June 01, 2012 BY Burke Noble
Coverage Denials Become More Dangerous For Insurance Carriers In Georgia
In Hoover v. Maxum, Indemnity Company, 2012 Ga. Lexis 570 (June 18, 2012), the Georgia Supreme Court held that an insurance carrier which denies coverage and refuses to defend a suit against its insured must raise all applicable coverage defenses at the time coverage is denied or risk waiving any defenses which are not raised. Even prior to this decision an outright denial of coverage carried significant risks for an insurer. That is because if a court later ruled that the there was coverage or that the carrier breached its duty to defend, the carrier could be liable for a bad faith claim in which it might have to pay a judgment in excess of the insured’s policy limits. Cotton States Mutual v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003).
To avoid potential exposure for bad faith, the safest course has always been to defend the insured under a reservation of rights, file a declaratory judgment action on coverage and withdraw the defense only if the carrier prevails in the declaratory judgment action. The Hoover decision makes an outright denial of coverage and refusal to defend even more dangerous. That is because valid coverage defenses which the carrier may not learn about until later appear to be waived if they are not raised at the time of the denial.
In Hoover, the carrier issued a denial of coverage letter disclaiming liability for an injury to the insured’s employee and refusing to defend the employee’s suit against the insured, based on the Employer’s Liability Exclusion in the subject policy. The carrier had received arguably late notice of the claim, so the letter also stated that the carrier reserved it rights to assert other coverage defenses in the future, including that “the insured has not complied with the notice provisions under the policy.” The injured employee obtained a $16.4 million judgment against the insured and took an assignment of the insured’s bad faith claim against the carrier, alleging breach of the duties to defend and indemnify. When the carrier attempted to raise lack of timely notice as a coverage defense, the court held that the carrier had waive the notice defense by not raising it at the time of the denial and that its attempt to reserve its right to raise the defense later was ineffective.
The court held that a reservation of rights is available only to carriers who defend their insureds, not those who deny coverage, and that “an insurer cannot both deny a claim outright and attempt to reserve the right to assert a different [coverage] defense in the future.” Even assuming the carrier could have reserved its rights, the court found that the “boilerplate” language listing notice and a “myriad of other defenses” in the letter would have been ineffective, because it did not unambiguously and “fairly inform the insured of the insurer’s position” as required by World Harvest Church, Inc. v. Guideone Mutual, 287 Ga 149, 695 S.E.2d 6 (2010).
This surprising outcome is arguably inconsistent with the purpose of a reservation of rights. That purpose is to reserve the right to assert coverage defenses in a situation where the carrier’s conduct in defending an action would otherwise create a waiver of those defenses. A carrier who wishes to defend an action against its insured without waiving potential coverage defenses must issue a reservation of rights letter because: (1) defending the insured would otherwise indicate an intent to waive applicable coverage defenses; and (2) when a carrier takes over the defense of an action the insured “surrender[s] innumerable rights associated with the control of the defense[,] including choice of counsel and the ability to negotiate a settlement...” World Harvest Church , Inc. v. Guideone Mutual, 287 Ga. at 155-156. If the carrier takes the right to control the defense away from the insured without informing the insured that it may later deny coverage, prejudice to the insured is presumed and the insurer will be estopped from denying coverage. Id.
However as the dissent in Hoover noted, the carrier’s conduct at the time of the denial did not indicate an intent to waive the notice defense and the carrier instead attempted to reserve the right to raise the defense in the future. The carrier also did not prejudice the insured by taking away its right to control the litigation and in fact did just the opposite. Nevertheless, the majority held that a reservation of rights is available only to carriers who defend and that the carrier in Hoover “failed to properly reserve its rights to assert a notice defense when it denied [the insured’s] claim on [other] grounds . . . and refused to undertake a defense.”
The practical effect of this decision is well-stated by the dissent:
[I]insurers who wish to deny coverage will be forced to attempt to list all defenses in their initial denial letter. They must do so blindly, in the absence of necessary information and the discovery later litigation might provide. This result neither helps the insurance companies, which must scramble to come up with all possible defenses in good faith, nor the insured, who will have no good context of where he or she stands in the face of a laundry list of defenses.
Defending under a reservation of rights has always been the safest way for insurance carriers to avoid exposure for bad faith. However, in light of the Hoover decision, carriers will need to proceed with even more caution as any coverage defenses not raised at the time coverage is denied may be waived, even if the carrier does not learn about those defenses until later. Unless and until the legislature intervenes to change the law the only way for insurance carriers to ensure that all possible coverage defenses are preserved is to defend the insured under a detailed and all-encompassing reservation of rights and to seek a declaratory judgment in all coverage issues.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley