Chapter 4. Insurance defense practice - Reservation of rights defense
An insurer's duty to the insured is a matter of contract and determined from the outset of the litigation. It includes both the duty to indemnify and the duty to defend. “[T]he question of whether an insurer has a duty to defend is determined by comparing the true allegations of the complaint brought against the insured with the provisions of the policy, taking into consideration any additional facts the insured has brought to the attention of the insurer that might establish coverage under the policy.” 1 The question is not whether the underlying action is meritorious, but whether the complaint alleges a claim that, if successful, would be covered by the policy.2 But in Georgia “neither waiver nor estoppel can be used to create liability not created by an insurance contract and not assumed by the insurer under the terms of the policy.” 3
When coverage is in question, an insurer has three choices with regard to its duty to defend. First, it may defend without reservation, in which case it will be precluded from later denying coverage.4 Second, it may simply deny coverage and take its chances with liability for breach of contract and bad faith.5 Although an insurer has “no duty to investigate until the insured apprises the insurer of facts that would bring the claim within the policy's coverage, …. [and] an insurer who has wrongfully refused to defend may raise policy defenses to coverage[,]” ... “an insurer who fails to investigate its insured's contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.” 6 Once an insurer refuses to defend an insured, it may be estopped from later unilaterally asserting a defense under reservation of rights and may be liable for its breach of duty.7 Third, the insurer may follow the procedurally safe course of providing a defense subject to a unilateral reservation of its rights letter or a bilateral non-waiver agreement.8 It has long been the rule in Georgia that a liability insurer who assumes the conduct of the defense to an action with knowledge of facts constituting noncoverage and without disclaiming liability and giving notice of its reservation of rights thereafter estopped from denying coverage.9 The insurer can avoid estoppel by giving timely notice of its reservation of rights which fairly informs the insured of the insurer's position.10 If the insured does not object to the unilateral reservation of rights it is deemed to consent.11 But if the insured does object to a unilateral reservation of rights and does not enter into a bilateral non-waiver agreement, the insurer must also promptly file a declaratory judgment action.12
Defending the underlying suit subject to reservation of rights or non-waiver agreement presents a potential conflict of interest “because the insurer may be more concerned with developing facts showing non-coverage than facts defeating liability.” 13 Defense counsel employed in that context must take care to maintain and document adherence to the duty of loyalty to the insured client.
1 Storch v. Cambridge Mut. Fire Ins. Co., 230 Ga. App. 878, 879, 497 S.E.2d 606, 607 (1998). See Colonial Oil Industries Inc. v. Underwriters Subscribing to Policy Nos. TO31504670 and TO31504671, 268 Ga. 561, 562-563, 491 S.E.2d 337 (1997); Al Who Enterprises, Inc. v. Capitol Indem. Corp., 217 Ga. App. 423, 426, 457 S.E.2d 696 (1995).
2 See Southern Guar. Ins. Co. v. Dowse, 278 Ga. 674, 676, 605 S.E.2d 27 (2004) (insurer has a ... duty to defend its insured against all claims covered under a policy, even those that are groundless, false, or fraudulent”); Penn-America Ins. Co. v. Disabled American Veterans, Inc., 224 Ga. App. 557, 559, 481 S.E.2d 850 (1997).
3 Washington v. Hartford Acc. & Indem. Co., 161 Ga. App. 431, 432, 288 S.E.2d 343 (1982).
4 World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149, 695 S.E.2d 6 (2010); State Farm Mut. Auto. Ins. Co. v. Anderson, 104 Ga. App. 815, 123 S.E.2d 191 (1961).
5 Southern Guar. Ins. Co. v. Dowse, 278 Ga. 674, 676, 605 S.E.2d 27 (2004) (“[a]n insurer that refuses to indemnify or defend based upon a belief that a claim against its insured is excluded from a policy's scope of coverage [does] so at its peril”); Storch v. Cambridge Mut. Fire Ins. Co., 230 Ga. App. 878, 497 S.E.2d 606 (1998).
6 Colonial Oil Industries Inc. v. Underwriters Subscribing to Policy Nos. TO31504670 and TO31504671, 268 Ga. 561, 491 S.E.2d 337 (1997). See Allan D. Windt, Insurance Claims & Defenses §4.37 at 267; John Alan Appleman & Jean Appleman, Insurance Law & Practice §4689 at 211-212.
7 Vara v. Essex Insurance Company, 269 Ga. App. 417, 419, 604 S.E.2d 260 (2004). See also Drawdy v. Direct General Ins. Co., 277 Ga. 107, 586 S.E.2d 228 (2003).
8 Lawyers Title Ins. Corp. v. Stribling, 294 Ga. App. 382, 670 S.E.2d 154 (2008); Newberry v. Cotton States Mut. Ins. Co., 242 Ga. App. 784, 531 S.E.2d 362 (2000) (no attorney-client relationship between insured and attorney for insurer who takes statements from insured pursuant to bilateral reservation of rights and non-waiver agreement.).
9 World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149, 695 S.E.2d 6 (2010); Jones v. Georgia Cas. & Sur. Co., 89 Ga. App. 181, 78 S.E.2d 861 (1953).
10 State Farm Fire and Cas. Co. v. Walnut Avenue Partners, LLC, 296 Ga. App. 648, 675 S.E.2d 534 (2009); O'Brien Family Trust v. Glen Falls Ins. Co., 218 Ga. App. 379, 380, 461 S.E.2d 311 (1995).
11 State Farm Fire and Cas. Co. v. Walnut Avenue Partners, LLC, 296 Ga. App. 648, 675 S.E.2d 534 (2009); Kay-Lex Co. v. Essex Ins. Co., 286 Ga. App. 484, 649 S.E.2d 602 (2007); Jacore Systems, Inc. v. Central Mut. Ins. Co., 194 Ga. App. 512, 390 S.E.2d 876 (1990).
12 Richmond v. Georgia Farm Bureau Mut. Ins. Co., 140 Ga. App. 215, 231 S.E.2d 245 (1976).
13 Rockwell Internat. Corp. v. Superior Court, 26 Cal. App. 4th 1255, 32 Cal. Rptr. 2d 153, 158 (2d Dist. 1994) (where an insurer questions coverage and defends under reservation of rights, a conflict exists “because the insured's goal is coverage, which flies in the face of the insurer's desire to avoid its duty to indemnify”).