Without Reservations: Fourth Circuit Affirms That Vague Reservation of Rights Waived Insurers’ Coverage Arguments

Lara Degenhart Cassidy and Matthew J. Revis | Hunton Andrews Kurth

The Fourth Circuit recently affirmed insurance coverage for a South Carolina policyholder based on the “axiomatic principle” that an insurer which fails to fully and fairly articulate its potential coverage defenses in a reservation of rights letter loses the right to contest coverage on those grounds. Stoneledge at Lake Keowee Owner’s Assoc. v. Cincinnati Ins. Co., No. 19-2009, 2022 WL 17592121 (4th Cir. 2022) (quoting Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017)). More particularly, in Stoneledge, the Fourth Circuit affirmed per curiam a South Carolina District Court’s grant of summary judgment in favor of a homeowners association that had successfully sued its general contractors for construction defects and was seeking to recover the damages owed from the contractors’ insurers. The Fourth Circuit agreed that the insurers’ vague reservation of rights letters failed to reserve the defenses on which the insurers purported to deny coverage.

The question before the court in Stoneledge was whether the two insurers that had each agreed to defend their respective general-contractor insureds in the homeowner association’s underlying litigation had sufficiently informed their policyholders of their coverage positions. Specifically, the court considered whether the insurers provided notice of their intention to challenge coverage on specific bases and explained why those bases applied in their respective reservation of rights letters. Both of the insurers’ letters followed the typical approach of identifying various policy provisions and exclusions and outlining the general mechanics of those provisions, but they fell short of applying the provisions or exclusions to the facts in the case at hand. Further, the letters stated that the insurers would reevaluate how the provisions applied as the underlying case progressed. One of the insurer’s letters expressed doubt as to coverage but did not offer any analysis on the reasons for the prospective coverage denial.

The Fourth Circuit concluded that the insurers in Stoneledge had not sufficiently reserved their rights to deny coverage because their reservations of rights letters were simply copy-and-paste documents employing wait-and-see tactics. Adopting the “axiomatic principle” of insurance law from Harleysville, 803 S.E.2d 288, that “an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage,” the court agreed that “generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) [are] not sufficient.” Id. at 297. The court also confirmed that an insurer saying “we will let you know later” does not constitute a valid reservation of rights. Id. at 299. Simply put, the Stoneledge court reaffirmed that the onus is on the insurers to show their work when writing their reservation of rights letters.

The Fourth Circuit also rejected the insurers’ contention that the court was creating coverage where none existed by finding that the insurers had waived defenses unarticulated in their respective reservation of rights letters. Looking to settled South Carolina law, the court concluded that an inadequate reservation of rights letter operated as an implied waiver of defenses and prevented a later coverage denial, even if the insurer disputed whether a covered event ever occurred. Ex parte Builders Mutual Insurance Company, 847 S.E.2d 87, 94 (S.C. 2020).

The Fourth Circuit opinion highlights that policyholders should evaluate reservations of rights from their insurers as comprehensive statements of the grounds on which the insurers intend to challenge coverage, and that the following shortcomings in reservation of rights letters may limit the insurer’s ability to pursue unarticulated or ill-defined coverage defenses down the road:

  • mere identification of policy information and policy terms without substantive analysis;
  • no discussion of the insurer’s position as to the relevant policy provisions mentioned;
  • no explanation of reasons for potentially denying coverage; and
  • failure to reserve rights on specific issues.

In sum, policyholders should be mindful to scrutinize reservation of rights letters and consult coverage counsel if faced with insurers employing claims-handling strategies that leave open questions about the scope of the insurer’s reservation of rights.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Federal Courts Reject Insurers’ Attempts to Recoup Defense Costs Expended Under Reservation of Rights

Anthony L. Miscioscia and Margo Meta | White and Williams

In situations where there is a dispute over a duty to defend, an insurer may provide a defense to its insured, subject to a reservation of rights, to not only deny coverage for a defense, but also to file a declaratory judgment action and recoup defense costs in the event it is determined there is no duty to defend. But are defense costs recoupable? Last week, federal trial courts in Georgia and Pennsylvania answered this question with a resounding “no”.

In Chemical Equipment Labs, Inc. v. Travelers Property Casualty Company of America, Case No. 19-3441, 2022 U.S. Dist. LEXIS 61298 (E.D.Pa. Mar. 31, 2022), the United States District Court for the Eastern District of Pennsylvania was called to determine whether Travelers Property Casualty Company of America (Travelers) was entitled to reimbursement of defense costs after it was determined that it had no duty to defend its insured in an arbitration for breach of a charter agreement. The Travelers’ policies did not contain an express reimbursement provision. The court found that Travelers was not entitled to reimbursement because under Pennsylvania law, “[r]eimbursement of defense costs requires an express provision in the written insurance contract.”

Similarly, in Mt. Hawley Insurance Company v. East Perimeter Pointe Apartments LP, Case No. 20-cv-3529, 2022 U.S. Dist. LEXIS 61885 (N.D. Ga. Apr. 1, 2022), the United States District Court for the Northern District of Georgia considered whether Mt. Hawley Insurance Company (Mt. Hawley) was entitled to reimbursement of defense costs after it was determined that it had no duty to defend its insured against a lawsuit for negligent management and security. Mt. Hawley’s reservation of rights explicitly reserved the right to seek reimbursement of defense costs in the event it was determined that there was no coverage available under its commercial general liability policy; however, the policy did not contain a reimbursement provision.

The East Perimeter court acknowledged that the recoupment of defense costs in the absence of an express reimbursement provisions was an unsettled issue in Georgia, as “Georgia courts have not decided the issue and federal courts are split.” In Illinois Union Insurance Company v. NRI Construction, Inc., 846 F. Supp. 2d 1366 (N.D. Ga. 2012), the court permitted reimbursement, finding it was justified under an unjust enrichment or implied in fact contract theory. However, in American Family Insurance Company v. Almassud, 522 F. Supp. 1263 (N.D. Ga. 2016), the court required an express reimbursement provision in the contract, finding that “if a right to recoupment is a benefit that the insurer deems sufficiently important, it can easily secure that right by including it in the policy agreement.”

The East Perimeter court ultimately concluded that Almassud was more persuasive, on the basis that permitting a right to recoupment absent a policy provision would permit insurers to unilaterally impose post hoc conditions on their contractual obligations.  

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Insurer Motion to Intervene in Underlying Case Denied

Tred R. Eyerly | Insurance Law Hawaii

    The Colorado Supreme Court determined that the insurer defending under a reservation of rights could not intervene in the underlying case after the insured assigned its rights to any bad faith claim against the insurer. Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n, Inc., 2021 Colo. LEXIS 365 (Colo. May 24, 2021).

    Bolt Factory initiated a construction defects lawsuit against various contractors. Several defendants filed third-party complaints against subcontractors, including Sierra Glass Company. Auto-Owners agreed to defend its insured, Sierra Glass, under a reservation of rights. Auto-Owners declined to settle with Bolt Factory for $1.9 million, within policy limits. Sierra Glass then retains independent counsel and entered into a settlement with Bolt Factory. The settlement allowed Sierra Glass to assign its bad faith claims to Bolt Factory in exchange for the right to pursue the insurer for payment of the excess judgment rather than Sierra Glass. Instead of entering into a stipulated judgment, Bolt Factory and Sierra Glass proceeded to an abbreviated trial.

    The parties submitted proposed findings of fact and conclusions of law. Sierra Glass did not present a defense. Auto-Owners sought to intervene to protect its interest in the non-adversarial trial. The lower court denied Auto-Owner’s motion. The court entered judgment in favor of Bolt Factory and against Sierra Glass in the amount of $2.4 million. The court of appeals affirmed. The Supreme Court granted Auto-Owners’ petition for certiorari review.

    The Colorado Supreme Court found that the agreement between Sierra Glass and Bolt Factory was permissible under Colorado law. Faced with Auto-Owners’ refusal to settle within policy limits, Sierra Glass took steps to protect itself by entering into an agreement with Bolt Factory – an agreement that included both an assignment of claims and a covenant not to execute. The lower court had discretion of requiring the parties to agree to a stipulated judgment or proceed to an uncontested trial where the court itself determines damages.

   Auto-Owners was not allowed to intervene because its interests in the litigation were not impaired. Auto-Owners could sufficiently protect its interests in a subsequent declaratory judgment action regarding coverage. Auto-Owners could also raise its claims and defenses in any bad faith action that Bolt Factory might bring against Auto-Owners pursuant to the assignment of claims.

    The judgment of the court of appeals was affirmed. 

Colorado Supreme Court Holds Insurers Are Not Entitled to Intervene Where Insured Assigns Its Rights to Third Party

Luke Mecklenburg and Anna Adams | Snell & Wilmer

In a 4-3 decision in Auto-Owners Insurance Co. v. Bolt Factory Loft Owners Association, Inc., the Colorado Supreme Court held that an insurer who is defending under a reservation of rights is not entitled to intervene where the insured has entered into a Nunn-type Agreement to assign its bad faith claims to a third party and then proceeds to an uncontested trial. The majority affirmed the Colorado Courts of Appeals’ decision, but on different reasoning.

The dispute at issue began when Bolt Factory Loft Owners Association sued contractors over construction defects. The contractors in turn filed third-party claims against subcontractors, including Sierra Glass Company, which was insured by Auto-Owners Insurance Company. The insurance company accepted its obligation to defend Sierra Glass subject to a reservation of rights.

Bolt Factory settled with all parties except Sierra Glass. Auto-Owners declined Bolt Factory’s $1.9 million settlement offer—an amount within the policy limits. Sierra Glass then retained its own counsel and entered into a pre-trial agreement with Bolt Factory. This agreement, generally known as a Nunn Agreement in Colorado, provided that Sierra Glass assigned its bad faith claim to Bolt Factory and, in exchange, Bolt Factory agreed to pursue Auto-Owners directly for payments of the excess judgment. But unlike most Nunn Agreements, where parties typically enter into a stipulated judgment and potentially agree to have the amount of damages determined by an independent factfinder, Bolt Factory and Sierra Glass proceeded to a two-day trial at which Sierra Glass contested none of Bolt Factory’s claims. During a pretrial conference, Bolt Factory stated it planned to call four witnesses to testify on liability and damages during the trial, and Sierra Glass said it “will probably not be posing a defense to those claims or assertions that are made in this case.”

When it learned of this plan, Auto-Owners moved to intervene to protect its interests and contest liability and damages—essentially to put on the defense Sierra Glass wouldn’t. But the district court denied the motion to intervene, reasoning that Auto-Owner’s interest in the matter was contingent on its obligation to defend under its policy and it would have a chance to challenge its liability under that policy in later suits. At the bench trial, Sierra Glass presented no defense. The district court entered judgment in favor of Bolt Factory and against Sierra Glass for nearly $2.5 million.

A division of the Colorado Court of Appeals affirmed the district court’s decision denying Auto-Owners’ motion to intervene. The court of appeals reasoned that based on its reservation of rights, Auto-Owners lacked sufficient interest in the litigation to satisfy Rule 24’s requirements.

A majority of the Colorado Supreme Court affirmed, but on different reasoning than the court of appeals. First, the court affirmed that the agreement between Bolt Factory and Sierra Glass was a permissible Nunn Agreement even though it was unclear from the record why the parties conducted a one-sided trial instead of just stipulating to judgment on Bolt Factory’s claims.

Second, the court concluded that even though Auto-Owners was proceeding under a reservation of rights, it retained a broad duty to defend under Colorado law. But the court agreed that Auto-Owners ability to defend itself was not impaired by denying it the chance to intervene because it could still challenge its liability in subsequent suits. Indeed, as the state court appeals were pending, Auto-Owners filed a declaratory judgment action in the United States District Court seeking a declaration that it did not owe any obligations or payments to Sierra Glass under the insurance policy and that Sierra Glass had breached the policy.

Third, the Supreme Court concluded that allowing an insurer like Auto-Owners to intervene would undermine the purpose of the Nunn Agreement, which provides an insured an opportunity to “protect itself in the face of an insurer’s unreasonable refusal to settle within policy limits.” According to the court, allowing the insurer to intervene could create potential conflicts based on information the insurer could discover about its insured in the case and use in a later declaratory judgment action regarding coverage.

On these bases, the Supreme Court affirmed the propriety of this modified Nunn Agreement and the district court’s refusal to allow Auto-Owners to intervene in the uncontested trial that arose from that agreement. Of note, however, the majority emphasized that (1) the judgment in the uncontested trial was no more binding on Auto-Owners than a stipulated judgment would have been, and (2) although this approach was permissible, “courts are free to require the use of a stipulated judgment” such as that considered in Nunn, “rather than proceed with an uncontested trial.” Hence, as the dissent observed, it is unclear why anyone would use this procedure again rather than simply stipulating to judgment and proceeding to assert bad faith claims against the insurer, as approved in Nunn. But with all that said, Bolt Factory remains an interesting case study in the extent to which Colorado courts will condone and/or expand upon the types of agreements first approved in Nunn.

Allocating Covered and Uncovered Damages in Jury Verdict

David Adelstein | Florida Construction Legal Updates

When a liability insurer defends an insured from a third-party claim, they oftentimes do so under a reservation of rights.  A reservation of rights letter is issued to the insured that identifies certain coverage exclusions or reservations relative to the insurance policy that may impact the insurer’s duty to indemnify the insured for damages.  In other words, just because the insurer is defending its insured does not mean it will be indemnifying its insured for damages asserted in the third-party claim.

Under Florida law, the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage provisions of the insurance policy. An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is therefore generally fatal to its indemnification claim. However, the burden of apportioning or allocating between covered and uncovered damages in a general jury verdict may be shifted to the insurer if the insurer did not adequately make known to the insured the availability and advisability of a special verdict.

QBE Specialty Ins. Co. v. Scrap Inc., 806 Fed.Appx. 692, *695 (11th Cir. 2020) (internal citations omitted).

This is an important concept because even when the insurer is defending its insured under a reservation of rights, it may put its insured on notice that because of coverage concerns, the insured needs to include special interrogatory questions in the verdict form for the trier of fact (jury) to answer to determine covered versus uncovered damages.  If the insured fails to do so, it will give the insurer a very strong argument to avoid any indemnification obligation it has with respect to the judgement.  This mean the insured is on the hook to deal with the judgment without insurance coverage.

For example, in QBE Specialty Ins. Co., an insured was sued for a nuisance stemming from its metal shredding operations.  The insured’s liability insurer defended the insured under a reservation of rights.  During the course of the case, the insurer notified the insured that it needed special interrogatory questions in the verdict form because of coverage concerns.  The jury awarded $750,000 in nuisance damages against the insured.  There was no allocation for covered versus uncovered damages.  The insurer then filed a separate declaratory relief coverage action claiming it was not obligated to indemnify the insured for the $750,000 in damages.  The Eleventh Circuit Court of Appeals, affirming the trial court, agreed because “in the absence of an allocated verdict form in the underlying trial, [the insured] never provided the district court with a plausible method for separating those damages awarded by the jury that are covered by [the insurer’s] policies from those that are not.”  QBE Specialty Ins. Co., supra, at *696.