Insurance

• Publication year: 2012

Insurance

Bradley S. Wolff

Stephen Schatz

Stephen L. Cotter

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Insurance

by Bradley S. Wolff^* Stephen Schatz^** and Stephen L. Cotter^***

I. Introduction

In property insurance cases,¹ there were two Georgia Supreme Court decisions with the potential for significant impact.² The court held that insurance companies are liable for diminution in value of real property under commercial and homeowners insurance policies, extending the reasoning in State Farm Mutual Automobile Insurance Co. v. Mabry³ beyond motor vehicles for the first time.⁴ Answering a certified question, the supreme court also held a one-year suit limitation in a homeowners insurance policy is enforceable for losses not caused by fire,

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despite an insurance commissioner-issued regulation that would prohibit any limitation shorter than two years.⁵

Despite an insurer's plea that it faced irreconcilable conflicting obligations, the Georgia Court of Appeals held that an insurer faced with a time limit, policy-limit demand, and a hospital hen cannot escape liability to the hospital by paying its policy limits to the injured party, but an insurer might create a "safe harbor" from bad-faith liability where the claimant unreasonably refuses to assure the satisfaction of the lien, and the insurer satisfies the lien and pays any remaining proceeds to the claimant.⁶

In a case now pending before the supreme court, the court of appeals held that when a property owner and construction companies enter into a contract requiring each construction contractor and subcontractor to obtain liability insurance and other insurance coverage for the construction project to be provided by the owner for the benefit of all participants in the project, the owner and contractors can all be held liable for the damages caused to a construction worker, injured on the job, by a subcontractor who failed to procure the required liability insurance.⁷

An insurance carrier's attempt to deny coverage based on a defense not articulated in its reservation-of-rights letter was rejected by the supreme court, despite the carrier's inclusion of a "catch-all" clause.⁸ The court held that insurers may not both deny a claim on stated grounds and reserve the right to add other policy defenses later.⁹ Insureds who failed to cooperate with their insurer's investigation of claims or defense of suits and to provide timely notice to their carriers generally fared poorly in a number of cases decided during the survey period.

In the automobile insurance arena, the court of appeals considered several fact patterns presenting a question of whether injuries arose out of the "use" of an automobile.¹⁰ An insured who had rejected umbrella-policy uninsured motorist (UM) coverage in writing was allowed to recover UM benefits because his insurer required the UM coverage of any underlying policy be equal to the liability limits before it would

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allow UM coverage in an umbrella policy, which was held to be an impermissible condition prior to the 2009 statutory amendment that made umbrella UM coverage optional.¹¹ When several eyewitnesses to a fatal incident presented different versions of what occurred in a no-contact "John Doe" case, the plaintiff failed to satisfy the statutory corroboration requirement.¹² And where a known tortfeasor could not be found and publication service was accomplished, a voluntary dismissal of the lawsuit in which the UM carrier was served led to the plaintiff's inability to bring a renewal action after the expiration of the statute of limitations because she could no longer obtain a judgment against the tortfeasor due to the absence of personal service in the original action.¹³

II. First-Party Property Insurance

A. Recovery for Diminution in Value

In 2001, the Georgia Supreme Court held in State Farm Mutual Automobile Insurance Co. v. Mabry¹⁴ that an automobile insurance policy covers not only the cost to repair the damaged vehicle but also the diminution in value of the repaired vehicle.¹⁵ In 2012, the supreme court extended that interpretation to damage to real property under commercial and homeowners policies in Royal Capital Development, LLC v. Maryland Casualty Co.¹⁶ The court held that its ruling in Mabry "is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay."¹⁷

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In reaching its decision, the court adhered to the principle that damages should be measured in a manner that makes the insured whole-that is, to place the insured in the same position it would have been in had the injury never occurred.¹⁸ When damage to real property occurs, the policy promises to pay for the insured's loss, which includes loss of both utility of the property and its value.¹⁹ "Although unusual, it may sometimes be appropriate, in order to make [an] injured party whole," to award both cost of repairs and diminution of value for damaged property.²⁰

How this decision will affect the insurance industry remains to be seen. The insured will have the burden of proof to show that repairs to its real property create a "stigma" that entitles it to diminution in value.²¹ Real estate appraisers likely will need to satisfy such burden of proof. As acknowledged by the court, diminution of value to property is "unusual."²² For example, if an insurer pays to replace a roof due to hail damage, the new roof is an improvement to property that does not create a stigma necessitating an additional payment of diminution in value.

The court also acknowledged that its decision is based upon its interpretation of the policy language; whether diminution of value is recoverable "depends on the specific language of the contract itself."²³ Because the court did not cite to any public policy rationale, property insurers may begin to find ways to prevent coverage for diminution of value-both through the policy definition of loss and through a specific exclusion.

B. Suit Limitation Provision

In White v. State Farm Fire & Casualty Co.,²⁴ the supreme court answered a certified question from the United States Court of Appeals for the Eleventh Circuit,²⁵ holding that a one-year suit limitation provision in a homeowners insurance policy is enforceable for claims not involving a fire loss.²⁶ State Farm's policy contained a provision requiring its insured to file a lawsuit "within one year of the date of loss

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or damage."²⁷ After the insured made a claim for a theft loss, State Farm denied the claim, and the insured filed suit against State Farm more than one year after the date of loss.²⁸ In 2006, the Insurance Commissioner issued a regulation that forbade any property insurance policy covering loss or damage to real or personal property from requiring a suit to be filed against the insurer within a time less favorable to the insured than specified in the Standard Fire Policy.²⁹ The Standard Fire Policy only requires a lawsuit to be brought within two years of the date of loss.³⁰ The court held that the Insurance Commissioner did not have the authority to enact the regulation with respect to non-fire losses.³¹ Therefore, the one-year suit limitation provision in State Farm's policy was enforceable on the insured's theft claim, and the insured's lawsuit was barred because he failed to file suit within the requisite one year.³² Based upon this decision, the Insurance Commissioner's regulation will remain enforceable for fire losses, but not for other property losses; that is, the two-year suit limitation provision will only apply to fire claims.³³

During the survey period (and before White was decided), the Eleventh Circuit also addressed a suit-limitation provision in Jenkins v. Allstate Property & Casualty Insurance Co.³⁴ Allstate's policy contained a provision requiring its insured to file a lawsuit "within one year after the inception of loss or damage."³⁵ After the insured made a claim for fire and subsequent theft, Allstate denied the claim, and the insured filed suit against Allstate more than two years after the losses. Both parties conceded that the one-year suit limitation provision was invalid because it conflicted with state law at the time of the losses. The insured contended that since the limitation provision was void, there should be no contractual limitation period; consequently, the six-year statute of limitations for breach of simple contract should apply.³⁶ Allstate's policy, though, contained a conformity provision, which stated that "[w]hen the policy provisions conflict with the statutes of the state in

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which the residence premises is located, the provisions are amended to conform to such statutes."³⁷ In rejecting the insured's argument, the court held that the conformity provision amended the policy's one-year suit limitation provision to include the two-year suit limitation provision set forth in the Standard Fire Policy.³⁸

C. Subrogation

In Georgia Casualty & Surety Co. v. Woodcraft by MacDonald, Inc.,³⁹ the Georgia Court of Appeals held that a commercial property insurer's right to subrogation does not deprive the insured of its right to recovery under the full-compensation or made-whole doctrine.⁴⁰ The insurer exhausted its limits under a commercial property policy in paying the insureds for a loss arising out of an explosion to the insureds' building. The insurer then asserted a subrogation lawsuit against the tortfeasor. The insurance company subsequently reached a settlement in principle with the tortfeasor, in which it agreed that the insureds could continue to pursue their claims against the tortfeasor. The insureds filed suit against the insurer for breach of the insurance contract for failing to make them whole prior to settling its subrogation claim with the tortfeasor.⁴¹ The insureds contended the settlement impaired or impeded their ability to pursue the tortfeasor because they could not afford to litigate their claims on their own.⁴² The court concluded that...