(Article from Insurance Law Alert, December 2022)
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Applying South Carolina law, the Fourth Circuit ruled that three reservation of rights letters were insufficient to provide a basis for a coverage denial. Stoneledge at Lake Keowee Owners’ Assoc., Inc. v. Cincinnati Ins. Co., 2022 WL 17592121 (4th Cir. Dec. 13, 2022).
The coverage dispute arose out of faulty construction claims brought by a homeowners association against contractors. The contractors’ general liability insurers, Builders Mutual and Cincinnati, sent three reservation of rights letters over the course of the underlying litigation. After the underlying claims were resolved by a partial judgment and subsequent settlement, the contractors sought a declaration of coverage. Ruling on the parties’ cross-motions for summary judgment, a South Carolina district court held that the insurers had failed to adequately reserve their right to contest coverage. The Fourth Circuit affirmed.
The Fourth Circuit concluded that the insurers’ reservations of rights did not include sufficient information relating to the potential bases for a coverage denial. Applying the standard set forth in Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017) (discussed in our February 2017 Alert), the court explained that “generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient.” Here, the first letter “merely refers the insured to certain policy exclusions and summarizes the general nature of those exclusions.” The court found that this was precisely the type of reservation that the Harleysville court deemed insufficient. The second letter similarly referred to “coverage issues” in general and indicated that “your work product is not covered” under certain referenced exclusions. The court stated: “Under Harleysville, simply stating a policy exclusion—without more—does not constitute a sufficient reservation of rights.”
As to a third letter, the court noted it was a “closer question,” but concluded that the listing of several exclusions, together with statements that “coverage may be limited by several other exclusions and endorsements” and that “[i]t is doubtful that the claim alleges the happening of an ‘occurrence’ or that the ‘claim alleges property damage within the policy definition,” was insufficient. In so ruling, the court emphasized that a reservation of rights must address the question of “why” coverage may be unavailable under certain policy provisions.