Insurance contract policy allows insurer to withdraw defense, Third Circuit says

By Nicholas Malfitano | Jun 1, 2016

PHILADELPHIA -- The U.S. Court of Appeals for the Third Circuit ruled Nationwide Property & Casualty Insurance Company is not required to defend policyholders in litigation over an insurance contract dispute.

Judges D. Brooks Smith, Richard L. Nygaard and Thomas M. Hardiman opined May 26 that Nationwide was not required to defend appellants Walter G. Fox, Rosemary Fox, Patrick B. Iorio, Philomena Iorio, Jeffrey Iorio, Diane Iorio and Edith Tomei from a lawsuit filed by Randy and Erin Shearer.

“This appeal arises out of a property dispute between Randy and Erin Shearer and appellants (collectively, the policyholders), who were insured by Nationwide Property and Casualty Insurance Company and Nationwide Mutual Fire Insurance Company (collectively, Nationwide),” Hardiman wrote for the court. “After discovering the discharge of sewage and other waste on their property, the Shearers sued the policyholders under various theories sounding in trespass, nuisance, and violations of state environmental law.”

Hardiman explained Nationwide initially defended the policyholders subject to a reservation of rights, or the act to “reserve the right to later deny coverage on the claim at the conclusion of its investigation.”

“Nationwide highlighted the fact that each of the policyholders’ contracts contained exclusions for pollution or biological deterioration, which might apply. In a supplemental reservation of rights letter, Nationwide cautioned each policyholder to ‘be aware that as the facts are determined, [Nationwide] may assert the right to deny coverage and withdraw from the handling of this claim for any valid reasons that may arise,’” the judge wrote.

On June 9, 2014, Nationwide filed a lawsuit seeking a declaratory judgment that “it had no duty to defend or indemnify the policyholders in connection with the Shearers’ lawsuit, citing the pollution and biological deterioration exclusions,” which caused both sides to file cross cross-motions for summary judgment.

“The policyholders did not challenge the applicability of the pollution and biological deterioration exclusions. Instead, they argued that Nationwide should be equitably estopped from withdrawing because it had been defending them for several years and such an untimely withdrawal would prove prejudicial,” Hardiman wrote.

It was a position the district court did not concur with. That judiciary ruled in favor of Nationwide’s summary judgment motion on the matter, citing the specificity included in their reservation of rights correspondence.

“Although the Court recognized that a reservation of rights letter will not trump an estoppel argument in every case, it described a reservation of rights as ‘a lofty hurdle’ that can be cleared only by a showing of ‘actual prejudice.’ Finding ‘no allegations, let alone evidence, of prejudice,’ the Court held that ‘there is no basis to estop Nationwide from asserting its coverage defenses,’” Hardiman clarified.

The policyholders claim the district court erred in refusing to equitably estop Nationwide from withdrawing its defense of the Shearers’ lawsuit.

They further argue Nationwide’s about-face left them “in the lurch,” requiring them to spend time and money “to retain new counsel” and forcing them into “a disadvantaged position” in their ongoing litigation. The policyholders characterized these circumstances as the inducement, detrimental reliance and prejudice needed to make out a defense of equitable estoppel.

The Third Circuit disagreed.

“An insured must show ‘(1) An inducement, whether by act, representation, or silence when one ought to speak, that causes one to believe the existence of certain facts; (2) Justifiable reliance on that inducement; and (3) Prejudice to the one who relies if the inducer is permitted to deny the existence of such facts,’” Hardiman said, in reference to the burden of proof standards to show the insurer committed fraud.

“Here, Nationwide preserved its coverage defenses by mailing reservation of rights letters to the policyholders. Each policyholder was informed that Nationwide could withdraw its defense for various reasons. The fact that Nationwide defended the case for some time before citing an exclusion and denying coverage does not somehow turn the defense it did provide into fraudulent inducement. Nor does it turn the policyholders’ decision to allow Nationwide to provide them with a defense into detrimental reliance.”

The judge added, “Finally, the policyholders are unable to show prejudice. While they 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. We will affirm the judgment of the District Court for the reasons stated.”

The appellants are represented by Daniel I. Herman of Geer & Herman in New Castle.

The appellees are represented by Michael A. Hamilton of Goldberg Segalla in Philadelphia.

U.S. Court of Appeals for the Third Circuit case 15-1837

U.S. District Court for the Eastern District of Pennsylvania case 2:14-cv-00735

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at

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