Insurer Was Not Estopped from Denying Coverage Even Though It Had Been Defending Insureds for over Three Years

A federal district court in Pennsylvania has ruled that an insurer that issued timely reservation of rights letters was not estopped from denying coverage even though it had been defending the insureds for over three years. 

The Case

Randy and Erin Shearer sued a number of homeowners in a Pennsylvania state court alleging that, after they had purchased approximately 18 acres of undeveloped land, they discovered that multiple sewer pipes were “discharging raw sewage, effluent and wastewater” on their property, which pipes drained from the defendants’ properties. The Shearers alleged that the discharge had been absorbed into the ground and had contaminated the groundwater.

The Shearers asserted several legal theories in their complaint: trespass, continuing trespass, civil conspiracy to trespass, private nuisance, absolute nuisance, creation or maintenance of a dangerous condition, violation of the Pennsylvania Clean Streams Law, negligence, and public nuisance. They sought to recover damages for deprivation of their use and quiet enjoyment of portions of the property due to unsightly conditions and noxious aromas; inability to subdivide and develop the property into multiple home sites; lost profits from the inability to subdivide and develop the property; reduction of market value of the property; personal health problems such as nausea, depression, and inability to sleep; and permeation of the drywall of their residence of an objectionable odor, fecal matter, and sewage effluent.

The homeowners were insured by Nationwide Property and Casualty Insurance Company and Nationwide Mutual Fire Insurance Company (“Nationwide”), which defended them from the inception of the Shearers’ litigation, subject to a reservation of rights. In reservation of rights letters, Nationwide informed the homeowners that the Shearers’ claims might fall within the pollution exclusion and/or biological deterioration or damage exclusion, inasmuch as they stemmed from “raw sewage and/or waste products being discharged on or near the [Shearers’] property.”

Nationwide also sent each of the homeowners a supplemental reservation of rights letter. In this letter, Nationwide explained that it would “continue to handle this matter pursuant to a reservation of rights … because there are certain exceptions to coverage that may apply.” Nationwide went on to state that it would:

investigate this matter to determine if coverage will apply. You should be aware that as the facts are determined, [Nationwide] may assert the right to deny coverage and withdraw from the handling of this claim for any valid reasons that may arise. You should also be aware that even if this case proceeds to trial, we may not be obligated to pay any judgment nor any portion of any judgment that may fall outside the coverage afforded by the policy. 

After summarizing the Shearers’ allegation, Nationwide reiterated its position that the claims might fall within the policies’ pollution and/or biological deterioration or damage exclusions. Finally, Nationwide concluded by stating that “[b]y investigating, participating in your defense or negotiating settlement, we do not assume any liability in excess of that imposed by the policy, and we do not waive any of our rights to rely upon any of the provisions of the policy and do not admit that the policy provides coverage for the alleged damages.”

Thereafter, Nationwide went to court, seeking a declaration that it did not have a duty to defend or indemnify the homeowners for the claims asserted against them by the Shearers.

The parties moved for summary judgment. Nationwide argued that the Shearers’ claims in the underlying litigation fell within the pollution liability exclusion and/or the biological deterioration or damage exclusions contained in each of the policies. For their part, the homeowners did not challenge, or address in any manner, Nationwide’s position as to whether the Shearers’ claims were within those policy exclusions. Instead, they argued that Nationwide should be estopped from denying coverage because it had been defending them in the Shearers’ case for more than three years. The homeowners contended they would be prejudiced if Nationwide were allowed to withdraw because they would have to obtain new counsel at a late stage in the proceedings.

The Court’s Decision

The court granted Nationwide’s motion, rejecting the homeowners’ estoppel argument.

In its decision, the court explained that each of the homeowners had received a timely reservation of rights letter, followed by a supplemental letter, setting forth Nationwide’s position as to coverage and stating, among other things, that Nationwide’s actions in assuming the defense of the homeowners subject to a reservation of rights “shall not be deemed to be a waiver of or estoppel of these and all rights under the policy and applicable law.” According to the court, this “completely undercut” the homeowners’ estoppel argument.

The court added that, under Pennsylvania law, insurers had the “the option of defending subject to a reservation of its right later or simultaneously to contest coverage.” Thus, the court ruled, Nationwide could not be estopped from asserting its coverage defenses in the declaratory judgment action.

The court rejected the homeowners’ argument that Nationwide should be estopped from denying coverage because Nationwide had waited “too long” to bring the declaratory judgment action.  It explained that the homeowners had not cited any authority from Pennsylvania – or elsewhere – supporting their assertion that an insurer was required to disclaim coverage or file a declaratory judgment action within a certain period of time after issuing a reservation of rights letter.

In conclusion, the court stated that “the issuance of a timely reservation of rights letter will be a lofty hurdle for an insured party to overcome in asserting an estoppel defense,” and it found “no basis to estop Nationwide from asserting its coverage defenses.”

The case is Nationwide Prop. & Cas. Ins. Co. v. Shearer, No. 2:14-cv-735 (W.D. Pa. March 13, 2015).