The South Carolina Supreme Court issued a decision on 7/26/2017 which provides some good information regarding the purposes and requirements of reservation of rights (ROR) letters. The Court held in Harleysville Group Insurance Corporation v. Heritage Communities, Inc., 420 S.C. 321, 803 S.E.2d 288 (2017), that an insurer’s ROR letter in a construction defect case was insufficient to reserve its right to contest coverage. Harleysville filed a declaratory judgment action seeking a judicial determination that it had no duty to indemnify its insureds (the developers and general contractors of two condominium complexes) regarding judgments entered against them in the underlying lawsuits or, alternatively, if any of the damages awarded in the underlying lawsuits were found to be covered, Harleysville sought an accounting to determine what parts of the underlying jury verdicts constituted covered damages.
When Harleysville received notice of the underlying lawsuits, it sent ROR letters to its insureds stating that it would defend them but, according to the Court’s opinion, the letters were “generic statements of potential non-coverage coupled with furnishing [the insureds] with copies (through a cut-and-paste method) of the insurance policies.” The letters summarized the allegations of the underlying complaints and included a nine- or ten-page excerpt of various policy terms, but the letters did not state the grounds upon which Harleysville might dispute coverage or explain its reasons for potentially denying coverage.
The issues in Harleysville’s DJ action were referred to a Special Referee who conducted an evidentiary hearing and concluded that Harleysville failed to properly reserve its right to contest coverage. The South Carolina Supreme Court affirmed.
The Court began its discussion by stating 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.” The Court then stated that a ROR letter, from the insured’s perspective, is intended to benefit the policyholder by alerting the insured to the possibility of non-coverage, that conflicts may exist between the policyholder and the insurer, and the policyholder should take steps to protect its potentially uninsured exposure. A ROR letter must be unambiguous. “[I]f it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured.”
The following requirements for a ROR letter can be gleaned from the Court’s opinion.
1. It must state and explain the coverage issues or grounds upon which the insurer may later deny coverage and the insurer’s position regarding those issues. 2. It must notify the insured that the insurer intends to assert defenses to coverage or to seek declaratory relief at a later time. 3. If the possibility exists that some of the claimed damages may be covered and other damages may not be covered, the letter must notify the insured of its right to request a special verdict or interrogatories in the underlying lawsuit which could determine which damages are covered.
Attorneys who write reservation of rights letters for insurers should read this case. I could not find any North Carolina cases which address the sufficiency of a ROR letter.
The Court also addressed several other issues, such as whether the plaintiffs in the underlying lawsuits were entitled to challenge the sufficiency of the ROR letters, but those issues are beyond the scope of this blog post.