(Article from Insurance Law Alert, June 2016)
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In two decisions issued last month, Courts of Appeals for the Tenth and Third Circuits rejected policyholders’ waiver arguments and held that property insurers were not estopped from denying coverage based on policy exclusions.
In Gallegos v. Safeco Insurance Co. of America, 2016 WL 2849417 (10th Cir. May 16, 2016), the Tenth Circuit rejected a homeowner’s argument that a property insurer waived its right to rely on certain exclusions in denying coverage because it failed to specify those exclusions in its reservation of rights letter.
Homeowners sought coverage from Safeco for roof and ceiling damage following a storm. Safeco denied coverage on the basis that the damage was caused by poor construction and other events pre-dating coverage, rather than the snow storm. In its reservation of rights, Safeco identified several exclusions relevant to its denial. The homeowners filed suit. During the course of litigation, Safeco paid the homeowners approximately $10,000 in repair costs. Thereafter, a Colorado district court granted Safeco’s summary judgment motion, finding that improper construction and maintenance of the roof contributed to the damage, and that under the policy’s anti-concurrent causation clause, Safeco was not liable for damage caused in part by an excluded peril.
On appeal, the homeowners argued that Safeco had waived reliance on the relevant exclusions by failing to specifically identify them in the reservation of rights and/or by paying the costs of the roof repair during the litigation. The Tenth Circuit rejected these assertions and affirmed the district court. The Tenth Circuit concluded that the coverage denial sufficiently raised each exclusion relied upon by Safeco during litigation. The court further held that even if the reservation of rights had not properly preserved the relevant exclusions by name, that failure would not estop Safeco from denying coverage. The court explained that under Colorado law, an insurer can waive a defense that constitutes a “forfeiture of a policy,” but that “coverage and exclusion issues are not subject to waiver.” Finally, the court ruled that Safeco’s voluntary payment of the repair costs during litigation did not constitute an admission of liability or operate to waive Safeco’s right to deny coverage, explaining that waiver cannot be invoked to create coverage where none existed under the policy.
The Third Circuit rejected a different waiver/estoppel argument in Nationwide Property & Casualty Insurance Co. v. Shearer, 2016 WL 3018764 (3d Cir. May 26, 2016). There, the policyholders were sued for trespass, nuisance and violations of environmental statutes based on sewage leaks onto neighboring property. Nationwide defended the suit under a reservation of rights that expressly stated that pollution or other exclusions might apply. In a supplemental reservation letter, Nationwide cautioned that it reserved its right to deny coverage and withdraw from the defense if valid bases for doing so arose. More than two years after the underlying suit began, Nationwide sought a declaration that it had no duty to defend based on the pollution and biological deterioration exclusions. The policyholders did not dispute application of the exclusions but argued that Nationwide was estopped from withdrawing a defense because “such an untimely withdrawal would prove prejudicial.” The court disagreed and granted Nationwide’s summary judgment motion. The Third Circuit affirmed.
The Third Circuit ruled that the policyholders failed to establish equitable estoppel under Pennsylvania law. In particular, the court held that the policyholder did not establish “inducement” by virtue of the fact that Nationwide provided a defense for more than two years. The court explained that any claim of inducement was defeated by Nationwide’s express reservation of rights, notwithstanding its long-term defense of the underlying suit. The court also ruled that the policyholders could not establish the requisite prejudice, explaining that although the policyholders “were understandably disappointed by Nationwide’s decision to withdraw its defense, the fact that it was entitled to do so under the terms of the insurance contracts means that the defense it did tender was a temporary benefit” to the policyholders.