Reservation of Rights Letter Merely Citing Policy Provisions Inadequate

    In an unpublished opinion, the Fourth Circuit affirmed the district court’s finding that the insurers’ reservation of rights letters did not provide a basis for denial of coverage. Stoneiedge At Lake Keowee Owners Ass’n Inc. v. Cincinnati Ins. Co., 2022 US. App. LEXIS 34292 (4th Dist. Dec. 13, 2022).

    The Stoneledge AOAO sued the general contractor Marlick Home Builders, LLC and other defendants after construction of 37 units. The complaint alleged construction defects that resulted in water intrusion and other physical damage. Marlick notified its insurers, Cincinnati Insurance Company and Builders Mutual. Various reservation of rights letter were sent by the insurers.

    In the underlying case, a judgment was entered against Marlick totalling approximately $1.6 million. As a judgment creditor of Marlickm, Stoneledge sued Cincinnati and Builders Mutual. The district court granted Stonelege’s motion for summary judgment, primarily on the ground that the insurers failed to reserve the right to contest coverage.

    On appeal, the South Carolina Supreme Court’s decision in Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E. 2d 288( S.C. 2017), was controlling. There, the Supreme Court 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.” In Harleysville, the insurer failed to reserve its rights as to the following issues: whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy periods, and what damages were attributable to non-covered faulty workmanship (e.g., the your-work exclusion]. 

    The court found that, at the very least, an insurer should discuss its position as to the various provisions  and explain its reasons for potentially denying coverage. If the reservation of rights was ambiguous, it had to construed against the insurer and liberally in favor of the insured, 

    Here, the letters failed to inform the insureds that the insurers intended to litigate coverage issues and did not apprise the insureds of potential conflicts of interest. Builders Mutual’s letter merely referred the insured to certain policy exclusions and summarised the general nature of those exclusions.

    Cincinnatti’s letter presented a closer question. It listed certain policy exclusions and noted that “coverage may be limited by several other exclusions and endorsements.” The letter continued with respect to whether coverage was triggered in the first place, stating that “it is doubtful that the claim alleges the happening of an ‘occurrence'” or the the “claim alleges ‘property damage’ within the policy definition,” and if there is no “occurrence” or “property damage” as defined by the policy, there is “no coverage.”

    Under Harleysville, this was still insufficient to reserve the right to dispute coverage as to the policy exclusion. The letter was devoid of any explanation for why Cincinnati found it “doubtful” that there was an “occurrence” or “property damage” within the meaning of the policy. Therefore, the district court’s judgment was affirmed.