Denying Coverage and Reserving Rights Simultaneously

Insurance companies were historically faced with a Hobbesian’s choice in deciding to defend their insureds in personal injury actions where there was doubt as to whether the insurance policy provided coverage for the claim being asserted. Practical Tools for Handling Insurance Cases, § 2:17 (Thomson Reuters 2011).

On the one hand, the insurer could refuse to defend its insured and risk a large judgment it might be obligated to pay if it failed to establish a valid basis for denying coverage. On the other hand, the insurer could defend the lawsuit and use its best efforts to prevent an excessive verdict, but in so doing, the insurer risked waiving its rights to raise a policy defense or exclusion to coverage under its policy at a later date. This Hobbesian’s choice was mitigated by the development of so-called reservation of rights defenses. An insurer who defends its insured under a full reservation of rights provides a defense in the liability action, but reserves the right to contest coverage later.

Every year the body of case law in the insurance context is supplemented with a plethora of published decisions regarding a particular jurisdiction’s view of reservation of rights defenses. Nuances abound in this arena.

Recently, the Georgia Supreme Court supplemented the case law with its decision in Hoover v. Maxum Indem. Co., 291 Ga. 402, 730 S.E.2d 413 (2012).

The Hoover case involved a serious brain injury that occurred when an employee fell while climbing down from the roof of a residence while working for his employer, Emergency Water Extraction Services (EWES). The employer was insured with a commercial liability policy issued by Maxum Indemnity Company. Maxum denied coverage and refused to defend. The employee, James Hoover, obtained a $16.4 million negligence judgment against EWES. Hoover received an assignment of claims from EWES against Maxum. The complaint was forwarded to Maxum by correspondence dated October 19, 2006. Maxum disclaimed coverage citing the policy’s employer’s liability exclusion as the basis for refusing to defend. Maxum also reserved its right to assert a number of other defenses including that “coverage for this matter may be barred or limited to the extent the insured has not complied with the notice provisions under the policy.” The policy notice provision required EWES to notify Maxum “as soon as practicable” of an occurrence that might result in a claim.

The Georgia Supreme Court began its analysis by recognizing that insurance companies had three options when faced with a decision regarding how to handle a claim of coverage during the pendency of a lawsuit: (1) the insurer can defend the claim thereby waiving its policy defenses and claims of non-coverage; (2) the insurer can deny and refuse to defend, leaving policy defenses open for future litigation; and (3) the insurer can defend under a reservation of rights. However, insurance companies could not both deny a claim outright and attempt to reserve the right to assert a different defense in the future. Hoover, 291 Ga. at 404-405, 730 S.E.2d at 416-17. The Georgia Court of Appeals had held that Maxum could both deny the claim and reserve its rights to assert other defenses later. This holding was rejected by the Georgia Supreme Court. Specifically, the Georgia Supreme Court held that Maxum failed to properly reserve its rights to assert a notice defense when it denied EWES’s claim on the ground of the employer liability exclusion and refused to undertake a defense.

In holding that insurers could not both deny and reserve at the same time, the Georgia Supreme Court reviewed what it believed to be fundamental principles associated with reservation of rights defenses. First, the Court noted that a reservation of rights does not exist so that insurers who have denied coverage could continue to investigate to come up with additional reasons upon which the denial could be based if challenged. Rather, a reservation of rights exists to protect both the insurer and the insured by allowing the insurer who is uncertain of its obligation under the policy to undertake a defense while reserving its rights to ultimately deny coverage following its investigation.

A reservation of rights letter must inform an insured of the insurer’s position regarding its defenses and, therefore, the reservation of rights must be unambiguous. Hoover, 291 Ga. at 406, 730 S.E.2d at 417, citing Gant v. State Farm Mut. Auto. Ins. Co., 109 Ga.App. 41, 43-44, 134 S.E.2d 886 (1964).

Where an ambiguity exists in the purported reservation of rights, the ambiguity must be construed strictly against the insurer and liberally in favor of the insured. Where the reservation of rights does not fairly inform the insured of the insurer’s position it is not valid. Against this backdrop of fundamental principles regarding reservation of rights, the Court noted that even if Maxum was successful in broadening the definition of a reservation of rights to encompass situations where insurers used the reservation of rights as a vehicle to pursue further potential disclaimers, Maxum’s notice was inadequate because, according to the Georgia Supreme Court, it did not unambiguously inform EWES that Maxum intended to pursue a defense based on untimely notice of the claim. Any boilerplate language in the denial letter purporting to reserve the right to assert a myriad of other defenses at a later date did not clearly put EWES on notice of Maxum’s position. On the one hand, Maxum’s letter denied coverage yet stated on the other hand that Maxum reserved “the right to disclaim coverage on any other basis that may become apparent as this matter progresses and as Maxum obtains additional information.” Hoover, 291 Ga. at 406-407, 730 S.E.2d at 417.

It is common for insurance companies to issue reservation of rights defenses with language in the form of a catch-all clause broadly indicating that other facts may exist which are currently under investigation which may give rise to additional specific reservations. The Georgia Supreme Court’s ruling in Hoover would call into question this practice. The Hoover Court’s analysis would freeze the insurer’s knowledge of a claim when presented with the lawsuit. This can be particularly problematic when the insurer receives notification of the claim for the first time when the lawsuit is served. When the lawsuit is the first notice of the claim, the insurer has a short period of time to investigate the claim before filing an answer on behalf of its insured.

A reservation of rights to uncover additional defenses is not ambiguous. It is a standard and acceptable means of determining one’s rights, often through litigation and discovery, when facts become evident.

For now, at least in Georgia, insurers cannot have their cake and eat it too. The Hobbesian’s choice has been raised from the dead.