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Archive for the ‘Insurance Coverage/Bad Faith’ Category

Strict Scrutiny Standard Applied for Reservation of Rights Letters

Posted on: March 13th, 2017

By: Joyce Mocek

The South Carolina Supreme Court recently addressed whether an insurer’s reservation of rights letter was adequate where a carrier was providing a defense in a claim and, adopting a strict scrutiny standard, found that the letters did not adequately explain to the insured how the policy provisions quoted in the letter applied to preclude coverage. Harleysville Group Insurance v. Heritage Communities, Inc., et al., 2017 S.C. LEXIS 8 (Jan.  11, 2017). To be a valid reservation of rights letter, the Court maintained that the letter needed to contain specificity on the reason for the reservation and be detailed and precise enough to explain to the insured why there might not be coverage under the policy. The Court advised that the letter should notify the insured of the potential for conflict, that the insurer might file a declaratory judgment action, and the potential of a special verdict for apportioning damages. Although the reservation of rights letter at issue included quoted verbatim policy language, the Court stated that “cutting and pasting” from a policy is not enough. Further, the Court held that the insurer did not sufficiently inform the insured how the exclusions referenced could result in an allocation between covered and noncovered damages, if the insurer decided to file a declaratory judgment action.

The Court did not cite any specific South Carolina authority, rather it relied on decisions from other jurisdictions and maintained that the insurer’s letter was not sufficiently specific and precise. Although the claim at issue involved a construction defect claim, the decision did not appear to be limited to construction claims. Thus, it may have far reaching implications to liability insurers in South Carolina and potentially other jurisdictions reviewing reservation letters in all liability claims. The decision did not specify that it would only apply on future claims. As a result, insurers that have issued reservation of rights letters that pre date this decision may want to review the letters to determine whether they meet the requirements outlined in the Harlesyville decision and, if there is any concern, consider supplementing or amending the letters. 

For any questions, contact Joyce Mocek at [email protected].

Cancellation vs. Expiration: The Subtle Distinction and Why it Matters

Posted on: February 14th, 2017

By: Connor M. Bateman

In most jurisdictions, insurers must adhere to a detailed set of statutory provisions when cancelling or refusing to renew certain types of insurance policies. Most notably, insurers are often charged with delivering or mailing a written notification to the insured providing clear and unequivocal notice that the insurance coverage at issue is ending. Even slight deviations from the statutory requirements governing such notices will likely vitiate the cancellation or nonrenewal and cause coverage under the policy to remain in place.

Although the law typically requires strict compliance with these provisions, there is an important distinction between cases where an insurer cancels a policy and cases where the policy simply expires by its own terms due to the insured’s failure to remit his or her premium payment. In the latter case, an insurer is not bound by the notice requirements in place for cancellations. The same distinction exists between cases where an insurer refuses to renew a policy and cases where the coverage simply lapses.

For example, say that an insurance company issues a standard residential fire insurance policy for a one year effective term. The insured consistently makes timely premium payments for five years and renews his coverage at the end of each term by paying the renewal premium. On the sixth year, however, the insured fails to pay the minimum balance required to renew his coverage and the policy expires at the end of that term. Although insurers are normally required to provide written notification of an impending nonrenewal, many courts have determined that this requirement only applies to cases where the insurer is unwilling to renew an insurance policy. In other words, the statutory notice provisions are generally inapplicable to situations where a policy is not renewed because of nonpayment of premium by the insured. Thus, in the above example, the insurer would have no obligation to notify the insurer that the policy was set to expire.

This distinction may prove crucial in cases where a loss occurs after the policy expires, and the insured insists that coverage should be afforded due to the insurer’s failure to abide by the statutory notice provisions. Although it is important for insurers to carefully follow the statutory guidelines when cancelling policies, insurers should also be aware of the distinction between instances where the termination of coverage is due to the expiration of the risk insured by the policy.

Belt And Suspenders: Reserving Rights In A Changing Liability Landscape

Posted on: December 1st, 2016

insurance-coverageBy: Philip W. Savrin

In many jurisdictions, substantive coverage cannot be expanded by means of waiver or estoppel. An important exception can exist where the insurer provides a defense to the insured in a third party liability action without having first reserved its rights to deny coverage. In general, a reservation of rights letter, sent out at the commencement of the defense, is intended to fairly inform the insured of potential coverage defenses. Theoretically at least, the insured can then make an informed choice to allow the insurer to control the defense or to take steps to protect its own interests. If the insurer does not advise the insured of coverage issues before providing a defense, some courts will allow substantive coverage to be created by waiver or estoppel in that limited circumstance.

Even if this rule applies, ambiguities can arise when facts develop during the liability case that impact defenses to coverage. From a practical perspective, it can be challenging for a claims adjuster who is focused on the defense of the insured to be mindful of coverage issues that may emerge, especially when the defense was provided without a reservation of rights because there was no coverage issue at the outset of the litigation. Most jurisdictions are silent on when rights must be reserved in this circumstance, while other courts allow flexibility by holding that a reservation of rights must be sent in a timely manner. This standard can be rather slippery to apply, which can be perilous for an insurer with the burden to preserve its coverage defenses in a timely and adequate manner.

Regardless of the rules in a particular jurisdiction, insurers are well-advised to evaluate coverage throughout the life of the liability claim, even if a reservation of rights letter has been issued to preserve the issues identified early on in the proceeding. A good rule of thumb is to reiterate the coverage issues in communications with the insured at various intervals, particularly when decisions are being made about the defense strategies, settlement opportunities, and trial. In this manner, the insured will be informed of the decisions being made on its behalf and the insurer for its part will be able to ensure that its coverage defenses are being preserved.

For any questions you may have, please contact Phil Savrin at [email protected].

Insurance Claims “Arising Out Of” Halloween Festivities

Posted on: October 19th, 2016

pumpkin-dogBy: Jessica Samford

As the witching hours of Halloween draw nearer, the time has come for the next installment of the FMG insurance coverage blog’s glossary of insurance terms. While the thought of interpreting a lengthy insurance policy may seem frightening to some, let’s take a quick look at one commonly utilized phrase in all types of insurance policies—“arising out of”—using the spirited theme of Halloween as inspiration.

Imagine a costumed homeowner is giving out candy to a group of rambunctious trick-or-treaters on her porch when all of a sudden her dog gets spooked and darts out of the door, knocking one unlucky ghoul down the steps. Such an occurrence is likely to fall within the liability coverage provided by a homeowner policy, which typically has language covering liability resulting from bodily injury “arising out of” the ownership, maintenance, or use of real or personal property.

Now conjure up a vision of that same homeowner on her porch collecting $5 admission fees from her neighbors as they enter her homemade haunted house attraction, of which her costumed dog is the feature creature. If a neighbor is cursed with a dog bite in this spooky scenario, the “arising out of” phrase may come up a second time when analyzing applicable coverage exclusions.  This is because most homeowner policies contain some sort of business activity exclusion, which typically provides that coverage is excluded for bodily injury “arising out of” business pursuits of an insured.

Interestingly, courts are likely to interpret the phrase differently within the same policy. Generally, courts construe “arising out of” quite broadly when used in the grant of coverage, frequently finding that almost any causal connection triggers the phrase.  At the same time, courts have construed “arising out of” narrowly in determining whether an exclusion applies, traditionally applying a “but-for” standard of causation: but for the insured’s new Halloween business venture, would the neighbor have been  bitten?  It would seem unlikely under these fictional facts.  No matter what arises this Halloween, don’t be bewitched by these divergent interpretations of “arising out of” and stay tuned for more spellbinding installments of FMG’s insurance blog.

Self-Driving Cars Will Likely Change the Insurance Landscape

Posted on: September 21st, 2016

Self-driving car conceptBy: Melissa Santalone

This week Uber debuts its pilot program for self-driving cars in Pittsburgh.  These lucky Uber users in Pittsburgh will be among the first Americans to come into direct contact with technology that is expected to eventually make its way into our everyday lives.  With the greater implementation of this technology, huge changes are likely to come in the legal and insurance realms and new cyber security concerns will be created.

The increased usage of self-driving cars, while intended to make driving safer, also opens up new opportunities for hackers.  Every car operated by a computer could be at risk of being taken over by hackers or invaded by ransomware or viruses.  This could pose catastrophic consequences for passengers, as well as other vehicles sharing the road.  This is especially true for fleets of vehicles programmed to communicate with each other, a problem which will no doubt be of special interest to Uber.  These new risks create new needs for protection by automakers, fleet operators, and individual vehicle owners.  Insurers will have an opportunity to offer protection from these new risks in the form of additional lines of insurance coverage.

This technology is coming and the inevitable changes it will bring are going to change the auto insurance industry and raise new and serious cyber security concerns.  The time for preparation is now.