Supreme Court of Georgia: Absence of a Reservation of Rights Waives Coverage Defenses Without a Showing of Prejudice


By Philip W. Savrin
The Supreme Court of Georgia has answered a lingering question as to whether an insurer can assert coverage defenses when it has defended its insured without a reservation of rights absent a showing of prejudice to the insured.  InWorld Harvest Church, Inc. v. GuideOne Mutual Insurance Company, Case No. S10Q0341 (Ga. May 3, 2010), the insurer assumed the defense of its insured while telling its insured that coverage was doubtful but would be evaluated.  The insurer continued to defend for almost a year before informing the insured that it would be withdrawing from the defense because there was no coverage.  After the insured retained its own attorneys, the case proceeded to judgment in excess of $1 million.  The insured then sued the insurer in federal court for coverage.
The federal judge found in favor of the insurer because even though the insurer did not issue a reservation of rights, the insured had not shown prejudice as a result of the insurer’s provision of a defense.  The insured appealed to the Eleventh Circuit which found the law uncertain and certified the issue to the Supreme Court of Georgia.
In its ruling, issued May 3, 2010, the Court first found that although a reservation of rights need not be in writing, it must be unequivocal.  Because the insurer’s statement that it did not believe the claim was equivocal, the defense had been undertaken without a reservation of rights.  To work an estoppel, the Court found that prejudice to the insured is required, citing in part an article authored by Philip W. Savrin and William H. Buechner, Jr.  After reviewing the law, however, the Court expressly adopted the “majority rule” that prejudice results from the defense of the insured without further proof of harm.  In surrendering control of the defense, the Court explained, the insured gives up the ability to decide when and how to assert defenses or seek to settle the case.  Although a previous decision had implied that prejudice must be shown, the Court distinguished that case because counsel retained by the insurer had made an appearance only but had not “defended.”  The Court concluded its analysis with the following holding:
Where, as here, an insurer assumes and conducts an initial defense without effectively notifying the insured that it is doing so with a reservation of rights, the insurer is deemed estopped from asserting the defense of noncoverage regardless of whether the insured can show prejudice.
In the wake of this decision, insurers must take caution to examine each liability claim for coverage at the very outset and issue a reservation of rights whenever coverage is doubtful.  Defending an insured without a reservation of rights can have dire consequences in those cases where coverage does not exist.
Click here for link to a copy of this important decision.  Click here to send an e-mail to author Philip Savrin.