SC Supreme Court Holds Reservation Of Rights Letters Must Be Specific To Be Effective

The Supreme Court of South Carolina has issued a decision that could have a great impact on how insurers issue reservation of rights letters. In Harleysville Group Ins. v. Heritage Group Communities, Inc., No. 27698, 2017WL105021 (S.C. Jan. 11, 2017), the Court held that Harleysville Group Insurance (Harleysville) failed to properly reserve its right to contest coverage of an underlying construction defect case because, even though Harleysville issued "reservation of rights" letters to the insured, these letters were ineffective because they "included no discussion of Harleysville's position as to the various [policy] provisions or explanation of its reasons for relying thereon" and "failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage." Id. at *6.

The letters issued by Harleysville included much of the stock language used by insurers in issuing reservation of rights letters. They identified the insured and the lawsuit at issue, summarized the allegations in the complaint, identified the policy numbers and policy periods for policies that potentially provided coverage and, "through a cut-and-paste approach," incorporated excerpts of various policy terms, provisions relating to the insuring agreement and Harleysville's duty to defend, and policy exclusions and definitions. However, the letters failed to make any connection between the cited policy provisions, the facts of the claim and how coverage may not apply.

Added the Court:

"Specifically, Harleysville did not expressly put its insureds on notice that it intended to litigate the issues of whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy periods, what damages were attributable to non-covered faulty workmanship, and whether certain damages resulted from intentional acts by the insured and were thus excluded. And in no way did the letters inform the insureds that a conflict of interest may have existed or that they should protect their interests by requesting an appropriate verdict. As the Fifth Circuit found in Duke v. Hoch, Harleysville's reservation of rights "was no more than a general warning" and "too imprecise to shield [the insurer]." 468 F.2d 973, 979 (5th Cir. 1972).

Id. at *7.

In finding the letters ineffective to properly reserve the insurer's right to contest coverage, the Court explained,

"It is axiomatic that an insured must be provided...