In 2011, Randy and Erin Shearer brought suit against a group of Nationwide Mutual Fire Insurance Company policyholders (Policyholders), who all held Nationwide homeowner insurance policies with identical language. The Shearers alleged that they purchased undeveloped land to build on, but that three years after purchasing the property, they discovered that multiple sewer pipes were discharging raw sewage, effluent, and wastewater onto their property. The Shearers asserted that the sewer pipes had drained from the neighboring proprieties of the Policyholders.

From the inception of this litigation, Nationwide began to defend each of the Policyholders under a reservation of rights. The reservation of rights letters (as well as the supplemental reservation of rights letters) sent to the Policyholders stated that Nationwide would investigate the circumstances surrounding the Shearer’s claims, and noted, that Nationwide specifically “reserve[d] the right to later deny coverage on the claim at the conclusion of its investigation.” The reservation of rights letters specifically informed Policyholders that the Shearer’s claims might fall within the bounds of the pollution exclusion and/or biological deterioration or damage exclusion.

Around three years later, Nationwide filed a Declaratory Judgment Act action against the Policyholders and moved for summary judgment. Nationwide sought a declaration that it did not owe the Policyholders defense or indemnity based on the pollution exclusion and/or biological deterioration or damage exclusion, which Nationwide had repeatedly cited in its reservation of rights and supplemental reservation of rights letters. In response, the Policyholders filed a motion seeking a dismissal.

After the district court addressed jurisdictional issues, it turned its attention to the Policyholders’ argument that Nationwide should be estopped from denying coverage. The Policyholders asserted that Nationwide had been defending them for more than three years and that they would suffer prejudice if they were forced to obtain new counsel so late in the proceeding.

However, the court disagreed. The court determined that each of the Policyholders received a timely reservation of rights letter, followed by a supplemental letter. Nationwide had clearly set forth its coverage position, and had only assumed the defense of the Policyholders subject to the reservation of rights. Furthermore, the court rejected the Policyholders’ argument that Nationwide should otherwise be estopped from denying coverage because Nationwide waited too long to bring this action. Instead, the court held that the Policyholders did not meet their burden of demonstrating that they were actually prejudiced by Nationwide’s delay in disclaiming coverage.

The moral to be gleaned from this Declaratory Judgment Act action is that a good reservation of rights letter can go a long way.  Thanks to Erica Woebse for her contribution to this post, and please email Brian Gibbons with any questions.