The underlying lawsuit arose out of contributions to the Church from two gentlemen who had operated a huge Ponzi scheme. A Receiver appointed by the Securities and Exchange Commission demanded that the Church return $1,800,000. in donations and initially brought suit against the Church in Illinois, claiming fraudulent transfer and unjust enrichment. Guideone, the Church’s commercial general liability insurer, was informed of the lawsuit and a sister company of Guideone responded with a written reservation of rights denying liability. Guideone ultimately concluded that the policy did not cover the Illinois action.
The Illinois case was dismissed for lack of personal jurisdiction and was refiled in the United States District Court for the Northern District of Georgia. When Guideone received the refiled lawsuit, it did not reissue a reservation of rights letter. Instead, the claims handler testified that he told the insured that “we didn’t see coverage but we would have to evaluate what we have currently to see if there would be coverage issues.” Guideone then assumed the defense of the lawsuit for over 10 months. When there was only a month remaining in the discovery period in the lawsuit, Guideone informed the Church that it would stop defending the action in 30 days because there was no coverage. The Church then hired its own lawyers, summary judgment was granted to the Receiver, and a judgment in the amount of $1,800,000 was awarded against the Church. The Church later settled with the Receiver for $1,000,000 and then sued Guideone.
The Georgia Supreme Court, answering certified questions from the United States Court of Appeals for the 11th Circuit, found that a reservation of rights does not necessarily have to be in writing; however, the adjustor’s statement that he “did not see coverage” was not sufficient to fairly inform the insured of the insurer’s position. At a minimum, a reservation of rights must “fairly inform the insured that, notwithstanding [the insurer’s] defense of the action, it disclaims liability and does not waive the defenses available to it against the insured.” The reservation of rights should also inform the insured of the specific basis for the insurer’s reservations about coverage. The reservation of rights must be unambiguous in order to be effective.
The Georgia Supreme Court decided that the prior reservation of rights in the Illinois lawsuit, considered in conjunction with the adjustor’s statement in the Georgia case, was, at best, ambiguous because the Illinois reservation of rights came from a “sister company” of the insurer.
The Supreme Court also discussed whether prejudice was required to be shown by the insured and whether prejudice was, in fact, shown in order to determine whether there was a waiver or estoppel of coverage defenses. In examining Georgia law and the law of other States, the Court wrote that when an insurer provides a defense to an insured and then withdraws that defense, “prejudice to the insured . . . is conclusively presumed . . . the loss of the right of the insured to control and manage the defense is, in itself, prejudice to the insured.”
According to the Georgia Supreme Court, where 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 non-coverage regardless of whether the insured can actually show prejudice.
Guideone must now pay a $1,000,000 settlement that it never would have owed if its rights had been properly reserved. In drafting a reservation of rights letter or determining whether to contest coverage and when to contest coverage this case should definitely be reviewed.
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