Harleysville Grp. Ins. v. Heritage Communities, Inc.
Written by: Alan Belcher, Esq.
Throughout the country, insurance carriers are tasked with balancing their duties to their insured with the principals of corporate stewardship. For certain, Insurance companies are required to govern their relationship with their insureds in good-faith. On the other hand, insurance companies are required to justify the payment of defense costs and claims based upon the policy language that establishes the definition of a covered claim.
In South Carolina, as well as many other states, an insurance carrier’s balancing act is accomplished, in part, by issuing a formal reservation of rights (“ROR”) to their insured when a claim is made against the policy. Over the years, our insurance coverage practice group has reviewed numerous ROR’s, many of which have historically been prepared by claims professionals or in-house counsel within the insurance companies we represent. There was a time in the past when these in-house-prepared ROR’s were sufficient to accomplish the task of advising the insured that the insurance policy in question may not afford coverage for a claim by simply cutting and pasting the policy provisions. However, courts throughout the country have recently begun to take a much closer look at the content and sufficiency of the ROR correspondence.
This past year, the South Carolina Supreme Court published an opinion in the case styled Harleysville Grp. Ins. v. Heritage Communities, Inc., 420 S.C. 321, 803 S.E.2d 288 (2017). In Harleysville, the insurer filed declaratory judgment actions to determine what portion of the verdicts against its insured (in underlying construction defect trials) would be covered under the policy. Id. at 331. Harleysville claimed it had no duty to indemnify its insured for certain non-covered damages pursuant to the terms of the applicable insurance policies. Id. The Special Referee in the declaratory judgment actions found coverage under the policy was triggered, since the general jury verdicts were never allocated between covered and non-covered damages. Id. at 332. Therefore, the insurance company had a duty to indemnify all damages, subject to its time-on-risk allocation. Id.
The Harleysville Court dedicated a portion of its analysis to criticisms of the cut-and-paste ROR that Harleysville sent its insured during the pendency of the underlying construction defect lawsuits. The Court held, “Harleysville’s efforts to reserve its rights were generic statements of potential non-coverage coupled with furnishing most of the Heritage entities with copies (through a cut-and-paste method) of the insurance policies.” Id. at 330. Based upon our review of the Harleysville opinion, we believe that the Court is sending a clear message to insurance carriers that they must improve the analysis in their ROR correspondence, if they intend to actually exercise their rights to deny coverage at a later date.
The Harleysville Court continues with guidance as to language which must be included in an ROR for the benefit of the insured. Examples include, but are not limited to:
- The potential that coverage under the policy may be inapplicable for the loss.
- Conflicts may exist between the policyholder and the insurer.
- Insured should take steps necessary to protect its potentially uninsured interests.
- Insurer may be personally liable for damages occurring during periods of lapse in coverage.
- Insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage.
- Notice to the insured that the insurer intends to assert defenses to coverage or to pursue a declaratory relief action at a later date.
- Insurer has a duty to inform the insured of the need for an allocated verdict as to covered versus non-covered damages.
Drawing from the lessons in Harleysville, attorneys at Hall Booth Smith, P.C. have used the Court’s opinion to create an in-house checklist in order to ensure that ROR’s that we prepare will allow insurance carriers we represent to exercise their right to deny coverage at a later date. Following the checklist allows an insurance company or its coverage counsel to convey the applicable policy provisions and provide legal analysis as to why coverage for the claim is in question. We encourage carriers to review their practices and either adopt this checklist in preparing their in-house ROR’s or consult with coverage counsel to confirm that a similar checklist is in place.
As a final note, we also believe that Harleysville not only requires an in-depth coverage analysis to be included in the ROR, it also requires that supplemental ROR’s be sent to the insured throughout the life of the claim. Coverage counsel should be engaged at milestones during the underlying litigation to update the ROR with facts that have been revealed through discovery. By updating the ROR throughout the life of the claim, the carrier is in a far more advantageous position at the declaratory judgment stage of the claim, where the details of its coverage analysis matter most.
For Harleysville, the Court’s criticism of its ROR’s to its insured was a rude awakening. For other insurance carriers, it is a cautionary tale. Gone are the days when a cut-and-paste ROR would allow the carrier to “check-the-box” and deny coverage at a later date. It is critical that insurance carriers and coverage practitioners learn from the Harleysville opinion and provide substantive analysis of their coverage position to their insured early in the life of the claim and throughout the claim until coverage issues are resolved or litigated.