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Boilerplate RORs Are Insufficient to Disclaim Coverage

November 17, 2021
May 15, 2020

The Pennsylvania Superior Court recently issued a decision that should serve as a cautionary tale to those insurers looking to disclaim coverage after defending under a reservation of rights.  In Selective Way Ins. Co. v. MAK Services, No. 1289 EDA 2019 (Pa. Super. April 24, 2020), the Superior Court reaffirmed that an insurer’s reservation of rights letter must provide the insured both timely and specific notice of the basis for the reservation of rights.  

The case underlying the decision is described by the Superior Court as a “veritable comedy of errors” due to the unique fact pattern.  In the underlying matter, the defendant insurance company insured MAK Services, a company exclusively in the business of snow and ice removal.  MAK was sued in a slip-and-fall case by an injured plaintiff who alleged that MAK had failed to render a parking lot safe, thereby causing the plaintiff’s injuries.  The insurer agreed to defend MAK under a reservation of rights.

Interestingly, the insurance policy contained a specific exclusion for snow and ice removal services, despite the fact that snow and ice removal was the entirety of MAK’s business.  Even so, the insurer’s reservation of rights letter did not identify this exclusion, instead providing a wholly generic statement that the insurer reserved the right to disclaim coverage at a later date.

The insurer then proceeded to defend MAK for eighteen months in the underlying litigation without ever raising the exclusion. After those eighteen months passed, the insurer instituted a declaratory judgment action in which it sought a declaration that it owed no defense or indemnity for MAK under the insurance policy at issue.  

Despite the fact that the insurer never identified the specific policy exclusion to its insured, the trial court granted summary judgment to the insurer on the coverage question based on the plain language of the policy.  MAK appealed to the Superior Court, which reversed the trial court’s grant of summary judgment.

The Superior Court reasoned that an insurer has a duty to promptly investigate policy defenses and to promptly communicate any coverage issues to the insured.  While an insurer need not lay out “every potential defense for coverage in its reservation of rights letter,” it must still provide “some level of specificity.”  (Emphasis in original.)  Accordingly, because the insurer’s generic reservation of rights failed to identify any specific policy exclusions, the letter was inadequate to notify MAK of potential coverage issues—particularly when the insurer raised those coverage issues for the first time after eighteen months of defense.

In sum, the insurer here could have avoided this reversal if it had issued a more specific reservation of rights, completed its coverage analysis before eighteen months had passed, or communicated the basis for its coverage determination to its insured in a timely fashion.  

Interestingly, the Superior Court’s decision was not unanimous.  While the lead opinion found that prejudice to the insured could be presumed under these circumstances, Judge Strassburger filed a dissent and argued that MAK (and similarly situated insureds) should still have to prove actual prejudice arising from the deficient reservation of rights letter.  Judge Strassburger’s opposition focused on the practical effect of the insurer’s actions, stating, “MAK Services has not claimed lost evidence or witnesses, or that it would have handled its defense differently. Rather, all the record indicates is that Selective Way provided free legal representation to MAK Services for 18 months.  That does not establish prejudice.”  Id. at 15.

However, Judge Strassburger’s argument did not carry the day, so the takeaways for an insurer are clear.  In any case where coverage is not certain, the insurer has a duty to promptly and diligently investigate any potential policy defenses and to keep communication open with the insured.  Any reservation of rights letters must be specifically tailored to the case and the policy at issue, and those letters must be updated as new information becomes available.  Only by communicating openly and transparently with the insured can an insurer stay on the right side of the law and avoid increased exposure.