The Third Circuit Court of Appeals recently dealt with a challenge by an insured to the withdrawal of a Reservation of Rights in Nationwide Ins. Co. v. Shearer.  The underlying claims arose from damage caused by the discharge of sewage and other waste by Nationwide’s policyholders, which had drained onto the Shearers’ property and subsequently contaminated their groundwater. The Policyholders were insured by Nationwide, who agreed to provide a defense but stated in Reservations of Rights letters that the claims may be subject to a pollution or biological deterioration exclusion and that it was not waiving its rights to later disclaim coverage.

Nationwide subsequently filed a declaratory judgment action and moved for summary judgment, arguing that the claims were excluded from coverage. The policyholders did not challenge the applicability of the exclusionary language and instead claimed that Nationwide should be equitably estopped from withdrawing because it had been defending them for several years and that an untimely withdrawal would be prejudicial.

The District Court rejected the policyholders’ arguments and awarded summary judgment in favor of Nationwide. The District Court noted that Nationwide’s reservation of rights letters made clear that its defense “shall not be deemed to be a waiver of or estoppel” of its rights under the policy. The District Court also rejected the policyholders’ claim that Nationwide was required to take steps to withdraw its defense within a certain period of time after issuing reservation of rights letters and that it was instead the burden of the insured to establish “actual prejudice.” Finding no allegations or evidence of prejudice, the Court held that there was no basis to estop Nationwide from asserting its coverage defenses. The policyholders appealed, and the Third Circuit affirmed. Echoing the lower court’s decision, the Third Circuit determined that Nationwide had preserved its coverage defenses in its reservation of rights letters. The appellate court also rejected the Policyholders’ claims that they would be prejudiced as a result of allowing the withdrawal of the defense at such a late stage in the case.

Thanks to Jorgelina Foglietta for her contribution to this post and please write to Mike Bono for more information.