You’ve just written the greatest reservation of rights letter in history and dropped it in the mail. But there’s one problem - it didn’t address coverage for all of the insureds that are defendants in the action. For example, consider a complaint that names several insureds as defendants, such as a named insured company and several of its employees. Here an insurer could overlook the employee-insureds, and send a reservation of rights letter to only the named insured company, and limit the discussion of coverage to the named insured.

The Pennsylvania Superior Court’s decision in Erie Insurance Exchange v. Lobenthal demonstrates this situation and the result for the insurer was harsh. A letter that was a reservation of rights letter is now not a reservation of rights letter.

Lobenthal involved coverage for a motor vehicle accident. I’m going to skip some of the details and focus on the overarching lesson from the case. Kory Boyd suffered injuries in a motor vehicle accident while a passenger in a car driven by Devin Miller. An underlying complaint alleged, among other things, that Michaela Lobenthal engaged in “negligent, careless, reckless, outrageous, willful and wanton conduct” and concerted tortuous conduct in that she permitted the possession and consumption of controlled substances by Defendant Miller at a property owned by Defendant Lobenthal’s parents which was covered by [the Erie] insurance policy.”

Putting aside some details, Erie defended Michaela Lobenthal -- being an insured as a resident of her parents’ household. But there was a coverage issue – the potential applicability of a “controlled substances” exclusion. Despite Erie sending two reservation of rights letters, the issue before the Pennsylvania appeals court was whether Michaela Lobenthal was being defended under a reservation of rights.

Here is how that issue could be: “In the instant case, Erie sent two reservation of rights letters, one on April 28, 2011, prior to the underlying complaint being filed, and another on February 7, 2012. Both letters were addressed only to the named insureds, Michaela’s parents, Adam and Jacqueline Lobenthal; neither letter mentioned the defendant in the underlying tort action, Michaela Lobenthal, who had attained majority status as of November 20, 2010. These letters reserved Erie’s right to disclaim coverage and liability for any judgment ‘that may be rendered against yourself,’ i.e., against Adam and Jacqueline Lobenthal. Furthermore, only the second reservation of rights letter, sent approximately three and one-half months after the preliminary objections were decided, referenced the controlled substances exclusion in the policy.” [Preliminary objections resulted in the covered claims, providing alcohol, being dismissed.]

The opinion notes that Michaela’s parents were voluntarily dismissed from the underlying action in June 2011, i.e., they were not defendants when the second reservation of rights letter – at the time that the case was in suit -- was sent.

The court had little trouble concluding that, despite the February 7, 2012 reservation of rights letter being addressed to the named insureds, Michaela’s parents, as well as being sent to her defense counsel, Michaela was not being defended under a reservation of rights.

The court’s decision was as follows: “Erie’s reservation of rights letter was addressed solely to the named insureds, Adam and Jacqueline Lobenthal, not to Michaela. The letter made no mention of Michaela. As in [citation omitted], we will not impute notice to Michaela based on the fact the letter was sent to counsel where the letter was addressed to her parents and made no reference whatsoever to Michaela. By the same token, we refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time. Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter. Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”

Thus, despite that Erie should have owed no coverage to Michaela, on account of the controlled substances exclusion – the court made that point clear – such was not to be the case, as no reservation of rights letter was ever sent to her.

There is much that can be said about this opinion.

Since Michaela’s parents were not defendants when the second reservation of rights letter was sent, a letter addressed to them, stating that Erie was reserving its right to disclaim coverage and liability for any judgment “that may be rendered against yourself,” i.e., against Adam and Jacqueline Lobenthal, certainly lacked precision.

But the overarching take-away from Lobenthal is that, when an insurer sends a reservation of rights letter, no matter how well-drafted it is, it must address coverage for all insureds and be sent to or on behalf of them. There are opportunities for this to be missed. If so, a lot of effort that is put into a reservation of rights letter may be for naught if some insureds are overlooked.