that, voila, the insurer reserves its rights.

But drafting a reservation of rights letter takes more than simply addressing the facts (in detail, hopefully) and citing policy provisions (not numerous irrelevant ones, hopefully). The important step is then to tie these two aspects together. In other words, when a policy provision is cited in the reservation of rights letter because it may preclude coverage, it should be accompanied by the allegations in the complaint that support this potential coverage defense. A letter may not be a reservation of rights letter simply because it calls itself one, nor because it says — sometimes multiple times throughout — that the insurer is reserving its rights to deny coverage.

ROR letter must be ‘unambiguous’

Lots of courts have concluded that reservation of rights letters, lacking specificity in why coverage may not be owed, don’t make the grade, no matter how many times they may use the phrase “reservation of rights.” As such, the reservation of rights letter is ineffective. Translation: The insurer doesn’t have the coverage defenses that it thought it did. The loudest cases of late to make this point have been Hoover v. Maxum Indem. Co. (Ga. 2012) and Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co. (Mo. Ct. App. 2014).

In Hoover, the court said: “In order to inform an insured of the insurer’s position regarding its defenses, a reservation of rights 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. A reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position.”

In Advantage Builders, a Missouri trial court found that an insurer, after undertaking its insured’s defense, owed no coverage. But that decision went by the wayside at the appeals court because the reservation of rights letters — despite containing a lot of pages, setting out the facts at issue, voluminous policy language and a statement that the insurer was reserving its rights — were found to be not effective. The court put it like this: “The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.”

Most significant case of 2017

The new year is only one-third over. But, nonetheless, I believe that the most significant coverage decision of the year has already arrived.

In Harleysville Group Insurance v. Heritage Group Communities, (S.C. Jan. 11, 2017), the Supreme Court of South Carolina held that an insurer’s “reservations of rights” letter, despite setting out many pages of policy provisions, and other information usually contained in a reservation of rights letter, was ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage.

Specifically, the court held:

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.

Other courts may follow

Heritage Communities is one of the loudest, longest and clearest decisions that I have seen holding that a reservation of rights letter can be ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage. Such a strong decision, from a supreme court, not to mention on the heels of others, sets the stage for the possibility of Heritage Communities being followed by courts on a national basis.

In addition, decisions addressing the manner of reservation of rights letters — because they are relevant to every type of liability policy, and without regard to the claim facts — have the potential for the widest impact of all coverage cases. Because of this combination it will take a lot for me to conclude that another coverage decision, handed down this year, could be as impactful on as many claims.

“What’s in a name? That which we call a rose by any other name would smell as sweet.” (William Shakespeare, “Romeo and Juliet,” Act II, Scene 2.) But the same cannot be said of reservation of rights letters. In fact, just the opposite. A letter that is called a reservation of rights may be nothing of the sort.

Randy J. Maniloff is an attorney at White and Williams, LLP in Philadelphia, where he represents insurers in coverage disputes under a host of policies. He is the co-author of General Liability Insurance Coverage – Key Issues in Every State (3rd edition, National Underwriter) and the publisher of the newsletter and website www.CoverageOpinions.info

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