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Georgia – Reservation of Rights

Georgia Supreme Court  Nullifies Rights Reserved In Declination Letters.

Hoover v. Maxum Indemnity Co., 2012 Ga. LEXIS 570 (June 18, 2012)

The Georgia Supreme Court in a stunning opinion has ruled that “an insurer cannot both deny a claim outright and attempt to reserve the right to assert a different defense in the future.”

The question presented on appeal was whether Maxum, which had declined coverage to Hoover’s employer on an employment exclusion, was entitled in the coverage suit to assert the defense of late notice which it had raised as a reserved defense in its declination letter.  It was not disputed that Maxum had reserved on late notice when declining coverage as the Court quoted Maxum’s declination letter which stated that “coverage… may be barred or limited to the extent the insured has not complied with the notice provisions of the policy.”

In an extremely narrow reading of past precedent the Court restated the three approved courses of action for an insurer disputing coverage under its policy: 1) defend the claim, waiving policy defenses and claims of non-coverage; 2) deny coverage and refuse to defend leaving policy defenses open for future litigation, or; 3) defend under a reservation of rights.

Where the Georgia Supreme Court narrowed the insurer’s options is when denying coverage, even if additional probative facts might be learned later or during discovery which support other grounds for declination that have been reserved, the Court ruled once the insurer decides to decline coverage outright, it waives its right to reserve on other grounds of declination that further investigation would have revealed. If it wants to investigate those other grounds for declination, it would have to defend under a reservation of rights and continue to investigate or defend and file a declaratory judgment on all grounds it seeks discovery on.

Thus, since Maxum denied coverage entirely, the Court ruled it could not rely on its reserved defense of late notice.  Partially driving the Court’s decision was Maxum’s half-hearted enforcement of its late notice condition and the reality that all the elements of late notice (a significant two year late notice) were known by Maxum as soon as it first received notice of the underlying suit.  In hindsight, clearly Maxum should have denied on both the employment exclusion and breach of the condition precedent requiring timely notice of occurrence.

Having reversed and found the defense of late notice was waived, the Court sent the case back down for a determination of Maxum’s liability for the $16 million judgment. The remainder of the decision addresses the broad construction given pleadings in triggering the duty to defend such that the Employer’s Liability exclusion was held not triggered based on the allegations of the Complaint. Thus Maxum, by the Court’s ruling, being bereft of its late notice defense was found to have breached of its duty to defend.


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