Insurers Issuing Reservation of Rights Notices to Insureds Must Invoke All Potentially Applicable Policy Exclusions
A recent decision of the Superior Court of Pennsylvania underscores the need for insurers to conduct an adequate investigation prior to the issuance of reservation of rights letters. In Selective Way Insurance Co. v. MAK Services, Inc., the intermediate appellate court reversed the trial court’s award of summary judgment to Selective Way Insurance Co. (“Selective Way”), finding that Selective Way’s failure to invoke a policy exclusion in its initial reservation of rights letter—or for eighteen months thereafter—estopped the insurer from relying on that exclusion to disclaim coverage. 2020 Pa. Super. 103, 232 A.3d 762, 764 (2020).
In 2011, Selective Way issued a commercial general liability policy to MAK Services, Inc., a snow and ice removal company. Pursuant to a provision entitled Snow and Ice Removal Exclusion, Selective Way’s policy excluded “‘bodily injury’, ‘property damage’, or ‘personal and advertising injury’ arising out of snow and ice removal activities that are performed for others by the insured or by any contractors or subcontractors working on the insured[‘]s behalf.” 232 A.3d at 764.
In October 2011, Oscar Gordon slipped and fell while walking through a parking lot on the premises of the Valley Forge Marketplace, a client of MAK Services. Gordon sued MAK Services, among others, alleging that MAK had been negligent in removing snow and ice from the Marketplace’s premises. MAK Services tendered the claim to Selective Way under its commercial general liability policy. Id. at 765.
In response to the claim, Selective Way issued a letter stating it would defend MAK Services, subject to a reservation of its rights. Selective Way’s letter stated, in relevant part:
In the meantime, please be aware that Selective Way will be handling this matter under a reservation of rights. This means that Selective Way reserves all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop. Those rights include, but are not limited to, the rights to decline coverage for this claim and to withdraw assigned defense counsel.
Id. After issuing the reservation of rights letter, Selective Way provided MAK Services with defense counsel for eighteen months. Selective Way then filed declaratory judgment action, seeking a finding that the CGL policy’s Snow and Ice Removal Exclusion barred coverage. Id. at 765-66. The trial court granted summary judgment to Selective Way, finding that Exclusion was clear and unambiguous. Id. at 766.
The Superior Court of Pennsylvania reversed the trial court’s decision. The Court held that Selective Way’s failure to raise the Exclusion in its reservation of rights letter, or during the eighteen months that Selective Way provided the insured with a defense, meant that “Selective Way may not disclaim coverage at this late hour in the litigation under the snow and ice removal exclusion.” (Emphasis in original.) Id. at 772 n.8.
The Superior Court acknowledged that “[t]he lack of specificity in Selective Way's reservation of rights letter is not determinative, in and of itself. We are not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them.” Id. at 770.
However, the Superior Court noted that insurers had both a duty to investigate claims and a duty to provide insureds with notice that “fairly inform[ed] the insured of the insurer’s position.” Id. at 768. Because “[a]ny complete review of the Policy would have immediately revealed the existence of this exclusion,” the Court found that Selective Way’s failure to identify the Snow and Ice Removal Exclusion in its initial letter “bespeaks the deficient investigation carried out by Selective Way.” Id. at 770. Selective Way’s failure to identify the Exclusion also “presumptive[ly] prejudiced” MAK Services, which “reach[ed] the reasonable conclusion there was no pressing need to secure back-up counsel.” Id. at 770, 772. As such, the Court estopped Selective Way from relying on the Exclusion in its declaratory judgment action.
Courts in other jurisdictions have reached similar conclusions regarding insufficiently specific reservation of rights letters. For example, in Harleysville Group Insurance v. Heritage Communities, Inc., the Supreme Court of South Carolina agreed that “it is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage.” 420 S.C. 321, 337-38, 803 S.E.2d 288, 297 (2017). As such, that Court found that a reservation of rights letter which included a “copy-and-paste” listing of “all or most of the policy provisions,” without discussion, was insufficient to preserve the insurer’s right to disclaim coverage on the basis of those exclusions. 420 S.C. at 338.
Other courts have not required the same degree of specificity. For example, in 1997 the Texas Court of Appeals found that an insurer may only waive a policy exclusion where it “with knowledge of facts indicating non-coverage, assumes the insured’s defense without a reservation of rights.” Katerndahl v. State Farm Fire & Cas. Co., 961 S.W.2d 518, 523 (Tex. App. 1997). And in Smith v. Shelby Ins. Co. of Shelby Ins. Grp., 936 S.W.2d 261, 263 (Tenn. Ct. App. 1996), the Tennessee Court of Appeals found that an insurer was not estopped from relying on a theft exclusion in its policy where the insurer did not raise that exclusion until the insured had commenced litigation seeking coverage.
While state judiciaries have differed over the degree of specificity required in reservation of rights letters, insurers should conduct a diligent investigation of all claims and confirm that any reservation of rights letter invokes all policy exclusions or other limits to coverage that could be applicable at that time.