Insurance Company Reservation of Rights Letters—Better be Specific!

Insurance Company Reservation of Rights Letters—Better be Specific! by Evan Schwartz



A recent case decided by the Supreme Court of South Carolina, Harleysville Group Insurance v. Heritage Communities Inc., exemplifies an important lesson for lawyers on both sides of the insurance recovery spectrum—particularly concerning reservation of rights letters sent by insurance companies. 

In the case, two Myrtle Beach condominium complexes were built with major construction defects. A lawsuit was brought against a series of developers, resulting in multi-million dollar verdicts. Harleysville Group Insurance was one of the insurance companies that was going to be partially responsible for paying out these verdicts—indemnifying its insured, Heritage Communities. 

At the time that the cases were litigating, Harleysville received notice from Heritage and agreed to defend. Harleysville also sent a reservation of rights letter, however, reserving its right to deny coverage in the future for the ultimate verdicts in the cases. 

Harleysville’s letter to Heritage was intended to preserve its right not to indemnify, and the letter quoted, verbatim, block sections of the policy that Harleysville believed afforded it this right. After the verdicts were rendered, Heritage was forced to sue Harleysville to pay for the judgments obtained by the plaintiffs in the construction defect cases.  

The South Carolina Supreme Court required Harleysville to pay for its share of the verdicts because its reservation of rights letter was not specific enough—it lacked an explanation as to why those sections of the policy it quoted in its reservation of rights letter gave it the right to refuse coverage. 

Due to lack of specificity in its reservation of rights letter, Harleysville unwittingly waived its right to refuse coverage.    

Insurance companies often fail to follow their legal obligations when refusing coverage. This case is a perfect example of it. Lawyers representing insureds need to examine a reservation of rights letter very carefully. They should first examine whether or not the insurance company has been specific in explaining why there is not or may be no coverage. Second, the lawyer should determine whether or not applicable state law provides the type of waiver remedy that South Carolina provided to this particular insured—where the waiver of the insurance company’s right to refuse coverage in its reservation of rights letter is not specific.                            


Evan S. Schwartz
Founder of Schwartz, Conroy & Hack