Pennsylvania Superior Court Finds Insurer is Estopped from Denying Coverage Based on Applicable Policy Exclusion Due to Failure to Timely and Clearly Advise Insured of Possible Coverage Issues

In a two to one decision, the Pennsylvania Superior Court in Selective Way Insurance Co. v. MAK Services, Inc., 2020 PA Super 103 (2020), recently presumed an insured was prejudiced as a result of the insurer’s failure to timely identify an applicable exclusion of coverage. It was apparent the exclusion was applicable when the reservation of rights letter was sent to the insured and defense counsel was assigned. The reservation of rights letter, however, consisted solely of boiler point language and did not identify the exclusion at issue as possibly applicable.

Eighteen months later, without issuing any subsequent reservation of rights letters, the insurer initiated a declaratory judgment action seeking to deny coverage based upon the exclusion which the insurer knew applied when it issued the reservation of rights letter. The Superior Court found that the insurer failed to timely and clearly advise the insured of the rights it was reserving and that, due to the passage of 18 months while the insurer was controlling the defense of the insured in the underlying case, prejudice to the insured was presumed. The Superior Court, therefore, held that the insurer was estopped from denying coverage based on the exclusion.

By way of background, MAK Services was a snow and ice removal company. It purchased liability insurance coverage from Selective Way. However, the policy expressly excluded coverage for “snow and ice removal”. Specifically, the policy exclusion stated there was no coverage for “bodily injury,” “property damage,” or “personal and advertising injury” that arose out of “snow and ice removal activities that are performed for others by the insured or by any contractors or subcontractors working on the insured’s behalf.” The exclusion defined snow and ice removal as including, but not limited to, “snow plowing, snow blowing, snow or ice clearing, shoveling or salting by means whether mechanical or by hand.”

On October 30, 2011, the underlying plaintiff slipped and fell while walking through a parking lot. On April 9, 2013, MAK Services was one of several entities sued as a result of the injuries sustained by the plaintiff. On May 1, 2013, Selective Way sent a letter to MAK Services advising it would defend it subject to a reservation of rights. The letter failed to identify that there was a snow and ice removal exclusion in the policy. The reservation of rights letter stated the following, in relevant part:

One of the benefits of your insurance policy from Selective 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 Selective.

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.

In the meantime, please be aware that Selective will be handing 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 right to decline coverage for this claim and to withdraw assigned defense counsel.

The same day the reservation of rights letter was sent, defense counsel retained by Selective Way entered an appearance on behalf of MAK Services in the underlying personal injury action. MAK Services defended Selective Way in the personal injury lawsuit for 18 months. No subsequent reservation of rights letters were sent to MAK Services.

Eighteen months later, on November 13, 2014, Selective Way commenced a Declaratory Judgment Action in the Court of Common Pleas of Montgomery County Pennsylvania seeking a declaration that it did not owe MAK Services a defense or indemnification in the underlying personal injury action as a result of the snow and ice removal exclusion. MAK Services subsequently filed a counterclaim seeking insurance coverage, fraud, and bad faith. Cross motions for summary judgment were filed regarding the sufficiency of the reservations of rights letter regarding the preservation of the efficacy of the snow and ice removal exclusion. On April 16, 2019, the trial court entered an order granting Selective Way’s motion for summary judgment. MAK Services appealed.

The issue on appeal was the sufficiency of the reservation of rights letter, and whether it preserved the application of the snow and ice exclusion.

The Superior Court, in a two to one decision, noted that “Pennsylvania counterbalances the insurer’s broad obligation to defend even claims as to which coverage may not apply by providing the insurer with the option of defending subject to a reservation of its rights later or simultaneously to contest coverage.” Therefore, an insurer’s defense of the insured does not waive the insurer’s claims that a policy exclusion applies. However, an insurer is required to provide timely and sufficient notice of any such reservation of rights to the insured advising that the insurer has not waived the benefit of its defense under the policy. To be effective, the reservation of rights “must fairly inform the insured of the insurer’s position and must be timely, although delay in giving notice will be excused where it is traceable to the insurer’s lack of actual or constructive knowledge of the available defense.” Brugnoli v. United Nat. Ins. Co., 426 A.2d 164, 167 (Pa. Super. 1981).

Therefore, a reservation must be submitted in a timely fashion and “fairly inform the insured of the insurer’s position” to preserve an insurer’s assertion of policy exclusions once a defense of the insured has been mounted.

In performing its analysis regarding whether or not the reservation of rights was sufficient, the Superior Court started with the general principle that a reservation of rights letter sent close-in-time to the commencement of a potentially covered legal action is “timely” under Pennsylvania law. Previously, the Superior Court has found that a reservation of rights letter sent approximately seven months after the Complaint was filed was untimely. The Selective Way Court found the reservation of rights letter sent approximately three weeks after the filing of the underlying Complaint to be timely.

Turning to whether the reservation of rights letter fairly informed MAK Services of Selective Way’s position to validly preserve the defenses to coverage under the policy, the Superior Court noted that reservation of rights letter failed to specifically identify any emergent coverage issues. Instead, utilizing boilerplate language, the reservation of rights letter simply reported to include all issues that may become relevant as this matter continues to develop.

The Superior Court noted insurance companies have a well-recognized duty to conduct an appropriate and thorough investigation to preserve defenses to coverage. The insurer cannot play fast and loose, taking a chance in the hope of winning and, if the results are adverse, take advantage of a defect in the policy. The insured loses substantially when it surrenders, as it must, to the insurance carrier the conduct of the case. If the insurer conducts its investigation with reasonable dispatch, and its disclaimer is made with promptness upon discovery of the facts, the defenses would be preserved via a reservation of rights. However, an insurance company cannot delay its decision and refrain from giving notice to the insured until such time has elapsed that the insured’s rights concerning the accident are prejudiced. Where an insurer fails to clearly communicate a reservation of rights to an insured, prejudice would be fairly presumed.

The Selective Way Court found the reservation of rights letter provided no notice whatsoever of the existing coverage issue appearing on the face of the policy, the snow and ice removal exclusion. The Court noted that any review of the policy would have immediately revealed the existence of this exclusion. The boilerplate language utilized by Selective Way hid the absolute defense to coverage, and caused MAK Services to reach the reasonable conclusion that there was no pressing need to secure backup counsel. While Pennsylvania law does not require an insurance company to list every potential defense to coverage in its reservation of rights letter, some level of specificity is necessary. Moreover, insurance companies can send multiple reservation of rights letters during the evolution of a case as new facts are discovered. The Court found the lack of specificity in the letter demonstrated the deficient investigation carried out by Selective Way. The snow and ice removal exclusion was evident on the face of the policy. Moreover, the certified record revealed Selective Way admitted to having actual knowledge of the exclusion from the outset. Despite that knowledge, Selective Way waited 18 months to raise the policy exclusion, and provided no further notice to MAK Services that it would have to mount a defense to the underlying personal injury action on its own. The Court found that given Selective Way’s failure to clearly communicate its coverage position and the speculative nature determining how the case may have unfolded differently had the insurance company acted with appropriate diligence, prejudice could be fairly presumed against MAK Services. To support the finding of prejudice, the Court noted that MAK Services ceded their defense of the underlying action to Selective Way, and declined to obtain separate counsel or negotiate with the Plaintiff himself. As a result of the prejudice, Selective Way should have been estopped from denying coverage based on the application of the snow and ice removal exclusion without sufficient notice to MAK Services regarding Selective Way’s coverage position. As a result, the Superior Court reversed the trial court’s order granting Selective Way’s motion for summary judgment.

The dissent argued prejudice as to MAK Services could not be presumed. Instead, MAK Services should have been required to prove prejudice. The dissent noted that MAK Services did not claim lost evidence or witnesses, or that it would have handled its defense differently. Instead, Selective Way provided free legal representation to MAK Services for 18 months. The underlying case settled on April 2, 2019, two weeks after the trial court granted Selective Way’s Motion for Summary Judgment.

This case serves as a reminder that the insurance company must fairly inform the insured of its position in a reservation of rights letter if there are potential issues of coverage under the policy. In addition, the insurer must conduct its investigation of coverage with reasonable dispatch, and provide its disclaimer promptly upon the discovery of the facts. If appropriate, as facts are uncovered through the course of litigation of the underlying complaint, additional reservation of rights letters should be promptly sent to the insured clearly identifying all potential additional policy provisions and exclusions which may preclude coverage to the insured. Failure to conduct an investigation with reasonable dispatch and failing to clearly communicate to the insured potential coverage issues can result in a finding of presumed prejudice against the insured. Finally, if coverage questions exist, the insured should be informed of its right to retain its own personal counsel to mitigate any potential prejudice.

For further information, contact Dan Strick at Wright & O’Donnell, P.C., 610-940-4092.