Reservation of Rights Letters Preserved Coverage Defenses

June 21, 2016 | Insurance Coverage

The U.S. Court of Appeals for the Third Circuit, affirming a decision by the U.S. District Court for the Western District of Pennsylvania, has ruled that insurers had preserved their coverage defenses by mailing reservation of rights letters to their policyholders.


After discovering the discharge of sewage and other waste on their property, Randy and Erin Shearer sued various policyholders insured by Nationwide Property and Casualty Insurance Company and Nationwide Mutual Fire Insurance Company for trespass, nuisance, and violations of state environmental law.

Nationwide initially defended the policyholders subject to a reservation of rights. Nationwide informed the policyholders in a letter that it would investigate the circumstances surrounding the Shearers’ claims, but stipulated that “this investigation [was] subject to a Reservation of Rights, meaning that [Nationwide] specifically reserve[d] the right to later deny coverage on [the] claim at the conclusion of its investigation.” Nationwide highlighted the fact that each of the policyholders’ contracts contained exclusions for pollution or biological deterioration that, it wrote, might apply.

Then, in a supplemental reservation of rights letter, Nationwide cautioned each policyholder to “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.” Nationwide also made clear that its assumption of the policyholders’ defense “shall not be deemed to be a waiver of or estoppel of these and all rights under the policy and applicable law.”

Nationwide subsequently sought a declaration that it had no duty to defend or indemnify the policyholders in connection with the Shearers’ lawsuit, citing pollution and biological deterioration exclusions in their policies.

The policyholders did not challenge the applicability of the pollution and biological deterioration exclusions but, rather, argued that Nationwide should be equitably estopped from withdrawing its defense because it had been defending the policyholders for several years and such an untimely withdrawal would prove prejudicial to them.

The district court granted summary judgment in favor of Nationwide, and the policyholders appealed to the Third Circuit.

The Third Circuit’s Decision

The Third Circuit affirmed.

The circuit court decided that Nationwide had preserved its coverage defenses by mailing reservation of rights letters to the policyholders. Each policyholder, the circuit court said, had been informed that Nationwide could withdraw its defense for various reasons. It added that the fact that Nationwide had defended the case for some time before citing an exclusion and denying coverage did “not somehow turn the defense it did provide into fraudulent inducement” or the policyholders’ decision to allow Nationwide to provide them with a defense into “detrimental reliance.”

The Third Circuit concluded by acknowledging that the policyholders were “understandably” disappointed by Nationwide’s decision to withdraw its defense, but said that the fact that Nationwide was entitled to do so under the terms of the insurance contracts meant that the defense it did tender had been only a temporary benefit to the policyholders.

The case is Nationwide Property and Cas. Ins. Co. v. Shearer, No. 15-1837 (3d Cir. May 26, 2016).

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  • Robert Tugander

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