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Superior Court Finds Reservation of Rights Letter Which Does Not Include Potential Exclusions to Be Ineffective

The Superior Court of Pennsylvania recently held that while reservation of rights letters from insurance companies do not need to list every potential defense to coverage, a reservation of rights letter which does not include some detail regarding potential exclusions does not provide sufficient notice to the insured regarding the insurer’s coverage position and is ineffective.  See Selective Way Ins. Co v. MAK Services Inc., 2020 WL 1973964 (Pa.Super.Ct. 2020). 

In MAK Services, the insured snow and ice removal business obtained liability insurance from the insurer, and the policy issued by the insurer included a snow and ice removal exclusion.  In October 2011, an individual submitted a claim to the insurer after he slipped and fell on ice while walking through the property of a client of the insured.  In May 2013, the insurer appointed defense counsel to defend the claim and sent a reservation of rights letter to the insured.  The reservation of rights letter did not reference the snow and ice removal exclusion.  Defense counsel represented the insured for the next eighteen months against the insured individual’s claims, but in November 2014 the insurer sought a declaratory judgment that it did not owe coverage on the basis of the snow and ice removal exclusion.  The trial court awarded declaratory relief to the insurer, finding that the insurer’s reservation of rights letter sufficiently preserved the snow and ice removal exclusion.

On appeal, the insured challenged the sufficiency of the insurer’s reservation of rights letter and thereby its preservation of the exclusion.  In analyzing whether the insurer sufficiently preserved its defenses to coverage under the policy, the Superior Court considered whether the reservation of rights: (1) was submitted in a timely fashion, and (2) fairly informed the insured of the insurer’s position.

With respect to the timeliness of the reservation of rights letter, the Superior Court held that the letter was timely submitted to the insured when it was sent within three weeks of the filing of the injured party’s civil action and prior to the undertaking of the defense on behalf of the insured.

Next, the Superior Court reviewed the reservation of rights letter to assess whether it informed the insured of the insurer’s positions.  While the letter indicated that the insurer generally reserved all rights under applicable law, insurance regulations and policy provisions, including the right to deny coverage, the Superior Court found that the letter failed to specifically identify any coverage issues, including language in the policy excluding coverage for injuries stemming from snow and ice removal.

The Superior Court held that the lack of specificity in the reservation of rights letter showed a lack of investigation that ultimately prejudiced the insured.  As a result of its finding of prejudice, the Superior Court concluded that the insurer was estopped from asserting the snow and ice removal exclusion for the first time eighteen months after sending the reservation of rights letter and without sufficient notice to the insured regarding the insurer’s coverage position.  While Pennsylvania does not require an insurer to list every potential defense to coverage in its reservation of rights letter, the Superior Court held that “some level of specificity is necessary.”