Unless insurance coverage is absolutely clear, liability insurers usually will not assume the defense of an insured without issuing a broadly worded “reservation of rights” letter. Such letters often contain language purporting to reserve the carrier’s right to assert any coverage defenses that it may discover as the case progresses. In Hoover v. Maxum Indemnity Co., Case Nos. S11G1681, S11G1683, 2012 Ga. LEXIS 570 (Ga. June 18, 2012), the Georgia Supreme Court concluded that when a carrier denies all coverage and refuses to defend its insured, a non-specific, general reservation of rights does not preserve the carrier’s right to invoke an unasserted defense to coverage in subsequent litigation with the insured.

In Hoover, a home repair contractor asked an employee to deliver a ladder to an independent roofing subcontractor, who asked the employee for help with the roofing work. The employee (Hoover) sustained a serious brain injury when he fell while descending from the roof on another ladder that collapsed. Hoover unsuccessfully pursued a workers compensation claim against his employer and then, almost two years later, filed a bodily injury lawsuit against the employer, who forwarded the complaint to its general liability insurer, Maxum. Maxum denied coverage and refused to defend, invoking an exclusion barring coverage for work-related injuries of employees. The carrier’s letter also contained a general statement reserving “the right to disclaim coverage on any other basis that may become apparent as this matter progresses and as Maxum obtains additional information.”

Neither the Georgia Court of Appeals nor the Georgia Supreme Court addressed the Employer’s Liability exclusion, other than to note that Hoover’s duties as a “water extraction technician for [his employer] did not include climbing on ladders or making roof repairs.” Rather than rely on the exclusion raised in its denial letter, Maxum successfully invoked another defense in the trial court, based on the insured’s two-year delay in providing timely notice of the accident and injury. The Georgia Court of Appeals affirmed summary judgment for Maxum, rejecting the argument that by failing to raise untimely notice in its letter denying coverage, Maxum had waived that defense.

The Georgia Supreme Court reversed, noting in part that the carrier had not issued a “reservation letter,” but had denied all coverage and refused to defend, invoking the Employers’ Liability exclusion as the sole basis for doing so. The court ruled that “[a] reservation of rights does not exist so that an insurer who has denied coverage may continue to investigate to come up with additional reasons on which the denial could be based if challenged.” (emphasis in original). Rather, the proper reason to issue a reservation letter is to allow the carrier, if uncertain about its policy obligations, to “undertake a defense while reserving its rights to ultimately deny coverage following its investigation or to file a declaratory judgment action to determine its obligations.” The court criticized Maxum’s use of “boilerplate language… purporting to reserve the right to assert a myriad of other defenses at a later date,” noting that the carrier’s general reservation did not advise the policyholder of the notice defense. As a result, the court ruled that the “purported ‘reservation of rights’ is invalid.”

In addition, the Hoover court cited the “undisputed” record showing that Maxum not only omitted the notice defense from its purported reservation letter, but also had failed to raise the defense when it filed a declaratory judgment action (later dismissed in light of the “outright” denial of coverage) or during discovery in connection with the insured’s third party claim against Maxum in the underlying case. Apparently, the carrier raised the notice defense for the first time in the lawsuit Hoover filed, as assignee of the insured’s coverage rights, following entry of a $16.4 million judgment against the insured in the tort case. The court noted that a carrier has the right to assume the defense of its insured “under a reservation of rights,” but ruled that a carrier could not “both deny a claim outright and attempt to reserve the right to assert a different defense in the future.”

Quoting Richmond v. Georgia Farm Bureau Mutual Insurance Co., 140 Ga. App. 215, 217 (1976), the Hoover court noted that when a liability carrier receives notice and a demand for the defense of a claim, the carrier’s “proper” course of action is to assume the defense “‘under a reservation of rights and then proceed to seek a declaratory judgment in its favor.’” The court did not address the scope of a required reservation letter in such a situation or whether a “boilerplate,” general reservation of rights would suffice, but noted that any such reservation “must be unambiguous,” concluding that the letter at issue did not “unambiguously inform [the insured] that Maxum intended to pursue a defense based on untimely notice of the claim.”

The impact of the Georgia court’s “waiver” ruling when a carrier both defends and issues a “boilerplate” reservation of rights is uncertain. In World Harvest Church, Inc. v. Guideone Mut. Ins. Co., 287 Ga. 149, 152 (2010), the court ruled that a carrier’s assumption of its insured’s defense without issuing an unambiguous reservation of rights estopped the carrier from later denying coverage and abandoning the defense. Thus, absent an unambiguous reservation that fairly advises the insured of possible coverage defenses, a carrier who assumes the defense of its insured cannot later set up a defense to coverage for the claim being defended.

The rulings in Hoover and World Harvest Church require insurance carriers asked to assume the defense of a claim to clearly and fairly advise their insureds of all defenses to coverage. Some coverage defenses may not become apparent until discovery in the tort case proceeds; however, others, such as a “notice” defense, should be obvious from the outset and arguably must be timely and unambiguously invoked by the carrier to preserve the defense. As ruled in Hoover, an insurance carrier cannot issue an “outright denial” of coverage and refuse to defend its insured without asserting all coverage defenses that it may later want to invoke in opposing coverage. Accordingly, Hoover may and should result in a significant reduction in the number of cases in which a carrier refuses to defend, as opposed to assuming the defense under an unambiguous reservation of rights.