Georgia – Waiver/Reservation of Rights
Georgia Court of Appeals Weighs in on Reservation of Rights And the Right to Recoupment for Non-Covered Claims.
Last month the Georgia Court of Appeals held that an insurer waived all of its defenses to coverage when, under a reservation of rights raising issues of non-coverage, it paid a settlement to protect the insured from increased liability and then sought to recoup those sums from the insured via a declaratory judgment seeking a ruling that the policy provided no indemnity coverage. See Facility Investments, LP v. Homeland Ins. Co. Of New York, 2013 Ga. App. LEXIS 322 (March 29, 2013).
In Facility Investments, a professional E&O insurer, Homeland, had been defending under a reservation of rights which informed the insured that the allegations of liability pled against it were not covered by the E&O Policy. The plaintiff in Facility Investments made a 30-day time limit settlement demand. Three days before the running of the 30-day period, the insured demanded the insurer pay the demand. In response, the insurer demanded contribution from the insured for the settlement based upon non-covered claims and it revised its reservation of rights now for the first time adding that if the insured did not contribute to the settlement for the non-covered claims, the insurer was reserving the right to recoup from the insured any settlement amount it paid. The insured receiving the response and revised ROR refused to contribute to the settlement and refused to agree to the insurer’s attempt to try and reserve the right of recoupment for any settlement it paid. The deadline having run, the insurer paid the settlement on the last day permitted and thereafter instituted suit seeking a declaration that the E&O Policy did not provide any indemnity coverage for the suit and that the insurer was entitled to recoup from the insured the settlement payment.
The Appellate Court set forth the Georgia rules regarding reservation of rights: a reservation of rights must be unambiguous, defenses not unambiguously reserved are waived, if the insured objects or affirmatively rejects a reservation of rights the the insurer must immediately proceed to file a DJ and seek to stay the main action. Following the citation of these “rules,” the Court held that when the insured refused to agree to the revised reservation of rights (adding the right of recoupment for the insured’s failure to contribute to the settlement) the insurer was required to either “deny coverage” or “immediately proceed with a declaratory judgment action.” The Court did not attempt to address the conundrum that implementing that procedure would likely mean the 30-day time limit demand would not be met and the significant ramifications resulting therefrom. Instead, it took a “blinders on” approach and said that because the settlement was paid after the insured refused to agree to the revised reserved rights, that decision to pay the claim instead of immediately seeking a declaratory judgment meant that the insurer had waived its coverage defenses and any right it had to try and recoup payment from the insured for payment of settlement of non-covered claims.
This decision may be headed to Georgia Supreme Court. The Appellate Court fails to even consider, much less address, applying in rote fashion the rules applicable for reservation of rights when an insurer is also facing a policy limits time-limited demand. Certainly there are good policy arguments that the first priority should be to protect the insured from further liability by allowing the insurer to pay the settlement demand particularly as that payment was demanded by the insured. It is difficult to argue any nature of prejudice to the insured by the insurer doing what the insured demand be done and then having the coverage decision decided thereafter. Otherwise, the insurer in this situation appears to be directed by the Court to file some nature of TRO on the time limit demand, immediately that same day file a DJ seeking determination of coverage and perhaps tender to the registry of the Court the settlement monies to be released upon coverage being decided. Yet, the Court in Facility Investments says nothing to provide guidance in that regard. Absent revision or clarity by the Georgia Supreme Court, insurers may be left to adding early on reserved rights of recoupment, contribution and allocation in their ROR’s and then promptly moving to DJ if the insured objects to those rights being reserved.