When an insurer is asked to cover a liability claim for which coverage is in doubt, the prudent course of action is to provide a defense subject to a reservation of rights. The reservation of rights preserves the insurer’s ability to deny coverage, for either defense and indemnity, if it is determined that the claim is not covered under the policy. In many instances, a reservation of rights is accompanied with the filing of a declaratory judgment action in which the insurer asks the court to determine whether the underlying claim triggers the policy’s defense and indemnity coverage. However, the need or basis for seeking a declaratory judgment may not always be evident when the insurer first decides to defend under a reservation of rights. Therefore, a dispute or potential dispute over coverage may not arise until sometime after the claim was initially presented to the insurer and, in some cases, years after the insurer began providing a defense.
On July 7, 2015, the Pennsylvania Superior Court issued a decision in the case of Selective Way Insurance Co. v. Hospitality Group Services, Inc., et al., on the question of when the statute of limitations begins to run for a declaratory judgment action involving coverage under a liability policy. Based on the court’s holding, determining when the statute of limitations for a declaratory judgment action begins to run will require an evaluation of the particular facts of each case.
A cause of action for declaratory judgment accrues when an actual controversy exists between the parties. The court rejected bright line rules that would set this time at either the point when the insurer first is presented with a claim for which coverage is sought or at the time when the insurer denies coverage. Instead, the court’s holding calls for a determination of “when the [insurer] had a sufficient factual basis to present the averments in its complaint for declaratory judgment that the insurance policy at issued does not provide coverage for the claims made in the third party’s action.” The court recognized that in some instances this would occur upon the insurer’s receipt of the underlying complaint. But, in other instances the facts giving rise to an actual controversy over the duty to defend or indemnify could be ascertained later, such as when an amended complaint is filed or when facts that would negate coverage are determined through discovery.
The decision has interesting implications, especially given the specifics of the case. The insurer in Selective Way, defended under a reservation of rights for years and filed its declaratory judgment action on the eve of trial in the underlying case. The court’s decision permits an inquiry into the specific facts as to when the insurer knew that coverage was in question.