EDNC Ruling Brings to Light Potential Consequences of Generic Reservations of Rights in North Carolina
The Eastern District of North Carolina held that generic reservation of rights letters did not waive an insurer’s coverage defenses, but left open the possibility that the letters violated North Carolina’s Unfair and Deceptive Trade Practices Act (UDTPA) by misrepresenting facts or policy provisions.
In Beach Mart, the insurer issued several reservation of rights letters to the insured and ultimately agreed to provide the insured a defense against an underlying lawsuit. At issue was the application of a breach of contract exclusion to several intellectual property claims. The insurer quoted the exclusion in its analysis of a primary policy in the letters, but failed to do so in its description of an umbrella policy that was also potentially implicated. The court described these letters as “generic statements of potential noncoverage coupled with excerpts of various parts of the insurance policies, furnished through a cut-and-paste method.”
The court in Beach Mart enforced longstanding North Carolina case law that establishes that the doctrines of waiver and estoppel do not apply to broaden a policy’s coverage to embrace risks not covered by the policy’s terms. The court held that the letters were issued timely, provided the insured with full knowledge that the insurer contested coverage, and asserted a clear and unequivocal reservation of rights, such that the insurer was not estopped from disputing coverage and had not waived its coverage defenses based on the letters.
The court declined to follow Harleysville, Advantage, and Hoover – three non-North Carolina authorities often cited in the proposition that an insurer has waived its coverage defenses based on claims correspondence to an insured. By declining to follow those cases, the court emphasized how North Carolina law may be more lenient with respect to reservation of rights letters than some other states.
In Harleysville, the South Carolina Supreme Court came to the opposite conclusion. The court found that an insurer had not properly notified the insured of a dispute in coverage because of its generic statements as to coverage and its failure to tie allegations against the insured to the specific policy provisions. As a result, the court found the letters insufficient for the insurer to have reserved its right to contest coverage of the actual damages established in the underlying litigation. Similarly, in Advantage, a Missouri appellate court found that an insurer’s failure to inform the insured of how policy provisions might apply to the underlying plaintiff’s allegations against the insured or of the potential coverage issues presented by the lawsuit constituted an ineffective reservation of rights and barred the carrier from later contesting coverage. The Beach Mart court found these authorities inconsistent with North Carolina law.
However, the court declined to grant summary judgment for the insurer on whether the letters violated North Carolina General Statute by misrepresenting facts or policy provisions. The court reasoned that the letters included irrelevant exclusions, did not discuss the carrier’s position in relation to the policy provisions, and did not explain how specific allegations might create coverage issues. Therefore, the court’s decision left the possibility that the reservation of rights letters could lead to UDTPA liability for the insurer.
The court’s decision echoes a Fourth Circuit opinion issued earlier this year that found an insurer to have engaged in unfair and deceptive trade practices under North Carolina law where it cited to extraneous coverage provisions and failed to connect its policy language to the facts of the claim. In DENC, the insurer’s denial letter for a first-party property claim similarly quoted inapplicable coverage provisions and failed to connect the facts to the coverage provisions in a way that would inform the insured of its basis for denying the claim. The Fourth Circuit upheld the district court’s finding that the denial letter violated North Carolina’s UDTPA under subsection (n), for failure to provide a “reasonable explanation of the basis in the insurance policy in relation to the facts…for denial of a claim or for the offer of a compromise settlement.”
Taken together, these decisions emphasize the importance of an insurer’s clear explanation of how the facts of a claim may implicate the policy provisions. While courts may not find coverage positions waived by poorly-written correspondence to the insured, they may find that the insured was damaged by misleading or incomplete coverage positions.
Additionally, the court rejected the insured’s argument that it was entitled to refuse the insurer’s defense when offered under a reservation of rights. The court distinguished an older North Carolina case because there was no argument in Beach Mart that defending under a reservation of rights created a conflict of interest. The court held that the policy language granted the insurer the right to defend and did not grant the insured authority to deny a defense offered under a reservation of rights. In doing so, the court differentiated North Carolina law from jurisdictions that allow an insured to reject an insurer’s defense subject to reservation of rights and to control the defense itself.
Please contact any member of the Phelps Insurance Team if you have questions on this case or need advice or guidance.