Pennsylvania Superior Court Rules That Insurer Waived Coverage Defense by Not Including It in the Reservation of Rights Letter

By Lawrence E. Currier

In a split 2-1 decision in Selective Way Insurance Company v. MAK Services., Inc., et al. al., 2020 PA Super 103 (Case Number 1289 EDA 2019), issued April 24, 2020, the Pennsylvania Superior Court (the “court”) held that a reservation of rights letter from an insurer reserving its right to deny coverage after it begins to defend a claim on behalf of a policyholder must include at least some detail about potential exclusions that could apply. The court reversed an order of the trial court granting summary judgment to Selective Way, the insurer (“Selective”).

In 2011, MAK Services Inc., (“MAK”) a company exclusively in the business of ice and snow removal, purchased liability insurance from Selective for its business operations. The policy purchased by MAK contained various exclusions, including one entitled “Exclusion – Snow and Ice Removal.” This provision excluded coverage for “‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ arising out of snow and ice removal activities . . . .”. In October 2011, Oscar Gordon slipped and fell on ice while walking through a parking lot at the Valley Forge Marketplace, a client of MAK, and subsequently initiated a lawsuit against MAK and several other defendants on April 9, 2013.

In a reservation of rights letter dated May 1, 2013, Selective stated that Gordon’s case was a “potentially covered” claim, assigned defense counsel, and stated that it reserved all rights under “applicable law, insurance regulations and policy provisions,” including the right to deny coverage. However, Selective did not identify any specific coverage issues, including the policy exclusion for ice and snow removal. See Selective Way Ins. Co. v. MAK Servs., Inc., et al., No. 1289 EDA 2019 (PA Super. Ct., April 24, 2020) (slip op. at 10).

On November 13, 2014 (approximately 18 months after issuing the reservation of rights letter), Selective filed a complaint seeking declaratory judgment against MAK, claiming in part that the policy specifically excluded coverage for damages arising out of snow and ice removal. The parties filed cross motions for summary judgment, and the trial court entered an order granting Selective’s motion. MAK appealed, arguing that Selective had waived its right to rely on the exclusion by raising it for the first time in the November 2014 declaratory judgment action. Relying on prior authority, the court stated that a reservation must be submitted in a “timely fashion” and “fairly inform the insured of the insurer’s position” in order to preserve an insurer’s assertion of policy exclusions once a defense of the insured has been mounted.

The court first analyzed the timeliness of Selective’s May 1, 2013 reservation of rights letter sent within three weeks of the filing of the underlying civil action, and prior to undertaking any defense of MAK. In determining that Selective’s reservation of rights letter was timely submitted, the Court cited both Brugnoli v. United Nat. Ins. Co., 426 A.2d 164 (Pa. Super. Ct. 1981), and Erie Ins. Exch. v. Lobenthal, 114 A.3d 832 (Pa. Super. Ct. 2015). In Brungoli, the court held that a reservation of rights letter sent within one week of service of a complaint was considered “timely.” Brugnoli, 426 A.2d at 168. In contrast, the court found in Erie, a reservation of rights letter sent approximately seven months after the filing of a complaint was not considered timely. Erie Ins. Exch., 114 A.2d at 840. The court found that Selective’s three-week time frame more closely aligned with the facts of Brugnoli, and held that Selective’s letter was timely submitted. Therefore, the court agreed with the trial court in finding that Selective did not waive the coverage exclusion.

The court next addressed the sufficiency of Selective’s reservation of rights letter, noting that, in addition to being timely, such a letter must also “fairly inform the insured of the insurer’s position” to validly preserve any defenses to coverage. Brugnoli, 426 A.2d at 168. The court also noted “where an insurer fails to clearly communicate a reservation of rights to an insured, prejudice may be fairly presumed.” Erie Ins. Exchange v. Lobenthal, 114 A.3d at 839, Malley v. American Indemnity Corp., 146 A. 571, 573 (Pa. 1929).

The court found that a review of the policy would have “immediately revealed” the existence of the exclusion. While the court conceded that Pennsylvania law does not require an insurance company to identify every potential defense to coverage, it noted that recent case law, specifically Lobenthal and Brugnoli, suggest that some level of specificity is necessary, and best practices may be multiple reservation of rights letters during the evolution of a case. The court, cautioned, however, that; “We are not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them.” Instead, the court noted that “the lack of specificity in the letter bespeaks the deficient investigation carried out by Selective Way.”

The court ultimately found that prejudice to MAK could be fairly presumed and Selective should not be permitted to rely on the policy exclusion because Selective had knowledge of the coverage exclusion from the initiation of the lawsuit against MAK in 2013, and subsequently waited 18 months to first raise the issue in its declaratory judgment action.

The court remanded the case for further proceedings consistent with its opinion.