The majority rule in the United States is that a policyholder may not create coverage under an insurance contract through either waiver or estoppel. This is true under both first-party property insurance policies as well as liability insurance policies. Last week, however, the Georgia Supreme Court, in reviewing three questions certified by the 11th Circuit U.S. Court of Appeals, held that because an insurer had not effectively reserved its rights when undertaking the defense of its insured, the insurer had waived its rights to contest its obligation to defend or to indemnify.
In World Harvest Church, Inc. v. GuideOne Mut. Ins. Co. , S10Q341 (Ga. May 3, 2010), two individuals operated an automobile title business called Cash 4 Titles, which actually amounted to a Ponzi scheme. One of the principals was a member of the World Harvest church, and he gave $1 million in proceeds from the business to this church. Later, an SEC investigation confirmed that the donated funds flowed from the illegal scheme. 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 trial court dismissed the Illinois action for lack of personal jurisdiction, the receiver brought a similar action in 2004 against the church in its home state of Georgia. The insureds again sought a defense from 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 assumed the defense of the lawsuit for over ten months before ultimately denying coverage and instructing the lawyers it had retained to withdraw from the defense of the case. Although the church subsequently engaged its own counsel, they were unsuccessful in persuading the court to extend pre-trial deadlines and the court thereafter entered summary judgment against the insured. The church ultimately settled the claims for $1 million and brought suit against GuideOne.
The Georgia Supreme Court opinion does not indicate that the church disputed that the underlying claims fell outside the scope of the CGL coverage. Nevertheless, the insured argued that GuideOne was estopped to assert coverage defenses because it failed to issue a reservation of rights letter 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. The court ruled, however, that the claim representative's vague statement about "coverage issues" did not satisfy the requirement of a reservation of rights. Further, the 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.
The court stated that "[e]ven 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 earlier reservation of rights was not effective, the court ruled that GuideOne was estopped to raise any coverage defenses because it had retained counsel and had controlled the defense of the case for the church. The court declined to require that the insured prove that it had been prejudiced as the result of this defense and instead made a presumptive finding of prejudice, based on the actions of the insurer.
This case illustrates an exception to the general rule that an insurer's actions cannot create coverage by waiver. Although many courts have found an exception to this principle in cases where delays or misconduct by the insurer have caused prejudice to the insured, the courts are not in agreement regarding whether the insured must prove that it was prejudiced by the insurer's actions. Some states have established a rebuttable presumption of prejudice that the insurer may nonetheless overcome. World Harvest is unusual, however, in that it finds there is a conclusive presumption of prejudice that bars the insurer from arguing that the insured was actually prejudiced by the insurer's actions.
In many cases, when an insurer declines coverage, the insured often communicates with the insurer and demands that the insurer reverse its decision. Based on the rationale of World Harvest, this action by the insured could alert an unwary insurance company to its fatal mistake. The more prudent course of action for the policyholder may to defend the case itself and, after a judgment or settlement, seek reimbursement from the insurer relying on the waiver rule enunciated by the Georgia Supreme Court.
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