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“Cut-And-Paste” Approach was Insufficient to Reserve Rights to Contest Indemnity Coverage

South Carolina Supreme Court Finds that Reservation of Rights Letter Which Used “Cut-And-Paste” Approach To Listing Policy Provisions in Dispute was Insufficient to Properly Reserve Rights to Contest Indemnity Coverage

In Harleysville Group Ins. v. Heritage Communities, Inc., — S.E.2d–, 2017 WL 105021 (S.C. Jan. 11, 2017) the South Carolina Supreme Court found that a reservation of rights letter which simply “cut-and-paste” policy language was insufficient to effectively reserve rights to contest coverage for damages arising out of a construction defect lawsuit.  These letters explained that the insurer would provide a defense in the underlying suits and listed the name and contact information for the defense attorney it had selected to represent the policyholder 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, the insurer’s duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of the insurer’s position as to the various provisions or any 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 the insurer did, or might thereafter, dispute coverage.

Nor did the letters or testimony indicate that, in the event the policyholder was found liable in the suits, the insurer intended to file a lawsuit to contest coverage issues. Specifically, the insurer did not expressly put its policyholder 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 such, the Supreme Court refused on appeal to even consider the insurer’s arguments regarding application of exclusions.  

Written by Richard A. Vazquez