Editor’s note: The recent decision in HarleysvilleGroup Insurance v. Heritage Group Communities should be awake-up call for insurers of the need to draft proper reservationof rights (ROR) letters. The consequences of getting it wrong canbe severe. Hear about the case, and get a 50-Item ROR checklist, byattending the webinar on May 18: “The Definitive Reservation of Rights Checklist: 50 ThingsThat Every ROR Needs.”

I have lost track of the number of times that I’ve explained atclient seminars, in webinars and to the guy next to me in line atTrader Joe’s, that for areservation of rights letter to be effective it must fairly informthe insured of the reasons why the insurer may not be obligated toprovide coverage for certain claims or damages in a suit — eventhough the insurer is providing a defense. The only other reminderI’ve given more often is to my 10-year-old daughter — that she nottalk to strangers.

We have all seen reservation of rights letters that set forth abrief factual summary of the claim, followed by several pages ofpolicy language — some completely irrelevant — and then aconcluding statement that, voila, the insurer reserves itsrights.

But drafting a reservation of rights letter takes more thansimply addressing the facts (in detail, hopefully) and citingpolicy provisions (not numerous irrelevant ones, hopefully). Theimportant step is then to tie these two aspects together. In otherwords, when a policy provision is cited in the reservation ofrights letter because it may preclude coverage, it should beaccompanied by the allegations in the complaint that support thispotential coverage defense. A letter may not be a reservation ofrights letter simply because it calls itself one, nor because itsays — sometimes multiple times throughout — that the insurer isreserving its rights to deny coverage.

ROR letter must be ‘unambiguous’

Lots of courts have concluded that reservation of rightsletters, lacking specificity in why coverage may not be owed, don’tmake the grade, no matter how many times they may use the phrase“reservation of rights.” As such, the reservation of rights letteris ineffective. Translation: The insurer doesn’t have the coveragedefenses that it thought it did. The loudest cases of late to makethis point have been Hoover v. Maxum Indem. Co. (Ga. 2012)and Advantage Builders & Exteriors, Inc. v. Mid-ContinentCasualty Co. (Mo. Ct. App. 2014).

In Hoover, the court said: “In order to inform aninsured of the insurer’s position regarding its defenses, areservation of rights must be unambiguous. If it is ambiguous, thepurported reservation of rights must be construed strictly againstthe insurer and liberally in favor of the insured. A reservation ofrights is not valid if it does not fairly inform the insured of theinsurer’s position.”

In Advantage Builders, a Missouri trial court foundthat an insurer, after undertaking its insured’s defense, owed nocoverage. But that decision went by the wayside at the appealscourt because the reservation of rights letters — despitecontaining a lot of pages, setting out the facts at issue,voluminous policy language and a statement that the insurer wasreserving its rights — were found to be not effective. The courtput it like this: “The letters generally discussed the nature ofthe underlying lawsuit and set forth various provisions ofAdvantage’s general liability policy. Neither letter clearly andunambiguously explained how those provisions were relevant toAdvantage’s position or how they potentially created coverageissues.”

Related: Why do insurers write 'reservations of rights'letters?

Most significant case of 2017

The new year is only one-third over. But, nonetheless, I believethat the most significant coverage decision of the year has alreadyarrived.

In Harleysville Group Insurance v. Heritage GroupCommunities, (S.C. Jan. 11, 2017), the Supreme Court of SouthCarolina held that an insurer’s “reservations of rights” letter,despite setting out many pages of policy provisions, and otherinformation usually contained in a reservation of rights letter,was ineffective because it failed to adequately inform the insuredof the reasons why the insurer may not be obligated to providecoverage.

Specifically, the court held:

At the hearing before the SpecialReferee, Harleysville produced letters it sent to former Heritageprincipals and counsel between December 2003 and February 2004.These letters explained that Harleysville would provide a defensein the underlying suits and listed the name and contact informationfor the defense attorney Harleysville had selected to representHeritage in each matter. These letters identify the particularinsured entity and lawsuit at issue, summarize the allegations inthe complaint, and identify the policy numbers and policy periodsfor policies that potentially provided coverage. Additionally, eachof these letters (through a cut-and paste approach) incorporated anine- or ten-page excerpt of various policy terms, including theprovisions relating to the insuring agreement, Harleysville’s dutyto defend, and numerous policy exclusions and definitions. Despitethese policy references, the letters included no discussion ofHarleysville’s position as to the various provisions or explanationof its reasons for relying thereon. With the exception of the claimfor punitive damages, the letters failed to specify the particulargrounds upon which Harleysville did, or might thereafter, disputecoverage.

Other courts may follow

Heritage Communities is one of the loudest, longest and clearestdecisions that I have seen holding that a reservation of rightsletter can be ineffective because it failed to adequately informthe insured of the reasons why the insurer may not be obligated toprovide coverage. Such a strong decision, from a supreme court, notto mention on the heels of others, sets the stage for thepossibility of Heritage Communities being followed bycourts on a national basis.

In addition, decisions addressing the manner of reservation ofrights letters — because they are relevant to every type ofliability policy, and without regard to the claim facts — have thepotential for the widest impact of all coverage cases. Because ofthis combination it will take a lot for me to conclude that anothercoverage decision, handed down this year, could be as impactful onas many claims.

“What’s in a name? That which we call a rose by any othername would smell as sweet.” (William Shakespeare, “Romeo andJuliet,” Act II, Scene 2.) But the same cannot be said ofreservation of rights letters. In fact, just the opposite. A letterthat is called a reservation of rights may be nothing of thesort.

Randy J. Maniloff is an attorney at White and Williams, LLPin Philadelphia, where he represents insurers in coverage disputesunder a host of policies. He is the co-authorof General Liability Insurance Coverage – KeyIssues in Every State (3rd edition, NationalUnderwriter) and the publisher of thenewsletter and website www.CoverageOpinions.info

Related: Was a letter saying ‘notify your professionalliability carrier’ a claim?