Case Briefs

The court held that the insurer had not effectively reserved its rights to deny coverage because the notice from the insurer's sister company in the Illinois action and the statements from the claims adjuster were “ambiguous” at best and failed to “fairly inform” the insured of the insurer's position. Slip Op. at 7-8. Next, the court relied upon Georgia precedent to hold that without an effective reservation of rights, an insurer is estopped from asserting a defense of noncoverage after the assumption and conduct of defense because the insurer's loss of control over its defense, alone, is prejudicial without further proof. Slip Op. at 9-14. Accordingly, the court did not reach the third question.

Lewis E. Hassett and Cindy Chang contributed this month's Case Brief. Hassett is a member of this newsletter's Board of Editors and a partner in the Atlanta office of Morris, Manning & Martin, LLP, and co-chair of the firm's Insurance and Reinsurance Group. His practice focuses on the litigation and arbitration of complex insurance and reinsurance matters, including coverage disputes, agency matters, product disputes, business torts, and insurer insolvencies. Chang is an associate in the DC office of the firm. Her practice focuses on insurance regulatory and coverage matters.

GA Supreme Court Addresses Estoppel to Avoid Coverage

In World Harvest Church v. GuideOne Mutual Insurance Company, Case No. S10Q0341 (Ga. May 3, 2010), the Georgia Supreme Court held that although an insurer's reservation of rights is not required to be in writing, the reservation must be unambiguous, fairly inform the insured that it disclaims liability and does not waive the defenses available against the insured, and provide the specific basis for the insurer's reservations about coverage. Slip op. at 6-8. The court also held that when an insurer has not effectively reserved its rights, it is estopped from asserting the defense of noncoverage, regardless of whether the insured can show prejudice, especially when the insurer has provided the insured with legal defense until near completion of discovery. Id. at 13-14.

In World Harvest, a federal receiver brought an action against the insured, World Harvest Church, in an Illinois federal district court to recover $1.8 million of donations made by an individual who had pled guilty to criminal securities fraud and consented to a civil judgment with the Securities and Exchange Commission. The insured informed the insurer, GuideOne Mutual Insurance Company, of the lawsuit, and the insurer's sister company responded with a written reservation of rights to deny any and all liability and concluded that the action was not covered under the policy.

Although the Illinois action was ultimately dismissed for lack of personal jurisdiction, the receiver filed a similar action in January 2004 against the insured in the district court for the Northern District of Georgia. The insured again notified the insurer of the Georgia action, and the insurer assigned the claim to two adjusters to cover coverage and liability issues. The adjuster responsible for coverage issues informed the insured's counsel that “we didn't see coverage but we would have to evaluate what we have currently to see if there would be coverage issues.” The insurer then assumed the defense of the Georgia action for more than 10 months before informing the insured that it would stop defending the action due to noncoverage.

The insured hired its own attorneys, but the new attorneys did not enter their appearance until one month remained of the discovery period. New defense counsel asked the court to extend the discovery deadline, but the court denied the request. Apparently, the discovery period had been extended previously. Approximately one month after the new attorneys entered their appearance, the receiver moved for summary judgment. The court granted the motion and awarded damages of $1.8 million. The receiver and the insured later settled for $1 million.

Three months after settlement, the insured brought the instant action against the insurer, alleging breach of the insurance contract and its duty to indemnify and defend the lawsuit filed by the receiver. It was undisputed that the policy did not cover the judgment entered against the insured, but the insured argued that the insurer should be equitably estopped from denying coverage because it had represented the insured for nearly 11 months without reserving its rights.

Although the district court found that the insurer properly raised a noncoverage defense because the insured had not demonstrated prejudice suffered as a result of the insurer's defense, the Eleventh Circuit certified to the Georgia Supreme Court three questions: 1) Did the insurer effectively reserve its right to deny coverage? 2) When an insurer assumes defense of an action without reserving its rights, is the insurer estopped from asserting a defense of noncoverage only if the insured can show prejudice? 3) If the insured must show prejudice, do the facts and circumstances of this case show it?

The court held that the insurer had not effectively reserved its rights to deny coverage because the notice from the insurer's sister company in the Illinois action and the statements from the claims adjuster were “ambiguous” at best and failed to “fairly inform” the insured of the insurer's position. Slip Op. at 7-8. Next, the court relied upon Georgia precedent to hold that without an effective reservation of rights, an insurer is estopped from asserting a defense of noncoverage after the assumption and conduct of defense because the insurer's loss of control over its defense, alone, is prejudicial without further proof. Slip Op. at 9-14. Accordingly, the court did not reach the third question.

Lewis E. Hassett and Cindy Chang contributed this month's Case Brief. Hassett is a member of this newsletter's Board of Editors and a partner in the Atlanta office of Morris, Manning & Martin, LLP, and co-chair of the firm's Insurance and Reinsurance Group. His practice focuses on the litigation and arbitration of complex insurance and reinsurance matters, including coverage disputes, agency matters, product disputes, business torts, and insurer insolvencies. Chang is an associate in the DC office of the firm. Her practice focuses on insurance regulatory and coverage matters.