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

• Publication year: 2003

Insurance

Stephen L. Cotter^*

Stephen M. Schatz^** and

Bradley S. Wolff^***

I. Introduction

Extra-contractual issues continue to percolate in the insurance arena. The Georgia Supreme Court resettled the law enforcing contractual suit limitations and created a "safe harbor" for an insurer faced with demands conditioned on terms beyond an insurer's control.¹ The Supreme Court of the United States, in reversing a nine-digit punitive award, laid down "bright-line," conservative rules regulating punitive considerations in extra-contractual and other situations.²

II. Homeowner's and CGL Insurance

A. Suit Limitation Provision Enforced, Absent Fraud

Absent fraud, an insurer cannot waive the policy's contractual suit limitation provision after the time for bringing suit has expired.³ In Auto-Owners Insurance Co. v. Ogden,⁴ a Georgia Supreme Court decision, a provision in the applicable policy required that any suit against Auto-owners be brought by the insured within one year after the inception of the loss or damage. Auto-owners did not deny the insured's claim before that one-year period had expired. Instead, after the one-year period had expired, the claims adjuster for Auto-Owners notified the insured that his claim to recover repair costs to the fire-damaged home was denied because of the suit limitation provision.⁵ After that notification, however, the adjuster sent a letter to the insured's attorney stating that "'it is possible that Auto-Owners . . . would consider payment'" of repair costs.⁶

When the Georgia Court of Appeals issued its ruling in 2001, it recognized the general rule that an insurer does not waive a contractual suit limitation period by "'engaging in negotiations looking toward a possible settlement of [a] loss or claim.'"⁷ However, the court of appeals held that a question of fact on waiver existed, so it reversed the trial court's grant of summary judgment.⁸ The claims adjuster's letter to the insured's counsel after the suit limitation period expired stated that Auto-owners might consider payment, which was inconsistent with its earlier position that the claim was denied because the one-year suit limitation period had run.⁹

Last year a court of appeals decision flew in the face of the general rule allowing an insurer to negotiate toward a possible settlement of the claim, despite the running of the one-year suit limitation period.¹⁰ The

Georgia Supreme Court's recent decision agrees with that analysis.¹¹ "Relying [up]on long-standing precedent, [the supreme court held] that an . . . insurance adjuster [or agent] cannot waive the [suit] limitations provision in the insurance contract after it has expired without express authority from the insurance company."¹² Thus, "[u]nless the [claims representative or] agent perpetrates [a] fraud that [causes] the insured to delay bringing [a] lawsuit until after the time for bringing [the action] has expired, [an] insured cannot rely on the [representative's or] agent's conduct as an excuse for the failure to sue" in a timely fashion.¹³ "Once the time for bringing an action lapses, the forfeiture has taken place, the contract becomes a 'dead letter,' and an [adjuster or] agent cannot revive it by an acknowledgment or new promise."¹⁴

The court made it clear, however, that while an adjuster or agent of the company cannot waive the suit limitation period after the time has expired, an adjuster or agent can waive the suit limitation provision before the time has expired when the representative, by his conduct or communications, causes the insured to rely upon an express or implied promise to pay the claim.¹⁵

"If the insurer never denied liability, but continually discussed the loss with its insured with a view toward negotiation and settlement without the intervention of a suit, whether or not this lulled the insured into a belief that the 12-month clause in the contract was waived by the insurer can become a disputed question of fact" for the jury.¹⁶

Consequently, the court affirmed the court of appeals' reversal of summary judgment in the insurer's favor because sufficient questions of fact existed regarding whether Auto-Owners and the insured had settled the claim and whether Auto-Owners had promised to pay the outstanding amount owed for the claim as part of the settlement before the suit limitation period expired.¹⁷

Based upon the wealth of previous case law addressing the issue, the Georgia Supreme Court correctly decided Auto-Owners Insurance Co.¹⁸ Regardless, to completely avoid the issue, an insurer still needs to be cautious when making any communications with the insured, before or after the one-year period has expired, if those communications are inconsistent with the insurer's reliance upon the suit limitation provision.

B. Insurance Contract Interpretation—Y2K Remediation Not Direct Physical Loss

In a case of first impression, the Georgia Court of Appeals interpreted the following language commonly found in commercial property policies: The insurance company will provide insurance "'for direct physical loss of, or damage to' covered property."¹⁹ In AFLAC, Inc. v. Chubb & Son, Inc.,²⁰ "AFLAC sought declaratory relief as to coverage and damages under [its] two Chubb contracts of all-risk property insurance for [the] remediation costs incurred upon converting its computer systems [to avoid] the Year 2000 ('Y2K') computer problem."²¹ Chubb's policies provided all-risk personal property coverage "'for direct physical loss of, or damage to' covered property."²² AFLAC's computer systems constituted covered property under the policies. Therefore, the issue for the court was whether costs incurred in anticipation of the Y2K problem constituted direct physical loss or damage.²³ Relying upon the relevant rules of insurance contract construction, the court of appeals determined that the term "direct physical loss or damage"²⁴ "contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so."²⁵ Because the inability of AFLAC's computer systems to process twenty-first century dates existed from the time the systems were created, and because the remediated computer systems successfully avoided any Y2K problems, the court determined that no direct physical loss or damage resulted from a fortuitous event.²⁶ Therefore, the trial court's denial of AFLAC's motion for summary judgment was affirmed.²⁷

The ruling in AFLAC is not limited to claims for remediation costs related to the Y2K problem.²⁸ The ruling stands for the proposition that an insured is not entitled to coverage when it seeks "no more than an ordinary cost of doing business . . . ."²⁹ Business property policies do not afford coverage for costs incurred to improve or better business property when no loss or damage has occurred as a result of a fortuitous event.³⁰

C. Application Misrepresentation Increasingly a Jury Question

In light of Lively v. Southern Heritage Insurance Co.,³¹ insurance companies will find it more difficult to prevail on a motion for summary judgment based upon misrepresentations by an insured in the insurance application, particularly when the insurer does not treat the policy as void from its inception and does not refund all premiums to the insured. In Lively Southern Heritage moved for summary judgment based upon misrepresentations that the insureds made in their application for homeowner's insurance. Specifically, the application asked whether the insureds previously had any insurance declined, cancelled, or not renewed in the last three years and whether the insureds had any prior loss history. The insureds answered those questions negatively. However, the insureds had been refused a renewal of a previous homeowner's policy due to a fire within three years of the date of the application.³²

Reversing the trial court's grant of summary judgment in favor of Southern Heritage, the court of appeals determined that Southern Heritage failed to "demonstrate both [that the insureds] made . . . misrepresentations and that the misrepresentations were material from the view of a prudent insurer."³³ The court of appeals reiterated:

In order to void a policy of insurance for misrepresentation in the application, the insurer must show that the representation was false and that it was material in that it changed the nature, extent, or

character of the risk. A material misrepresentation is one that would influence a prudent insurer in determining whether or not to accept the risk, or in fixing a different amount of premium in the event of such acceptance.³⁴

Because the standard is objective, "the issue of materiality is ordinarily a question for the jury, unless the evidence excludes every reasonable inference except that it was material, in which case it becomes a question of law for the court."³⁵

In support of its motion for summary judgment, Southern Heritage submitted the underwriter's affidavit "stating that she would not have approved the policy if she had known of the prior fire losses and the nonrenewal."³⁶ The court held that the affidavit did not effectively remove all genuine issues of material fact.³⁷ "The affidavit [did] not set forth any bright-line company policies stating that coverage [would be] denied if a prior nonrenewal or prior losses exist[ed]."³⁸ Instead, the affidavit "contain[ed] only the underwriter's blanket statements that she would not have issued the policy if she had known of the [insureds'] prior history."³⁹ In opposition to the motion for summary judgment, the insureds submitted "an expert's affidavit [for the proposition] that prior nonrenewals and losses do not automatically preclude coverage, but rather . . . insurance companies will consider [numerous] factors in determining whether to [issue a policy]."⁴⁰ Therefore, while the insurance...