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Reserving your rights: Cautionary tales for insurers from the low country.

Insurance carriers can learn a thing or two from a fairly mundane case coming out of the South Carolina Supreme Court earlier this year.  In the case Harleysville Group Insurance v. Heritage Communities, Inc., the Court held that a Reservation of Rights letter (ROR) sent by an insurer to its insured was ineffective to preserve the carrier’s coverage defenses.

A reservation of rights (“ROR”) is a means by which an insurer agrees to defend an insured against a claim or suit while simultaneously retaining its ability to evaluate, or even disclaim, coverage for some or all of the claims alleged by the plaintiff.

In the case we’re discussing, the Court found that the insured’s ROR letters were merely “generic statements of potential non-coverage coupled with” the policy included in a “cut-and-paste” fashion. This general writing style and unspecific policy were enough to make the court decide in favor of the insured.

The letters reviewed by the Court in that case “included no discussion of the carrier’s coverage position or explanation of its reasons for relying thereon.”  Because of this lack of position, explanation, and reason, the Court declared that an ROR letter, to be effective, must be “unambiguous, . . . specify[ing] in detail any and all bases upon which [the carrier] might contest coverage. . . .” The vagueness included in the letter that was intended to protect the insurer ended up being so unspecific that, in fact, it achieved the opposite of its intended effect.

Here are some important pieces of information the South Carolina Court found lacking in the Harleysville case as an example of best practices. These are serious points that could be used against a business who has presented a weak ROR.  If these are applicable to your reservation of rights letter, it would be best to revise your letter to include these points.

  • If there is the possibility of a conflict of interest, be sure to inform your insured.
  • Warn the insured if you “intend to pursue a declaratory judgment action” in the event of adverse verdicts in the underlying suits; and
  • Advise the insured “that they should protect their interests by requesting an appropriate verdict” in the underlying suits, that is, special interrogatories that would make it easier to determine which parts, if any, of an adverse verdict, were covered.

Many Courts across the country have found that when the insurance carrier controls the defense, it owes the insured “a high fiduciary duty,” which requires the carrier to “sacrifice its interests in favor of those of the insured. . .” It is important to carefully draft an ROR letter to emphasize the defenses which may be available to you in order to preserve your rights in the future.

Our attorney’s here at Batson Nolan are experienced in reviewing Insurance Policies for coverage and drafting reservation of rights letters on behalf of carriers. Call us today to discuss how our experienced team of expert lawyers can help protect your business.  With hundreds of years of combined legal experience, we are committed to our clients and to achieving results that exceed expectations.