Strict Scrutiny Standard Applied for Reservation of Rights Letters


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