The Pitfall of Coverage by Estoppel in Georgia


By: Phil Savrin
The Supreme Court of Georgia swept aside many decades of case law recently when it decided that an insurer cannot rely on policy provisions to deny coverage if it defends its insured without reserving its rights.  Before the World Harvest decision, the cases seemed to require that the insured had to show that the insurer had prejudiced the insured’s rights in some fashion.
While the decision may seem harsh to insurers, the Supreme Court made clear that there are no formalities needed for an insurer to reserve its rights, which does not even need to be in writing.  There must be evidence, at a minimum, that the insurer “fairly informed” the insured of the possibility that the claim might not be covered by the policy so that the insured can decide whether to take steps to protect its interests apart from the insurer’s provision of a defense.
Indeed, reservation of rights agreements are just that:  an agreement between the parties that can be negotiated as to the terms of the insurer’s provision of a defense.  The agreement does not even need to be expressly accepted by the insured, as case law holds that the insured is “deemed” to have accepted the terms of the reservation of rights if it allows the insurer to control the defense after having been informed of the potential coverage issues.
A recent decision by a federal judge makes clear that the terms of the reservation of rights can be quite broad, as he enforced a provision that allowed the insurer to recover defense costs paid on the insured’s behalf, after a finding that the claim was not covered by the policy.
What this means is that, in Georgia at least, both insurers and insureds should consider the terms of the reservation of rights at the outset of the case.  For its part, the insurer should include terms that it believes are necessary and reasonable to protect its interests in the event the claim turns out not covered by the policy.  Insureds, on the other hand, should inform themselves of any potential downsides in accepting the terms of a defense under reservation of rights, and either reject or negotiate unwarranted terms before allowing the insurer to control their interests.  Once the defense is underway, the rights of both parties may be set with little relief available thereafter from the terms of the defense, with or without a reservation of rights agreement in place.