Insurance - Stephen L. Cotter, Stephen M. Schatz, and Brad S. Wolff

• Publication year: 2008

Insuranceby Stephen L. Cotter^*

Stephen M. Schatz^** and Brad S. Wolff^***

I. Introduction

During this survey period, the Georgia General Assembly stepped in to clarify, if not expand, insurance carrier rights under uninsured motorist (UM) policies to more limited coverage. Insurance agents were the subject of increasing scrutiny for potential liability. The courts continued to struggle for clarity in the area of coverage for "construction defects."

II. Commercial Liability Insurance

A. Interpretation of the Timely Notice Condition

In Kay-Lex Co. v. Essex Insurance Co.,¹ the Georgia Court of Appeals addressed whether an insured's notice to its independent agent constituted notice to its insurer as required by the condition of its commercial general liability (CGL) insurance policy.² The claimant was killed on June 19, 2003 while operating a forklift at the insured's warehouse. The insured provided notice of the accident on the day it occurred to its independent agent, who procured the coverage through a surplus lines broker. The insurer, however, did not receive notice of the accident until it received a demand letter from the claimant's attorney one year later.³ The CGL policy required the insured to provide notice of an occurrence "as soon as practicable."⁴ The insurer filed a declaratory judgment action, contending that no coverage existed under the policy for the accident because the insured had breached the timely notice condition.⁵

In deciding that the insured had breached the timely notice condition, the court held that the insured's notice to its independent agent did not constitute notice to its insurer.⁶ Under Georgia law, independent insurance agents or brokers are considered the agent of the insured, not the insurer.⁷ Here, no evidence existed to suggest that the independent agent had apparent authority to receive notice from the insured on behalf of the insurer.⁸ Moreover, in order for apparent authority to apply, the insured must have reasonably relied upon the representation of an agency relationship.⁹ No evidence of such justiciable reliance was presented by the insured.¹⁰

The United States District Court for the Northern District of Georgia reached a similar conclusion in Owners Insurance Co. v. Gordon.¹¹ In october 2002 the claimant's attorney sent three letters to the insureds that accused them of copyright infringement and threatened to file suit. In August 2005 the insureds were served with a complaint for copyright infringement. A few days later, one of the insureds notified his independent insurance agent of the suit. The agent failed to provide notice to the insurer, and the insurer was not notified of the suit and the underlying claims until June 20, 2006.¹² The policy required the insureds to provide notice of an occurrence or offense that may result in a claim, as well as any suit, "as soon as practicable," and "immediately" send the insurer "copies of any demands, notices, summonses or legal papers received in connection with the claim or 'suit.'"¹³

In finding that the insureds breached the timely notice condition, the court first held that the three letters sent by the claimant's attorney in october 2002 gave the insureds reason to know that their conduct may have resulted in claims under the terms of their policy, requiring them to put their insurer on notice "as soon as practicable."¹⁴ Second, the court held that the notice provided by the insureds to the independent agent of the lawsuit in August 2005 did not constitute notice to the insurer.¹⁵ Therefore, the insureds' failure to provide the insurer with notice of the suit until June 2006 was an unreasonable delay as a matter of law.¹⁶ Similar to Kay-Lex, no evidence was presented that the insurer placed the independent agent in a position of apparent authority to receive notice on the company's behalf.¹⁷

Contrast these two decisions with those decided in Bowen Tree Surgeons, Inc. v. Canal Indemnity Co.¹⁸ and Yeomans & Associates Agency, Inc. v. Bowen Tree Surgeons, Inc.¹⁹ In Bowen the court of appeals held that a question offact existed on whether the independent agent served as the insurer's agent to accept notice because of the existence of two factors: (1) the agent customarily accepted premiums and notices of claims on the insurer's behalf, and (2) the insurer never voiced an objection to this custom.²⁰ In Yeomans, because the evidence demonstrated that the agent had previously accepted premiums and notices of claims on the insurer's behalf and no evidence indicated that the insurer had ever objected to this custom, a jury question existed regarding whether the agent was authorized to accept notices of claims on the insurer's behalf "as a fiduciary and a dual agent."²¹

B. Interpretation of Coverage in Construction Defect Claims

Several decisions by federal courts in Georgia addressed whether coverage exists for construction defect claims under CGL policies. The courts took varied approaches but reached the same result, with one exception. In Hathaway Development Co. v. Illinois Union Insurance Co. ,²² the insured was a general contractor for the construction of three apartment complexes that suffered damage as a result of the subcontractors' allegedly faulty workmanship on the projects.²³ The United States Court of Appeals for the Eleventh Circuit upheld the district court's determination that the subcontractors' work on the project did not constitute an "occurrence" as defined by the policy and, therefore, was not covered under the policy.²⁴ The subcontractors' defective work was not an accident but "'an injury accidentally caused by intentional acts.'"²⁵ The court's approach is consistent with the one first adopted by the Northern District of Georgia in Owners Insurance Co. v. James²⁶ in addressing whether coverage exists for an insured's defective work that results in damage to the project itself.²⁷ Although Hathaway suggests that the insured paid residents of the apartments for their damages,²⁸ the case is silent regarding whether any such payments would be considered resulting damage to other property and, thereby, covered by the policy.

On the other hand, in Essex Insurance Co. v. H & H Land Development Corp.,²⁹ the United States District Court for the Middle District of Georgia rejected the analysis of Owners Insurance Co. v. James,³⁰ stating that "if the logic of [James was] universally applied, the 'occurrence' based policy would essentially provide coverage only from random events that involve no element of intent or conscious action."³¹ Furthermore, the court noted that "[a]lmost every conceivable accident for which an insured could be held liable involves some intentional action at some point in the chain of causation."³² In Essex, the insured developed property adjacent to the claimant's property, allegedly causing an increase in excess storm water, silt, sediment, and debris to run-off onto claimant's property.³³ The court held that summary judgment in favor of the insurer on the basis of lack of an "occurrence" would be inappropriate: "Although the construction work was intentional, the runoff that occurred was not intentional. It was the unintentional runoff, not the intentional construction, that caused injury to the neighboring property owners."³⁴ Essex was decided before the Eleventh Circuit's unpublished opinion in Hathaway. Therefore, it remains to be seen whether federal courts in the future will continue to follow the "occurrence" analysis adopted by James and Hathaway.

The Northern District of Georgia took a different approach in determining whether defective workmanship was covered in Massachusetts Bay Insurance Co. v. Sunbelt Directional Drilling, Inc.³⁵ The insured was a contractor who hired a subcontractor to perform drilling work to install underground cable. In performing its work, the subcontractor caused damage to the road.³⁶ In concluding that such defective workmanship did not constitute a covered "occurrence" under the policy, the court analyzed whether the insured's liability arose in contract or arose in tort.³⁷ The court relied upon the Georgia Court of Appeals decisions in McDonald Construction Co. v. Bituminous Casualty Corp. ³⁸ and SawHorse, Inc. v. Southern Guaranty Insurance Co.³⁹ for the proposition that a CGL policy only covers damage caused by faulty workmanship when the damage is to property other than the work itself and when the insured's liability for such damage arises in tort or negligence, not in breach ofcontract.⁴⁰ Because the insured's obligation to repair the road caused by the defective drilling arose in contract, as part of the project work itself, the cost of such repairs was not covered under the policy.⁴¹

The Northern District of Georgia took a similar, but slightly different, approach in Johnson Landscapes, Inc. v. FCCI Insurance Co.⁴² As it did in Massachusetts Bay, the court relied on McDonald, but instead of focusing on whether the defective construction was an occurrence or an accident, the court addressed whether the insured was "'legally obligated to pay as damages sums resulting from . . . property damage for which the policy provided coverage,'" as set forth in the insuring agreement of the policy.⁴³ Even if the defective work is considered an accident, there is no "property damage" if the damage arose out of the insured's contractual obligations and not from tort liability arising outside the construction contract.⁴⁴ The insured was a contractor who built a retaining wall that subsequently collapsed. Because the cost to reconstruct the retaining wall arose out of the insured's contractual obligations, the court held that the cost did not result from property damage and was not covered by the policy.⁴⁵

Although these cases apply differing theories in addressing coverage for construction defect claims, they all share a common theme: if the damage caused by the insured is to its own work or project, then no coverage exists under a CGL policy for...