In Selective Way Insurance Company v. Hospitality Group Services, Inc. an en banc panel of the Superior Court may have significantly altered how insurance companies must act when defending a case under a reservation of rights. The facts are relatively simple: the Plaintiff was injured on February 19, 2006; he filed suit against the insured on August 1, 2007; the carrier defended the case and advised the insured that it was unsure if there was a duty to defend or indemnify. During discovery, the carrier obtained information that indicated that the claims of the Plaintiff would not be covered by the policy. A declaratory judgment was filed on June 6, 2012, seeking a declaration that there was no duty to defend or indemnify the insured. The underlying case was still pending. The Trial Court held that the statute of limitations on a declaratory judgment action was four years, and dismissed the complaint. The underlying case then settled with the carrier paying the Plaintiff. After a lengthy discussion on whether the case was still ripe for appeal, the Superior Court held that the statute of limitations for a declaratory judgment action on issues of defense and indemnification must be filed within four years of the time the carrier knows of a coverage dispute. The court held that this was a factual issue and could not be resolved just by the four corners of the Complaint. While framed as a remand order, the ruling of the court essentially rendered moot the collateral impact of the judge’s ruling on the statute of limitations.

The Superior Court indicated that the failure to file a declaratory judgment action had no impact on the underlying coverage issue. The Superior Court described the impact of the trial judge’s ruling as follows: “Thus, despite the trial court’s conclusion that Selective filed its declaratory judgment action out of time, Selective was free to withdraw its defense and/or refuse to indemnify Hospitality Group in the Nemcheck Action if it determined that the insurance policies in question did not provide coverage for the claims made.”

The end result is that an insurance carrier with knowledge of a coverage issue when defending an insured has four years to file a declaratory judgment action. If the case lingers beyond four years, the carrier cannot initiate a declaratory judgment action to determine if it has a duty to defend and indemnify the insured. The carrier, though, can still deny coverage.

The case highlights the difference between a declaratory judgment action and a breach of contract claim. Under this ruling, once you are aware of an issue for which declaratory relief is appropriate you have four years to request relief. The time to file suit is not tolled even if the dispute between the parties is still ongoing five years later.

The long term issue will be how does an insured protect itself when there is clearly one claim that is covered but several claims that are not. Hypothetically, there is a breach of contract/negligence action. It is clearly a breach of contract claim, but the Plaintiff plead a negligence claim to bring it within the general umbrella of coverage. A proper reservation of rights letter is issued identifying which claims are covered. Four and a half years later, the judge partially grants a motion for summary judgment but only on the negligence claims. If the carrier denies a defense, can the insured file for declaratory relief or is that claim barred by the statute of limitations? Must the insured wait until the end of the case to file the breach of contract claim? Can the insured even file a breach of contract claim for the refusal to indemnify when that claim is not actually ripe?

For questions, comments or additional information, please contact Robert Foster, Partner in our Insurance Practices Group, at rfoster@regerlaw.com or via phone at 215.495.6514.