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Georgia Supreme Court Answers Insurance Coverage Questions

World Harvest Church, Inc. v. Guide One Mutual Ins. Co., S10Q0341.

In response to certified questions posed by the Court of Appeals for the 11th Circuit in World Harvest Church v. Guide One Mutual Ins. Co., 586 F.3d 950 (11th Cir. 2009), the Georgia Supreme Court clarifies two important coverage questions: (1) what is an effective reservation of rights and (2) when there is not an effective reservation of rights, is the insurer estopped from asserting no coverage after it has assumed and controlled the defense of the suit against its insured.

Regarding the effective reservation of rights issue, the Georgia Supreme Court determined that while an effective reservation of rights can be oral, it must “fairly inform the insured of the insurer’s position” and that a “mere allegation that the insured contended that the insured was not covered without more does not show any reservation on its part.” Simply stated, it must fairly inform of the specific basis for the insurer’s reservation about coverage in order to avoid waiving the defense available to the insured.

In the case before the Court, a claims adjuster’s statement that it did not see coverage but would have to see if there would be coverage issues was ineffective because it failed to “fairly inform” the church of Guide One’s position. Also the Court concluded that a prior reservation of rights by a Guide One sister company in a similar lawsuit involving World Harvest Church, Inc. in another jurisdiction involving an identical policy but not the actual policy implicated in this case was also ineffective.

Having determined that the reservation of rights of ineffective, the Court turned to the issue of whether the insurer was estopped from denying the claim regardless of whether the insured can show prejudice. The court, in reliance on its prior holding in Prescott’s Altama Datsun v. Monarch Ins. Co. of Ohio, 319 S.E.2d 445 (Ga. 1984) concludes that Georgia has embraced the general or majority rule to hold that “prejudice to the insured is conclusively presumed, or that the loss of the right to control and manage the case is itself sufficient prejudice to the insured.”

Accordingly, when an insured assumes and conducts an initial defense without effectively notifying the insured that it is doing so with a reservation of rights or the reservation of rights becomes ineffective, the insurer is estopped from asserting the defense of non coverage regardless of whether the insured can show prejudice.

First and foremost, it is imperative to issue a proper and effective reservation of rights when there are concerns about coverage. While the reservation of rights does not have to be in writing, it is advisable to confirm the reservation of rights in a letter to the insured fairly stating the specific basis for the insured’s reservations about coverage. When a proper reservation of rights is issued, the insured can assume the defense and preserves their coverage defenses until such time that they can be more specifically determined without risking losing the coverage defenses. On the contrary, without an effective reservation of rights, the insured can lose its right to deny coverage once it assumes and controls the defense.