Appeals court rules insurers’ reservation of rights inadequate


Reservation of rights letters issued by Cincinnati Insurance Co. and another insurer were inadequate and did not provide a basis for denial of coverage in a construction defect case, a federal appeals court ruled Tuesday in affirming a lower court.

The Stoneledge at Lake Keowee Owners’ Association Inc. in Lake Keowee, South Carolina, sued Prince Frederick, Maryland-based Marick Home Builders LLC and Marick’s managing member, Rick Thoennes, in 2009, alleging construction defects in townhouses that resulted in water intrusion and other physical damage, according to the ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia in Stoneledge at Lake Keowee Owners’ Association Inc. v. Cincinnati Insurance Co.; Builders Mutual Insurance Co.

Stoneledge had filed suit in U.S. District Court in Anderson, South Carolina, seeking a declaratory judgment in favor of coverage against Marick’s and Mr. Thoennes’ insurers, Cincinnati Insurance and Raleigh, North Carolina-based Builders Mutual, which had issued reservation of rights letters in the construction defect case.

The district court ruled in the association’s favor and was upheld by a three-judge appeals court panel.

In its ruling, the appeals court referred to a 2017 decision by the South Carolina Supreme Court in Harleysville Group Insurance v. Heritage Communities Inc.

That ruling held 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) is not sufficient,” the panel said.

“Lodging a litany of grievances with the rationale in Harleysville and attempting to cast its holding as highly fact-specific, the insurers ask us to look elsewhere for a rule governing in this case.

“It is, however, not for us to second-guess a decision of the Supreme Court of South Carolina on a matter of South Carolina law,” it said in affirming the lower court.

Association attorney Matt Austin, a partner with Nelson Mullins Riley & Scarborough LLP in Charleston, South Carolina, said in a statement the district court judge “correctly applied Harleysville and, at argument, the Fourth Circuit was clear in its belief that, since Harleysville is the law in South Carolina, they could not change that.”

Cincinnati’s attorneys did not respond to a request for comment.

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