A split appellate court in Pennsylvania has held that an insurer is estopped from asserting a policy exclusion that it failed to expressly raise in its reservation of rights letter. See Selective Way Ins. Co. v. MAK Servs., No. 1289 EDA 2019, 2020 Pa. Super. LEXIS 342 (Pa. Super. Ct. April 24, 2020). The court’s ruling is an important reminder that failure to properly reserve the insurer’s right to deny coverage can sometimes have significant consequences.

In MAK Services, the claimant slipped and fell on ice while walking in a parking lot, and he alleged in the underlying lawsuit that the insured negligently failed to remove snow and ice from the lot. The insured tendered the lawsuit to its insurer for coverage under a liability policy that included an exclusion for injury “arising out of snow and ice removal activities.” Id. at *2. The insurer promptly sent a reservation of rights letter, but it did not acknowledge or discuss the snow and ice removal exclusion. After defending the lawsuit for eighteen months, the insurer filed a coverage action seeking a declaration that the snow and ice removal exclusion barred coverage.

Although the insurer prevailed in the trial court, the appellate court ruled that the insurer’s reservation of rights letter was insufficient to preserve its right to rely on the snow and ice removal exclusion. The court found that an effective reservation of rights letter must “be submitted in a timely fashion” and “fairly inform the insured of the insurer’s position.” Id. at *10. The court determined that the insurer failed to satisfy the second requirement because its letter did not specifically identify “any emergent coverage issues,” id. at *12, such as the snow and ice removal exclusion. Although the court advised that “Pennsylvania law does not require an insurance company to list every potential defense to coverage in its reservation of rights letter,” it stated that “some level of specificity is necessary.” Id. at **15-16.

After stating that it was “not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them,” id. at *16, the court found that the insurer’s “boilerplate reservation of rights letter” was insufficient because it was “predicated upon a deficient investigation.” Id. The snow and ice removal exclusion was “evident on the face of the Policy,” and the insurer “admitted to having actual knowledge of the exclusion from the outset.” Id.

Finally, the court ruled that the insurer’s eighteen-month delay between assuming the insured’s defense and its first assertion of the snow and ice removal exclusion prejudiced the insured as a matter of law. Because the insurer “lulled the insured into a sense of security to his detriment,” and given “the inherently speculative nature of determining how the case might have unfolded differently had the insurance company acted with appropriate diligence,” the court ruled that “prejudice can be fairly presumed in this instance.” Id. The court therefore held that the insurer was estopped from asserting the snow and ice exclusion.

A dissenting opinion concluded that prejudice may be presumed only if the insurer utterly fails to reserve rights, but that prejudice must be proven when a reservation of rights letter improperly fails to assert a particular coverage defense. Finding the record devoid of evidence that the insured lost any evidence or witnesses, or would have handled its defense any differently, the dissent would have permitted the insurer to assert the snow and ice removal exclusion.

The court’s ruling in MAK Services is instructive because it shows the potential consequences of failing to properly reserve the insurer’s right to deny coverage. Importantly, however, MAK Services also shows that a reservation of rights letter should be effective if it timely raises the emergent coverage issues identified by a reasonable and timely coverage investigation.

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