Georgia High Court Expands Waiver of Coverage Defenses


By Philip W. Savrin
Last week, the Supreme Court of Georgia issued its decision in Hoover v. Maxum Indemnity Company finding that an insurer had not preserved its right to disclaim on defenses that were not asserted adequately in the disclaimer letter.  To briefly review the facts, Hoover sued his employer (EWES) for injuries sustained while climbing from a roof on a house where he had been sent by his employer.  Maxum received its first notice from EWES two years later and disclaimed based on an exclusion for injuries to employees.  The disclaimer letter reserved the right to disclaim on other bases, including the extent to which EWES had not complied with the notice provision.  A demand for policy limits of $1 million was rejected.  After the liability case went forward to judgment of $16.4 million, EWES assigned its insurance claims to Hoover who then sued Maxum for coverage and for failing to settle.
The trial court granted summary judgment to Maxum on the delayed notice issue, and that decision was affirmed by the Court of Appeals.  The Supreme Court then granted certiorari review on two issues:  (1) whether the Court of Appeals properly evaluated Maxum’s preservation of the notice defense; and (2) whether timely notice is a condition precedent to a duty to defend.
In the opinion issued last week, Justice Hunstein, writing for a majority of 4, found that an insurer cannot both disclaim on one ground and reserve its rights on another.  She ruled that a reservation of rights is intended to preserve defenses where the insurer is defending its insured.  Because Maxum did not defend EWES, she found it had not reserved its rights properly, with the consequence that the defense was waived.  Even then, she found that Maxum had waived the defense as a matter of law by relying on the substantive defense in the coverage litigation and not fairly informing EWES of the notice defense.  Finally, she ruled that the employer’s exclusion did not apply, based on her factual finding that Hoover was injured while complying with the directions of the contractor on the premises to which he had been sent by his employer, which was outside his job duties as an employee of EWES.  The opinion is silent on whether there was a duty to indemnify but says only that Maxum breached its duty to defend.
Justice Melton dissented from the ruling that an insurer cannot disclaim on one ground and reserve its rights on another.  He pointed out that the facts supporting a late notice defense are not known at the time that the claim is tendered and there is no inconsistency between the positions.  He noted it is common practice for parties in contract litigation to assert defenses that are later sorted out during discovery.  Justice Hines and Nahmias joined Justice Melton’s opinion, which does not state whether Maxum owed a duty to defend on the merits.
This opinion changes the standards for preserving coverage defenses in several respects.  Most importantly, it will encourage if not outright require that insurers state all bases for denial to avoid waiving defenses by stating that additional defenses “may” apply.  Insurers should no longer feel comfortable in reserving rights on grounds that are not part of the disclaimer decision.  In addition, the holding that an injury is not related to employment if it is not part of the employee’s regular job duties narrows the employer’s liability exclusion measurably and could have an unintended consequence in depriving employees of workers compensation coverage.
Given the exposure presented and the impact of the decision on claims handling procedures, Maxum will be moving for reconsideration and may be joined by amicus briefs filed by other insurers or trade organizations.  Reconsideration motions are rarely granted but this is one instance that may get noticed by the justices given the far-reaching implications of the rulings.
For more information, contact Philip W. Savrin at 770.818.1405 or[email protected].