An all too typical scenario- an insurer receives notice of a lawsuit filed against its insured. Coverage is questioned but the answer due date approaches. Should the insurer hire defense counsel? Send a reservation of rights? Disclaim coverage? Under two Georgia Supreme Court cases, the timing and decision could cost the insurer its rights to disclaim coverage.
An all too typical scenario– an insurer receives notice of a lawsuit filed against its insured. Coverage is questioned but the answer due date approaches. Should the insurer hire defense counsel? Send a reservation of rights? Disclaim coverage? Under two Georgia Supreme Court cases, the timing and decision could cost the insurer its rights to disclaim coverage.
Providing a defense without a reservation of rights in place could mean a waiver of coverage defenses.
A reservation of rights is a term of art in insurance designed to allow an insurer to provide a defense to its insured while still preserving the option denying coverage. In 2010, the Georgia Supreme Court held that where an insurer assumes and conducts an initial defense without effectively notifying the insured that it is doing so with a reservation of rights, it is estopped from asserting a lack of coverage defense. World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149 (2010). If coverage is questionable, send the reservation of rights before undertaking the insured’s defense. “At a minimum, the reservation of rights must fairly inform the insured that, notwithstanding [the insurer’s] defense of the action, it disclaims liability and does not waive the defenses available to it against the insured.” Id. at 152.
If coverage is disclaimed on the other hand, include all defenses in the disclaimer notice. In Hoover v. Maxum Indem. Co., 291 Ga. 402 (2012), decided in 2012, the Georgia Supreme Court held that an insurer cannot deny coverage on one basis and attempt to hedge its bet by reserving its right to assert other defenses to coverage in the event the basis for denial is later determined to be invalid. Recently the Northern District and the Eleventh Circuit have attempted to clarify the Hoover rule, with both courts suggesting that Hoover does not stand for the proposition that a non-waiver clause (that is, a clause purporting to reserve the insurer’s rights to later assert other coverage defenses) in a reservation of rights is unenforceable.
The courts have drawn a clear distinction between denial letters and reservations of rights.
In a denial letter, an insurer should include each and every basis for disclaiming coverage, and failure to do so likely will result in waiver of those grounds not included. In reservation of rights letters, an insurer should include all potential coverage defenses known to the insurer at the time of the reservation of rights, but a non-waiver provision may avoid the loss of coverage defenses discovered at a later time.
In Wellons, Inc. v. Lexington Ins. Co., 566 Fed. App’x. 813 (11th Cir. 2014), the insurer issued a reservation of rights with a non-waiver clause in response to an initial claim against the insured and ultimately paid the policy limits. Several years later, the same claimant made another claim against the insured, and the insurer sent a reservation of rights quoting the policy definitions of “property damage” and “occurrence,” outlining the “your work” exclusion, and including a non-waiver clause. When the second claim turned into a lawsuit, the insurer orally informed the insured’s counsel that the insurer would be defending under a reservation of rights and that the insurer’s previous reservation of rights letters were “in the same mode,” and “the issues addressed in each of the letters [we]re still applicable.” Id. at 819. The insurer later also notified the insured’s counsel via telephone that the insurer believed the first and second claims constituted a single occurrence. After a jury returned an $8 million verdict against the insured in the underlying lawsuit, the insured filed suit, claiming that the insurer had waived its rights to assert coverage defenses.
The court concluded that an insurer’s reservation of rights “need not specify each and every potential basis for contesting coverage, as long as the reservation fairly informs the insured that, notwithstanding the defense of the insured, the insurer does not waive its coverage defenses.” Id. at 821. The court noted that while an insurer “‘must’ fairly inform the insured that the insurer is providing a defense under a reservation of rights,” the Georgia authorities “only recommend that the insurer provide the specific basis for the reservation.” Id. at 822 (emphasis in original) (interpreting World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149 (2010)). Thus, according to the court, no Georgia authority requires that an insurer “list each and every basis for contesting coverage” in a reservation of rights. Id. at 822.
The court thus concluded that the insurer’s “oral reservation of rights was timely and unambiguous.” Id. at 823. The court noted that less than two weeks after the insured reported the second lawsuit, the insurer notified the insured that it would be defending under a reservation of rights and “referred the [insured] to [the insurer’s] prior reservation of rights letters and informed [it] that the issues addressed in those letters were still applicable.” Id.
Additionally, according to the court, the prior letters “identified specific policy provisions that [might] bar coverage” (i.e., the requirement that the claim be one for “property damage” caused by an “occurrence”) and “provided detailed analysis as to why specific provisions and exclusions [might] apply.” Id. at 823. Further, and importantly to the court, the insurer’s earlier reservation of rights letters “contained nonwaiver clauses that specifically reserved [the insurer’s] rights to assert additional coverage defenses,” and the insured, by permitting the insurer to “go forward with” defense of the insured in the second lawsuit without objection, “implicitly consented not only to a defense under a reservation of rights, but also to the terms of the reservation, including the nonwaiver clause[s].” Id. at 824.
Conversely, in Latex Constr. Co. v. Everest Nat’l Ins. Co., 11 F.Supp.3d 1193 (N.D. Ga. 2014), the insurer denied coverage on the grounds that the claim did not constitute an “occurrence,” that there was no allegation of “property damage,” and that the “your work” exclusion applied. The insurer’s denial letter also included a non-waiver provision purporting to reserve its rights to contest coverage on other grounds. The insurer made no mention of late notice in its denial, but after the insured sued for breach of contract, the insurer sought summary judgment on the ground of late notice.
In holding that the insurer was estopped from raising the defense of late notice, the court noted that the insurer “never, prior to this litigation, mentioned a defense of untimely notice—not even in boilerplate language.” Id. at 1202. And even after the litigation began, the insurer moved to dismiss the action on the basis that the policy did not provide coverage for the claims against the insured in the underlying litigation, not on the ground of late notice.
Thus, the court concluded that under Hoover, “once [the insurer] denied coverage, it no longer had a right to reserve future defenses.” Id. The court further found that even if the insurer were permitted to deny coverage while reserving future coverage defenses, its reservation of rights letter was “defective” because it “provided even less notice (as to a late notice defense) than the purported reservation of rights at issue in Hoover….” Id.