Georgia Insurance Coverage Decisions

Mandato & Assocs., Inc. v. Masonry,

2010 Ga. App. LEXIS 359

(April 6, 2010):

A homeowner filed a faulty construction claim against its

general contractor and the general contractor asserted a counterclaim for mo

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nies due on the construction project. The general contractor’s insurer Builders

Insurance Group, (“Builders") defended the claim. The general contractor,

the insurer and the homeowner participated in mediation wherein the home

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owner made an demand to settle the case in exchange for payment of

$325,000 and a dismissal of the counterclaim. The insured general contractor

and the insurer signed the settlement demand acknowledging receipt of the

demand and the period it was to remain open. Thereafter, the insurer sent the

homeowners a check for $325,000 and the plaintiff executed a unilateral re

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lease of all claims against the general contractor and its insurer.

In accordance with the express contractual rights of subrogation con

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tained in its policy, the insurer then brought an action against four of the sub

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contractors involved in the project seeking to recover the $325,000. The trial

court granted partial summary judgment to the subcontractors, finding that

because the insurer had not obtained written consent to the settlement from its

insured in accord with O.C.G.A. § 33-7-12, the insurer had not perfected its

subrogation rights. The insurer appealed.

O.C.G.A. § 33-7-12 provides that the provision in an insurance policy

which permits an insurer to compromise claims against its insured without the

insured’s consent is deemed to create an independent contractor relationship

between the insurer and the insured. To settle in accord with the statute, the

insurer must have written consent of the insured to relinquish the insured’s

rights against the settling plaintiff or the insurer must inform the settling

plaintiff in writing that the insured has not relinquished those rights and may

prosecute claims against the settling plaintiff. Failure to follow this proce

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dure results in the settlement being deemed null and void and the settlement

payment deemed made by an “independent contractor" and not “under the

policy."

In such instances where the insurer has failed to follow the provisions

of the statute, the Georgia Courts have held not only is the settlement not en

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forceable against the Plaintiff, but even if the Plaintiff does not seek to undo

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COURT DECISIONS

Georgia Decisions

Court of Appeals says that Georgia

statute § 33-7-12

requires an In

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sured's written consent to settle

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ment or no insurer subrogation.

Continuing a line of poorly reasoned

decisions, the Appellate Court searches

for the insured's written consent to

settlement and failing to find same

holds the insurer has no subrogation

rights.

Insurer's oral representation that “it

did not see coverage" deemed in

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sufficient to reserve insurer's rights.

ALERT: The Georgia Supreme Court, in

critical decision, moves to full waiver of

coverage defenses absent unequivocal

reservation of rights but leaves open

door for oral reservations.

Other Recent Cases Of

Interest Around the Country

South Carolina choice of law rules

discussed along with interpretation

of other insurance clauses.

U.S. District Court applies

Lex Loci

Contractus

rule to insurance policy is

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sued in Georgia and reconciles other

insurance clauses as being non-

repugnant.

U.S. District Court in Texas applies

indemnity agreement to damages

incurred by indemnitee directly.

Applying Texas law, the Court found

that an indemnity provision, if the terms

clearly provided, could be read to re

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quire indemnification of damage to the

indemnitee's own property.

Complex Insurance Litigation

and Liability Defense

the settlement, the insurer is left with no subrogation rights against other joint-tortfeasors.

However, in this case, the Appellate Court entirely fails to undertake any analysis as to whether the insurer notified the

settling plaintiff that the insurer had not obtained from the insured a relinquishment of the insured’s rights against the settling

Plaintiff. Instead, the Appellate Court, states that the insurer has no subrogation rights if the insured did not agree in writing

“to the settlement." Respectfully,

O.C.G.A. § 33-7-12 does require the insured agree in writing to the settlement. Neverthe

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less, citing other poorly worded decisions (

See e.g., BBL-McCarthy, LLC v. Baldwin Paving Co.

, 285 Ga. App. 494 (2007);

Carden v. Burckhalter

, 214 Ga. App. 487 (1994)), the Appellate Court then proceeds to find that the insurer failed to show the

insured’s written consent to the settlement

from either: 1) the written acknowledgement of the settlement demand from the

homeowner; 2) the homeowner’s general release and; or 3) the policy itself.

The

Appellate Court never states whether the settlement expressly notified the plaintiff that the settling defendant had not

relinquished it rights, if any, against the Plaintiff as required by the statute to make the settlement enforceable. If the settling

plaintiff was not so expressly informed, then, the settlement would be deemed null and void and the loss of subrogation rights

makes some sense. However, if the Plaintiff was informed that the settling defendant had not given a written relinquishment

of its rights against the Plaintiff, and the insurer thus complied with O.C.G.A. § 33-7-12, making the settlement enforceable,

it makes no logical sense to claim the insurer has no subrogation rights having complied with the express wording of its pol

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icy and the express requirements of the O.C.G.A. § 33-7-12. The insurer can hardly be said to have not settled “under the

policy" in settling in strict accordance with its agreed rights contained in the policy itself and in accordance with Georgia law.

World Harvest Church, Inc. v. Guideone Mutual Insurance Company

, 2010 Ga. LEXIS 365 (May 3, 2010):

World

Harvest was sued the first time in federal court in Illinois by a receiver appointed to recover certain donations made with

money obtained through a ponzi scheme. World Harvest requested a defense and indemnity from its liability carrier. That

carrier, a sister company to Guideone, issued a reservation of rights letter and ultimately concluded that its policy did not

afford coverage to World Harvest.

That suit was then dismissed for lack of jurisdiction and a similar action was filed two years later in Georgia. Guideone

(having a policy with similar terms to its sister company) was given notice of the new suit and decided to split the handling of

the file between two different claims adjusters. One would handle coverage issues and the other the liability issues. The

claims representative assigned to handle the coverage issues verbally advised the church’s counsel that the company “didn’t

see coverage" but would evaluate the information they had “to see if there would be coverage issues."

Without issuing a res

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ervation of rights

Guideone thereafter appointed defense counsel and proceeded to defend World Harvest for the next ten (10)

months.

Two months before the discovery period was set to expire, Guideone told World Harvest that it would stop defending the

action in thirty (30) days. The church hired its own counsel and sought to extend discovery but the court denied the request.

A damage award was entered against World Harvest which was settled on appeal for $1 million. Thereafter the church filed

suit against Guideone to pay the settlement damages even though it agreed there was no coverage under the policy.

On summary judgment the district court held in favor of Guideone finding that even though Guideone defended World

Harvest for ten (10) months without a reservation of rights, it was not estopped from denying coverage because there was no

prejudice to World Harvest. World Harvest appealed to the Eleventh Circuit. The Eleventh Circuit certified three questions

to the Georgia Supreme Court, two of which were addressed: 1) was this insurer’s oral representation that it did “not see cov

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erage" an effective reservation of rights considering the written reservation received earlier from the sister company on the

similar suit, and 2) when an assurer defends without a reservation is it estopped from claiming non-coverage only if the in

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sured shows prejudice, or is prejudice conclusively presumed.

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With regard to the first question, the Court quoted Georgia precedent requiring the reservation to “fairly inform[] the

insured of the insurer’s position" and holding that it cannot “be only a statement of future intent." “At a minimum, the reser

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vation 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." The reservation “should also inform the insured of the

specific ‘basis for [the insurer’s] reservations about coverage." The Court then held that an oral or written reservation of

rights can suffice but Guideone failed to comply with the minimum requirements and that failure could not be overcome by

the fact that Guideone’s sister company had issued its own reservation on the Illinois suit. The Court concluded that even

though a reservation “is not required to be in writing, an insurer does not effectively reserve its rights to deny coverage under

the circumstances set forth" in this case.

It is, however, the answer to the second question that is of critical importance. As framed, the issue of estoppel turned on

an insurer defending with actual or presumptive knowledge of coverage defenses and failing to reserve rights and then

whether the insured has to show prejudice or is it conclusively presumed. Here, after the Georgia Supreme Court cites cases

both inside and outside of Georgia it appears to broaden the doctrine of waiver in Georgia. Without mentioning the element

that the insurer defending is doing so with some level

knowledge

of its coverage defenses yet failing to reserve its rights, the

Court simply concludes that “where an insurer assumes and conducts an initial defense without effectively notifying the in

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sured that it is doing so with a reservation of rights, the insurer is deemed estopped from asserting the defense of noncoverage

regardless of whether the insured can show prejudice." If this case is cited for that conclusion in isolation, it will be deemed

to have effectively broadened the doctrine of waiver by

two

factors: (1) defending without a reservation of rights results in

coverage because now

prejudice is conclusively presumed

and (2) waiver will now apply

regardless of whether the insurer

had or did not have actual or presumed knowledge of coverage defenses

when it provided the defense without a reservation

of rights

. If the later factor is now applicable to the doctrine of waiver in Georgia, then this decision will essentially mean

before any defense is afforded under a Georgia liability policy, the insurer will need to be very sure whether coverage de

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fenses may apply and, if so, in writing fairly inform the insured that it is reserving its right to decline coverage on those

issues/conditions/exclusions. To meet this higher burden to avoid waiver, liability insurers may be wise to always seek cov

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erage counsel advice before undertaking the defense of every substantial insured liability.

Other Recent Cases Of Interest Around The Country

Encompass Ins. Co. of America v. Montgomery Mutual Ins. Co.,

2010 U.S. Dist. LEXIS 43552 (D. S.C. May 3,

2010):

This case revisited South Carolina’s rules when dealing with other insurance as well as South Carolina’s choice of law

rules specific to insurance policies. The case involved a run of the mill auto accident and how damages for the passenger in

one of the vehicles would be compensated. The accident occurred in Floyd County, Georgia between two cars insured under

policies issued in Georgia. The at-fault driver’s policy paid its limits of $25,000 for the passenger’s injuries but her damages

exceeded that amount. She then turned to the uninsured motorist

(“UIM")

coverage in the policy covering her sister’s vehi

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cle, the one she was in at the time of the accident, which was issued by Montgomery, as well as in her own auto liability pol

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icy issued by Encompass.

A suit was filed in South Carolina federal court by Encompass against Montgomery seeking a declaratory judgment con

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cerning which policy would have to respond as primary UIM coverage. Encompass’ policy was issued and delivered in

South Carolina although Galloway had since reportedly moved to Georgia and garaged her car in Georgia. On the other

hand, Montgomery’s policy was originally issued to her sister in Georgia, who lived and garaged the car in Georgia. The first

issue to be addressed was what law would apply to resolve the dispute.

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The District Court explained that under South Carolina’s choice of law rules, the historic approach is the

lex loci contrac

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tus

rule. This rule requires the law of the state where the contract was formed to apply. However, South Carolina has enacted

a specific statute which trumps that rule when insurance policies are at issue. S.C. Code Ann. §38-61-10 states:

All contracts of insurance on property, lives, or interests, in this State are considered to be made in the State and

all contracts of insurance the applications for which are taken within the State are considered to have been made

within this State and are subject to the laws of South Carolina.

Both insurers argued that the South Carolina rule should not apply in this instance and that

Lex Loci Contractus

should

apply instead. The Court held that the sister/driver’s only contact with South Carolina was the location of the accident, oth

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erwise she lived in Georgia and had her property located in Georgia and the Montgomery policy was issued there and the

insured was risk there. Hence,

Georgia law applied to the interpretation of the Montgomery Policy. South Carolina law ap

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plied to the interpretation of the Encompass Policy as it was issued in South Carolina under the

Lex Loci Contractus

or pur

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suant to

South Carolina law, as it originally insured risks in South Carolina.

Next the Court turned to the other insurance clauses applicable to the UIM coverage of each policy. The South Carolina

Court held that Georgia applies the “receipt of premium" test to determine the priority of insurance in instances such as these

(which to a limited degree, is a correct statement). Further, the

Montgomery Policy, which provided UIM coverage to per

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missive passengers, stated via its “other insurance" clause that it was primary only when affording UIM coverage to its own

named insured or family members and was excess if its UIM coverage extended to others in the insured automobile. The

Court stated that

South Carolina applies the “total policy insuring intent" test which involves four factors: 1) stated coverage

in the policy; 2) premium paid; 3) requirements of the policy for underlying insurance, and; 4) other relevant factors. The

Court also said that the

“total policy insuring intent" test was not needed when the “other insurance" clauses of the policies

were not repugnant. What is most interesting, is that the Court then leapt to a conclusion that the “other insurance" clauses

were

not repugnant

because first reading the Montgomery Policy’s “other insurance" clause explained that it was not “pri

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mary" insurance in this event. Thus, the Encompass Policy’s “other insurance" clause did not place it as excess coverage as

no other insurance therefore provided “coverage on a primary basis." The Court appears to ignore the obvious choice of giv

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ing first application to the Montgomery policy “other insurance" clause in order to reach its conclusion

.

BP Products North America, Inc. v. J.V. Industrial Cos., Ltd.,

2010

U.S. Dist. LEXIS 39180 (S.D. Tex. April 21,

2010):

In November of 2004, J.V. Industrial Cos., Ltd. (“JVI") entered into two contracts with BP. One, referred to as the

“Turnaround Contract" involved JVI performing mechanical and piping turnaround services. The second, referred to as the

“Short Form Contract," involved JVI providing general mechanical services to a specific piece of equipment at BP’s refinery

in Texas City. The Short Form contract, entered two weeks after the Turnaround Contract, incorporated the terms of the

Turnaround Contract and both were to be construed under Texas law.

A fire occurred in the area of the refinery where JVI had done its work, damaging the very piping that JVI had installed,

as well as other equipment. BP also claims to have lost profits as a result of the fire. Suit was filed alleging breach of con

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tract among other claims. BP alleged that JVI used incorrect piping that allowed for a release of hydrogen and methane which

ignited the fire.

The terms of the contracts between the parties set forth an indemnity obligation which provided that JVI would be

“solely responsible for all labor, materials, equipment and work until the work is accepted by [BP]." BP sought summary

judgment with regard to three specific issues concerning the indemnity provisions: (1) that the obligation was valid and en

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forceable; (2) that it applied to BP’s own claims, not just the claims of third parties against BP, and; (3) that BP was permitted

to recover consequential damages under the indemnity provision.

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The Court found the indemnity provision to be valid and enforceable. Texas law has two requirements for notice: (1)

that the parties intent be specifically stated in the contract and (2) that the provision be conspicuous such that attention is

drawn to it on the face of the contract. These conditions can be satisfied by a showing that the parties have actual knowledge

of the provision, which was the case in this instance.

As regards the second issue, BP wanted a ruling from the Court that the agreement applied to BP’s own damages. The

Court recognized that an indemnity agreement does not generally “apply to claims between the parties to the agreement but

obligates the indemnitor to protect the indemnitee against claims brought by third parties." However, it also stated that such a

provision could be written to require indemnity against each other’s claims. In this instance, the indemnity provisions pro

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vided for indemnity “for losses caused by ‘damage to, or loss or destruction of any property (including without limitation, the

Work and the property of [J.V. and BP]." The Court found that this additional and clear wording referencing damage to the

work and property of BP, was sufficient to clearly convey the contractual intent for the indemnity obligation to

also

apply to

the damage to BP’s own property and that BP was the party most likely to assert a claim for damages to its own property.

Thus, the contracting intent sufficiently re.ected that the parties contemplated a direct indemnity claim by BP for damage to

its own property permitting summary judgment to BP on all counts.

Best regards,

THE JOHNSON FIRM, LLC

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