For Lack Of A Nail: The Perils of Inadequate RoRs
Much has been written concerning the elements of estoppel and the necessity of an insurer effectively reserving its rights if it wishes to undertake its insured’s defense while still preserving coverage defenses. A ruling issued yesterday by the Georgia Supreme Court illustrates the peril that insurers face when they fail to do so.
In World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., S10Q341 (Ga. May 3, 2010), the operators of an automobile title lending business donated over $1 million in funds to the World Harvest Church. In turned out the funds were the product of a massive Ponzi scheme that quickly became the source of an SEC investigation. A Receiver sought to recover these funds from the Church and filed a civil enforcement action in Illinois asserting claims of fraudulent transfer and unjust enrichment. The Church tendered the defense of this case to its CGL carrier, GuideOne. A sister company of GuideONe responded with a written reservation of rights letter and ultimately denied coverage on the basis that its policy did not cover the Illinois action.
After the Illinois action was dismissed for lack of personal jurisdiction, a similar action was brought in 2004 against the Church in its home state of Georgia. The claim was again tendered to GuideOne which split the file between a liability and coverage adjuster. The coverage adjuster explained that, “We didn’t see coverage but we would have to evaluate what we currently have to see if there would be coverage issues.”
Without issuing a written reservation of rights, GuideOne then assumed the defense of the lawsuit for over ten months before it finally denied coverage and withdrew its defense. Although the insured engaged its own counsel, they were unsuccessful in persuading the court to extend pre-trial deadlines and the court shortly thereafter entered summary judgment against the insured. The Church ultimately settled the claims for $1 million and brought suit against GuideOne.
It does not appear that there was any dispute that the underlying claims fell outside the scope of the CGL coverage. Nevertheless, the Church argued that GuideOne was estopped to assert these coverage defenses by reason of its failure to assert them at the point that it undertook the defense of its insured. The Church further argued that any oral communications to it could not constitute an effective reservation of rights.
As to the first point, the Supreme Court held that it did not matter whether a reservation of rights was written or oral so long as it fairly informed the policyholder of the insurer’s position. By reason of this analysis, however, it found that the claim adjuster’s vague reference to coverage issues did not satisfy the requirements of a reservation of rights. Further, the Georgia Supreme Court refused to find that the reservation of rights letter and denial issued in the earlier litigation in Illinois had put the insured on notice concerning GuideOne’s position with respect to the later claims in Georgia. “Even if the prior reservation of rights is considered in conjunction with the adjuster’s statement in this case, the two communications are, at best, ambiguous because only the former effectively reserved the rights of an insurer to withdraw, and then only the rights of a different, though related, insurance company in a separate action which involved a distinct policy.”
Having found that the reservation of rights was not effective, the court ruled that GuideOne was estopped to raise these coverage defenses by reason of the fact that it had controlled the defense of its insured. It refused to require proof that the insured had been prejudiced as the result of this defense, finding that under such circumstances prejudice must be conclusively presumed.
Cases such as GuideOne illustrate the general conflict between issues involving the duty to defend and the general principle that an insurer cannot “waive into coverage.” Although courts have long recognized an exception to this principle in cases where delays or misconduct by the insurer have caused prejudice to the insured, they have differed with respect to whether prejudice must nonetheless be actually established or not. Some states have established a rebuttable presumption of prejudice that the insurer may nonetheless overcome (albeit with difficulty given the nature of such cases). This case is unusual, on the other hand, in holding that there is a conclusive presumption of prejudice that forecloses any opportunity on the part of the insurer to contest whether prejudice actually resulted. This holding is also somewhat unusual in that, given the circumstances of the case, it appears that the Church was actually prejudiced by the timing and lateness of the insurer’s denial.
