Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
Only 15 months ago, in Harleysville Group Insurance v. Heritage Communities, Inc., the South Carolina Supreme Court fundamentally changed the reservation of rights landscape in South Carolina. Id., 420 S.C. 321, 339, 803 S.E.2d 288, 298 (2017). In that case, the court held that because Harleysville’s reservation of rights letters did not explain why the cited policy provisions may preclude coverage, those provisions were waived. Accordingly, Harleysville was found liable for more than $10,000,000.00 in damages. (The court also held that Harleysville’s reservation of rights letters failed to notify its insured that it may commence a declaratory judgment action to determine coverage, intervene in the underlying action and that the insured had the right to retain its own counsel, given the possibility of covered and non-covered damages. For a brief, but more complete discussion of that decision, see my prior blog post: here).
Since Harleysville, two questions have remained:
A recent decision by the U.S. District Court of South Carolina may have answered both of these questions. (I say may because of a South Carolina Federal Court decision, albeit under South Carolina law, is only persuasive, and not binding, authority, to South Carolina State Courts.)
In Owners Insurance Company v. Cruz Accessories, et al., Owners Insurance commenced a declaratory judgment action to determine whether its commercial general liability insurance policy with two named insureds entitled those insureds to defense and/or indemnity in the underlying action brought against them by a plaintiff business. Id., 2018 WL 4654704 (D.S.C. Sept. 27, 2018). This blog looks at two of the questions posed:
Despite the looming cloud imposed by Harleysville, the court answered both questions “yes.”
The plaintiff in the underlying case commenced legal action against the insureds on August 18, 2016. On December 15, 2017, the insureds provided Owners Insurance notification of the lawsuit. Approximately three weeks later, Owners Insurance provided the insureds an attorney. Owners Insurance did not, though, send a reservation of rights letters until November 7, 2017—almost 11 months later. Given these facts, the insureds argued that Owners Insurance waived its right to decline or limit coverage. The court disagreed.
According to the court, a waiver cannot bring into coverage something which previously was uncovered. Although equitable estoppel may apply, it requires evidence that the insureds “detrimentally relied” on Owners Insurance’s providing of an attorney, without issuing a reservation of rights letter, for more than 10 months. According to the court, there was no evidence indicating that the delayed reservation of rights letter caused the insureds to actually incur a loss.
Another argument the insureds asserted regarding Owners Insurance’s reservation of rights letter was that they contained an explanation that was insufficient to apprise them that coverage may be limited or barred. According to the court, because Owners Insurance’s letters identified the specific, potentially applicable provisions that applied, and explained how coverage may be barred, such letters satisfied Harleysville’s criterium of “clearly identifying the grounds for the reservation of rights.”
The inference, following Harleysville, was that a reservation of rights letter must be detailed. The question though was, “how detailed?” Now, given Owners Insurance Company v. Cruz Accessories, et al., it seems that a reservation of rights letter must still include the facts and potentially applicable provisions, but that a short, concise statement sent 10 months after notice of the loss explaining why those provisions may bar coverage is likely sufficient, provided the insured can not demonstrate resulting damages from the time delay.
Ultimately, in this post-Harleysville world, an insurer’s reservation of rights letter in South Carolina remains fraught with risk if taken lightly. Such letters must still include more information than many other States (e.g., advising an insured that an insurer may commence a DJ; that it may wish to retain its own counsel; and that an insurer may intervene.). Nevertheless, the Owners Insurance Company v. Cruz Accessories, et al. decision appears to begin to provide clarity to some of these issues. As more decisions come down post-Harleysville, insurers in South Carolina will learn whether their reservation of rights letters can withstand legal challenges. But, going forward, all insurers would be wise to issue a prompt, detailed, and specific reservation of rights letters, to keep themselves out of the next case caption of note in this ever-changing arena.
Butler’s Charlotte office remains at the forefront of these issues, and we will update this space as new opinions are released.