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In Harleysville Group Ins. v. Heritage Communities, Inc., 2017 WL 105021 the South Carolina Supreme Court considered the impact that vague reservation of rights letters have on an insurer's right to pursue its coverage defenses. The claim arose out of property damage to condominiums originally caused by the insureds' faulty workmanship. After liability and damages were determined, the insurer in the Harleysville case filed a declaratory judgment to allocate between covered and non-covered damages (South Carolina follows the majority approach that the costs to repair faulty workmanship are not covered under a general liability policy but resulting damage to otherwise non-defective components is covered).
The insureds countered that the insurer could not allocate between these damages because of its failure to properly raise this issue in the insurer's reservation of rights letters. The South Carolina Supreme Court agreed. The court noted the coverage correspondence from the insurer included nine-to-ten page letters in which the insurer provided a "verbatim recitation of all or most of the policy provisions (through a cut-and-paste method)." The Harleysville court reasoned that the "letters included no discussion of Harleysville's position as to the various provisions or explanation of its reasons for relying thereon." In the court's view, this method of reserving rights comprises "no more than a general warning" and is "too imprecise to shield the insurer." The court therefore concluded the insurer was responsible for indemnifying the insureds for the full amount of the verdict.
The South Carolina Supreme Court's opinion provides an important warning that insurers should not simply recite policy provisions in their coverage correspondence to insureds. Insurers may waive the right to assert those coverage defenses if they do not adequately explain to the insured how those provisions may be implicated by the facts pertinent to the underlying claim.