Superior Court Provides Important Lessons Regarding Reservation of Rights Letters

In the case of Selective Way Ins. Co. v. MAK Services, No. 1289 EDA 2019 (Pa. Super. April 24, 2020) (Bowes, J., Shogan, J., Strassburger, J.) (Op. by Bowes, J.)(Dissenting Op. by Strassburger, J.), the Pennsylvania Superior Court issued an important decision pertaining to the validity of reservation of rights letters issued by liability insurance carriers.

According to the Opinion, the insured in this matter was a snow and ice removal contractor. The carrier at issue had issued a policy to this insured which had an exclusion for snow and ice removal coverage. 

In an underlying matter, the insured snow removal contractor was sued for a slip and fall event that allegedly occurred in an allegedly icy parking lot. 

According to the Opinion, even though the carrier had the exclusion for snow and ice removal activities contained in its policy, the carrier did not expressly reference that exclusion in its reservation rights letter that was initially issued to its insureds after the claim arose. 

Rather, the carrier defended the case for approximately eighteen (18) months before specifically raising the exclusion, for the first time, in a Declaratory Judgment Complaint.  In that Declaratory Judgment Complaint, the carrier requested a declaration from the court that it had no duty to defend or indemnify its insured under the case presented as applied to the policy language. 

The insured filed a counterclaim asking for a defense and coverage and also asserted claims for bad faith and fraud. Notably, the insured also included a request that the court declare that the carrier was "estopped" from ceasing its representation and indemnification of the insured in the underlying slip and fall lawsuit. 

At the trial court level, a ruling was issued that the language in the reservation of rights letter that was issued by the carrier was sufficient to preserve the carrier’s right to assert the snow and ice exclusion eighteen (18) months later even though that exclusion was not specifically referenced or quoted in the letter. The trial court had granted summary judgment in favor of the carrier on all counts in the declaratory judgment action. On appeal, the Superior Court reversed.

In so ruling, the Pennsylvania Superior Court reviewed certain general principles of law relative to the validity of reservation of rights letters. 

For example, the Pennsylvania Superior Court confirmed that “Pennsylvania law does not require an insurance company to list every potential defense to coverage in its reservation of rights letter.”  However, the Court did note that there was some recent case law that suggested that some level of specificity is necessary in this regard. 

The Superior Court also confirmed that an insurance company may “choose to send multiple reservation of rights letters during the evolution of case as a best practice.” 

The appellate court also confirmed that, even where a carrier “assumed the duty to defend, the [carrier] can simultaneously challenge whether the claim is covered under the insurance policy, even if the underlying case settles.”

The Superior Court also confirmed that “[a]n insurer’s defense of the insured, therefore, does not waive the insurer’s claims that a policy exclusion applies.” 

Yet, the appellate court also confirmed that a carrier is “required to provide timely and sufficient notice of any such reservation of rights to the insured....” 

Overall, the Court noted that a reservation of rights letter must “(1) be submitted in a timely fashion, and (2) ‘fairly inform the insured of the insured’s position’ in order to preserve an insured’s assertion of policy exclusions once a defense of the insured has been mounted.” 

The appellate court otherwise noted that a carrier “preserves defenses via a reservation of rights ‘[i]f its investigation is conducted with reasonable dispatch and its disclaimer is made with promptness upon the discovery of the facts....’” 

Stated otherwise, the Pennsylvania Superior Court noted that a carrier “cannot delay its decision and refrain from giving notice to the insured until such time has elapsed that [the insured’s] rights in relation to the accident are prejudiced or may become so…..” 

Notably, the Court additionally held that, where a carrier “fails to clearly communicate a reservation of rights to an insured, prejudice may fairly be presumed.” 

The Pennsylvania Superior Court went on to rule that a carrier will not be estopped from setting up the defense that the insured’s loss was not covered by the insurance policy, even if the carrier participates in the defense of the action against the insured, “if the [carrier] gives timely notice to the insured that it has not waived the benefit of its defense under the policy.” 

The Pennsylvania Superior Court cautioned, however, that, “to be effective, [a reservation of rights] must be communicated to the insured.” 

That reservation of rights must also “fairly inform the insured’s position and must be timely, although delay in given notice must be excused where it is traceable to the [carrier’s] lack of actual or constructive knowledge of the available defense.” 

The Superior Court also cited to Supreme Court precedent for the proposition that “[w]hen an insurance company or its representatives is notified of loss occurring under an indemnity policy, it becomes its duty immediately to investigate all of the facts in connection with the supposed loss as well as any possible defense on the policy. It cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, take advantage of a defect in the policy. The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.” 

The Pennsylvania Superior Court also confirmed that “insurance carriers may be estopped from asserting a policy exclusion where it has ‘lulled the insured into a sense of security to his detriment.’”  

In this case, it was noted that the carrier has issued the reservation of rights letter within three (3) weeks of the lawsuit filed against the insured, and before any defense was assigned. As such, the Superior Court found that the reservation of rights letter was timely in this case. 

However, the Superior Court found that the content of the reservation of rights letter, which did not reference the particular exclusion at issue, did not fairly inform the insured of the carrier’s position. The Superior Court faulted the carrier for using “boilerplate language” in its reservation of rights letter without reference to the particular exclusion the carrier wished to rely upon. 

The Superior Court reiterated that, while carriers do not have the list every potential defense in a reservation of rights letter, the trend of recent case law suggested that some level of specificity is necessary and, therefore, required. 

The Pennsylvania Superior Court was careful to note that “[t]he lack of specificity in [the carrier’s] reserve of rights letter is not determinative, in and of itself.   The Court emphasized that it was "not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them."

Here, the carrier had the policy language in hand along with actual knowledge of the nature of the claim, but still waited eighteen (18) months before specifically raising the exclusion. This, the Pennsylvania Superior Court found, was insufficient. Because the insured was allegedly presumably prejudiced as a result, the court found that the carrier was estopped from asserting the exclusion.  As stated, the trial court's decision in favor of the carrier was reversed and the case was remanded for further proceedings.

Anyone wishing to review a copy of this decision may click this LINK.

The Dissenting Opinion by Judge Strassburger can be viewed HERE.  Judge Strassburger was of the opinion that the prejudice in this context should not be presumed, but that the insured should be required to prove prejudice relative to the reservation of rights letter.

I send thanks to Attorney Lee Applebaum of the Pennsylvania law firm of Fineman, Krekstein & Harris for bringing this case to my attention and for his analysis of the same. Please be sure to check out Attorney Applebaum’s excellent Pennsylvania and New Jersey Insurance Bad Faith Case Law blog.