The judges of the Fourth Circuit Court of Appeals affirmed a district court decision that two insurers who tried to reserve their rights to deny coverage actually failed to do so for inadequate reservation of rights letters. The case is called Stoneledge at Lake Keowee Owners' Ass'n v. Cin. Ins. Co., 2022 U.S. App. LEXIS 34292 (4th Cir. 2022). Please note that this opinion is unpublished and may only be cited according to Rule 32.1 of the Federal Rules of Appellate Procedure.
Stoneledge managed a group of townhomes, built in the early 2000s, on Lake Keowee in South Carolina. In 2009, Stoneledge sued the construction company that had built the homes and its managing member for alleged construction defects that led to water intrusion and other physical damage in the townhomes. Both the company and its managing member had CGL policies covering property damage: one from Builders Mutual Insurance Company effective from January 30, 2004 to October 20, 2007, and another from Cincinnati Insurance Company that covered April 1, 2008 to April 1, 2012.
After Stoneledge filed suit, the construction company gave both insurers proper notice, and the insurers sent the company multiple "reservation of rights" letters. The suit was separated in two parts for trial purposes, corresponding with the two phases of construction for the townhomes. A trial for the first part ended in a Stoneledge victory, whereupon they became "judgment creditors" for the insureds for almost $1.63 million. The second part of the suit settled before trial for $2 million. Stoneledge sued both Cincinnati and Builders Mutual for coverage of the settlements. Everyone filed motions and cross-motions for summary judgment. The District Court for the District of South Carolina granted Stoneledge's motion, in part, because Cincinnati and Builders Mutual had sent inadequate reservation of rights letters. The insurers appealed.
The judges analyzed the reservation of rights letters according to the standard set by Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017). The insurer in Harleysville had only mentioned which policies might cover the loss and referred to a nonspecific list of policy provisions and exclusions. There was no mention of which specific exclusions or terms could lead to denial, nor was there any indication to the insured that the insurer would contest coverage. The South Carolina Supreme Court ultimately held that "generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient." (Harleysville at 297).
Builders Mutual's letters did mention there might be coverage issues in general and refer to some general exclusions, but they did not offer any explanation of why Builders Mutual thought coverage might be excluded. According to the court, it was "exactly the sort of general reservation of rights that Harleysville deemed insufficient."
Cincinnati's letter, like Builders Mutual's, contained a general reference that policy exclusions might apply and even included a list of potentially applicable exclusions, which the court said was not enough. However, Cincinnati's letter was different because it also stated that Cincinnati did not believe there had been an "occurrence" or any property damage within the meaning of the policy, which meant there would be no coverage.
In Harleysville, the South Carolina Supreme Court did find an adequate reservation of rights with respect to punitive damages. The insurer's letter had properly reserved the right to deny coverage for punitive damages because it stated that potential punitive damages "would not arise from an 'occurrence,' do not fit the definition of 'bodily injury or property damage,' and/or were 'expected and intended' within the meaning of exclusions in the policies." (Harleysville at 299).
Cincinnati's letter, on the other hand, did not explain why the insurer thought there hadn't been an occurrence or property damage within the meaning of the policy, only that Cincinnati doubted there had been a covered occurrence.
The Fourth Circuit, therefore, affirmed the district court.
Editor's Note: Insurers have a duty to defend their insureds even if damages from the suit are not covered. A reservation of rights is used to make this clear to the insured. It says an insurer will fulfill its duty of defense to the insured while also informing the insured that the insurer may ultimately deny coverage for the underlying events. As demonstrated by the Stoneledge and Harleysville cases, simply informing an insured the situation may not be covered without providing more detail is not enough.
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