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Is There a New Requirement for Reservation of Rights Letters in Pennsylvania?

May 1, 2020

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<p style="text-align: justify;">A recent case from the Pennsylvania Superior Court reiterates the impact of poorly crafted reservation of rights letters on future coverage defenses. In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2020/05/emily-pdf.pdf">Selective Way</a> Insurance Company v. MAK Services, Inc. et. al</em>., 2020 PA Super 103 (Pa. Super. Ct. Apr. 24, 2020), the insurer sought a declaration that it owed no duty to defend or indemnify its insured, MAK Services, in an underlying case arising out of a slip and fall on ice in a parking lot.</p>
<p style="text-align: justify;">On April 9, 2013, MAK Services was sued for negligent removal of snow and ice in the parking lot. Selective Way appointed defense counsel and sent a reservation of rights letter to MAK Services. The May 1, 2013, reservation of rights letter provided:</p>
<p style="text-align: justify;">O<em>ne of the benefits of your insurance policy from Selection is that we will provide you with a legal defense when potentially covered claims are made against you. Since this case meets that standard, I have referred your file to [a] law firm .... They will represent you in this case. You should be hearing from that firm shortly. Please give them your full cooperation and refrain from discussing this loss with anyone other than your attorney or a properly identified representative of Selection.</em></p>
<p style="text-align: justify;"><em>In addition, please be aware that you always have the right to consult an attorney of your choice, at your own expense, to discuss this matter or to coordinate your defense with the attorney we have retained for you.</em></p>
<em>In the meantime, please be aware that Selective will be handling this matter under a reservation of rights. This means that Selective reserves all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop. Those rights include, but are not limited to, the rights to decline coverage for this claim and to withdraw assigned defense counsel.</em>
<p style="text-align: justify;">On November 13, 2014, eighteen months later, Selective Way filed suit seeking a declaration that it does not owe a duty to defend or indemnify MAK Services because the underlying lawsuit “is based solely upon ice and snow removal activity, and the Policy specifically excludes a defense and indemnity for any damages arising from snow and ice removal activity.” However, Selective Way’s reservation of rights letter made no reference to the snow and ice removal exclusion. The trial court granted summary judgment in favor of Selective Way.</p>
<p style="text-align: justify;">The issue on appeal concerned the sufficiency of Selective Way’s reservation of rights and the timeliness of the coverage challenge. The Court found that the reservation of rights letter was submitted in a timely fashion, but took issue with the sufficiency of the notice. The Court found the absence of any reference or identification to emergent coverage issues problematic. The Court was also critical of the clause attempting to incorporate any issues “that may become relevant as this matter continues to develop.” The Court ultimately reversed the trial court’s grant of summary judgment to Selective Way, holding that the reservations of right letter here failed to provide notice of the existing coverage issues, namely the snow and ice removal exclusion, which should have been obvious to the insurer given language of the underlying complaint.</p>
<p style="text-align: justify;">The Court noted that insurers have a duty to conduct a thorough investigation to preserve coverage defenses. Although an insurer is not required to state every potentially relevant coverage defense in a reservation of rights, “some level of specificity is necessary.” In reversing the summary judgment ruling, the Court held that Selective Way was estopped from asserting the snow and ice exclusion for the first time eighteen months after the reservation of rights letter was issued because the reservation of rights letter did not provide the insured with sufficient notice of the insurer’s coverage position.</p>
<p style="text-align: justify;">This decision is a cautionary tale, and should serve as a reminder to insurance carriers of their obligation to conduct a thorough and timely investigation; to identify potential coverage issues; and to provide the insured with sufficient notice of said coverage positions.</p>
<p style="text-align: justify;">Thanks to Emily Finnegan for her contribution to this post. Please contact <a href="mailto:Haquino@wcmlaw.com">Heather Aquino</a> with any questions.</p>

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