On May 3, 2010, the Georgia Supreme court in World Harvest Church, Inc. v. GuideOne Mutual Insurance Company here held that an insurer who defends an insured in the absence of an express and specific reservation of rights to deny coverage is effectively estopped from later denying coverage, even where the absence of coverage for the underlying claim is beyond dispute. The principal rationale for the decision is the “conclusive presumption of prejudice” resulting from the insured’s inability to completely control its own defense in the face of a potential denial of coverage. Id. p. 2. As harsh as this result seems, it is consistent with Georgia’s pro-insurer rejection of the late-notice prejudice rule adopted by common law or statute in many other jurisdictions. Nevertheless, for insurers doing business in Georgia, an express and specific reservation of rights, prior to any meaningful assumption of the insured’s defense, is now an imperative.
No written reservation regarding the second suit was ever issued and after assuming the defense and defending for 10 months, GuideOne informed the Church that it would stop defending in 30 days because there was no coverage. Thereafter, the insured assumed its own defense. Following the receiver’s successful summary judgment motion, the court awarded damages against the church in the amount of $1.8 million. A few months later, the church sued GuideOne in the District Court for breach of the duty to defend and indemnify it from the receiver’s suit. After a lower court ruling in GuideOne’s favor, the case was appealed to the Eleventh Circuit which certified 3 questions:
(1) Does an insurer effectively reserve its right to deny coverage if it informs the insured that it does “not see coverage,” after the insured had received a written reservation of rights from the insurer’s sister company in a similar lawsuit in another jurisdiction, or is a written or more unequivocal reservation of rights required?
(2) When an insurer assumes and conducts an initial defense without notifying the insured that it is doing so with a reservation of rights, is the insurer estopped from asserting the defense of
noncoverage only if the insured can show prejudice, or is prejudice conclusively presumed?
(3) If the insured must show prejudice, do the facts and circumstances of this case show it?
See World Harvest Church v. GuideOne Mut. Ins. Co., 586 F3d 950, 961 (11th Cir. 2009).
The Georgia Supreme Court, in responding to the first question noted that a reservation of rights need not be written to be effective, however, the notice must reflect a present (not future) intent to avoid coverage (disclaim liability) on specified grounds and that it does not waive the defenses available to it against the insured. Id. at 5. The oral statements of GuideOne’s adjuster did not meet this standard, and the prior reservation by GuideOne’s sister company to a different (if similar) suit did not cure the defect and thus there was no adequate reservation.
On the second question, the Georgia Supreme Court found that the insurer, by failing to issue an adequate reservation was estopped to later deny coverage, even if the insured had actual knowledge of the likelihood that the insurer would ultimately deny coverage, and even if there was no affirmative showing of prejudice by the insured. According to the court, in this context-where the insurer assumes and actively conducts the defense, prejudice is conclusively presumed. The court distinguished its decision in Prescott’s Altama Datsun v. Monarch Ins. Co. of Ohio, 253 Ga. 317, 318, 319 SE2d 445 (1984), which precluded an automatic estoppel where the insurer merely filed an appearance but then immediately abandoned the defense. According to the court, the rationale for the estoppell is the insureds “surrende[r of] innumerable right associated with the control of the defense.” Id. p. 13.
Having found an estoppel as a matter of law, there was no need to respond to the third certified question regarding the existence of prejudice under the circumstances.
A rule which purports to apply a “conclusive presumption of prejudice” is one which, using the gloss of a purported evidentiary issue, is in fact a foregone conclusion. Why not just call it an anti-insurer estoppel, and leave it at that? Well, one reason may be that the rule in this context is really the necessary converse of Georgia’s pro-insurer rule of law, that an insurer who receives late notice may disclaim coverage even in the absence of prejudice. See Granite State Ins. Co. v. Nord Bitumi U.S., Inc., 262 Ga. 502, 504, 422 S.E.2d 191, 194 (1992) (”breach [of notice provision] relieved [insurer] of its obligation to defend [,] and of … liability for any judgment[.]”) This is contrary to the late notice/prejudice rule applied by common law or statute in many jurisdictions. In both cases, prejudice is presumed when the party at risk is denied the control of that risk which a defense right necessarily entails. All the more reason to “Consider the Risk.”