Adverse Coverage Ruling Has a Silver Lining


By: William H. Buechner, Jr.
The Georgia Court of Appeals recently ruled for the first time that an insurer may not rely on coverage defenses set forth in a reservation of rights that was sent before the insurer later disclaimed coverage. The Court also held that the insurer waived a counterclaim for rescission by denying coverage after learning of alleged misrepresentations by the insured in the application, by treating the policy as valid with respect to other claims in other cases, and by waiting approximately six months before asserting rescission as a counterclaim. American Safety Indemnity Co. v. Sto Corp., 2017 Ga. App. LEXIS 339 (June 30, 2017). In a silver lining for the insurer, however, the Court held that the insurer could not be held liable for bad faith pursuant to O.C.G.A. § 33-4-6 because the issue as to whether reservation of rights letters are still effective after the insurer later denies coverage had never been squarely addressed by Georgia courts and because there was some evidence in the record that could have led the insurer to believe that the reservation of rights letters had been sent to the insured.
In light of the Sto ruling, insurers issuing Georgia policies cannot rely on coverage defenses contained in a reservation of rights letter if it subsequently disclaims coverage. If the insurer initially disclaims coverage but changes its mind and decides to defend the insured under a reservation of rights, it must send the reservation of rights letter to the insured before it undertakes the defense of the insured. The insurer’s failure to do so may result in waiver of all coverage defenses. Finally, if an insurer concludes that the insured made material misrepresentations in the application for insurance, the insurer must promptly inform the insured of its intent to rescind the policy as void and then actually treat the policy as void. Sending a disclaimer letter or handling other claims under the policy as if the policy still exists may constitute a waiver of any rescission claim the insurer may have.
On the bright side, Sto provides some reassurance that Georgia courts will reject bad faith claims under § 33-4-6 where the denial of coverage is based on a legal issue of first impression or where the insurer otherwise has a reasonable legal or factual basis for denying coverage.
If you have any questions or would like more information, please contact William H. Buechner, Jr. at [email protected].