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By: Thomas Paschos, Esq.
Thomas Paschos & Associates, PC
Haddonfield, New Jersey

In Nationwide Prop. & Cas. Ins. Co. v. Shearer, 2016 U.S. App. LEXIS 9635 (3d Cir. (Pa.) 2016), Randy and Erin Shearer sued a group of homeowners, claiming that the owners permitted sewage to leak onto the Shearer’s property. Nationwide agreed to provide a defense under a reservation of rights.  Specifically, Nationwide advised by two separate letters that upon the conclusion of its coverage investigation, it might deny coverage based on its policy’s exclusions for pollution or biological deterioration.  Nationwide’s letters expressly stated that its decision to provide a defense should not be deemed a waiver or estoppel of its rights under its policy.

Nationwide subsequently sought a declaration that it had no duty to defend or indemnify the policyholders in connection with the Shearers’ lawsuit, citing pollution and biological deterioration exclusions in their policies.

The policyholders did not challenge the exclusions but rather claimed prejudice from Nationwide’s decision to terminate their defense.   The district court granted summary judgment in favor of Nationwide ruling that the reservation of rights letters entitled Nationwide to withdraw its defense.   The policyholders appealed to the Third Circuit.

On appeal, the policyholders argued that notwithstanding the reservations of rights letters, Nationwide’s decision to provide a defense for over two years resulted in an estoppel.  They further contended that they were prejudiced by Nationwide’s decision to withdraw from the defense.

The Third Circuit disagreed, finding that the policyholder did not establish “inducement” by virtue of the fact that Nationwide provided a defense for more than two years.  The court explained that any claim of inducement was defeated by Nationwide’s express reservation of rights. Each policyholder, the circuit court said, had been informed that Nationwide could withdraw its defense for various reasons.  The court further provided that the insured could not demonstrate it was prejudiced by Nationwide’s decision to provide a defense under a reservation of rights.