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

• Publication year: 2007

Insuranceby Bradley S. Wolff Stephen L. Cotter^** and Stephen M. Schatz^***

I. Introduction

The Georgia Supreme Court reviewed, and reversed, two cases featured prominently in last year's Insurance survey article,¹ and it also held a key provision of tort reform preempted by federal law.

The Georgia Supreme Court reversed the decision in Ryder Integrated Logistics, Inc. v. BellSouth Telecommunications, Inc.² and held that an agreement to name another as an additional insured could not be used to salvage an invalid indemnification clause in the parties' contract.³ The legislature amended Official Code of Georgia Annotated ("O.C.G.A.") section 13-8-2⁴ to help avoid this type of litigation in the future.⁵ However, both appellate courts continued to show a propensity for finding additional insured coverage for entities with whom the named insured has agreed to provide such coverage in a separate contract, as long as a connection exists between (1) the claimed injury and (2) the scope of the work set forth in the contract.⁶

In another case, the supreme court reversed a pass given by the intermediate court to an automobile insurer; the insurer allegedly conspired with an appraisal service to systematically undervalue its policyholders' property damage claims.⁷ In McGowan v. Progressive Preferred Insurance Co. ,⁸ the supreme court held that an appraisal and the insurer's subsequent payment of the difference between its valuation and the appraised value did not moot the insured's claims for damages other than the value of the car itself for claims such as fraud, breach of contract, and violation of the Georgia Racketeer Influenced and Corrupt Organizations Act⁹ ("RICO").¹⁰

Both appellate courts held that Health Insurance Portability and Accountability Act¹¹ ("HIPAA") regulations preempted O.C.G.A. section 9-11-9.2,¹² the tort reform provision that requires a plaintiff to file an authorization for the release of medical records and permission for defense counsel to speak with treating physicians in a medical malpractice case.¹³ The supreme court adopted and expanded upon the court of appeals' views in Allen v. Wright.¹⁴

Perhaps the most unanticipated decision of the survey period in the insurance law arena came from the court of appeals in Abrohams v. Atlantic Mutual Insurance Agency,¹⁵ a decision that the supreme court declined to review.¹⁶ In Abrohams the court held that a personal umbrella liability policy's coverage extended to uninsured motorists when the policy provided $1 million in excess liability coverage over the insureds' primary residence and motor vehicles, despite the fact that the umbrella policy itself specifically stated that it did not cover uninsured motorists.¹⁷ If an award was given for the most creative lawyering in an insurance case, it would surely be awarded this year to the attorney or attorneys who crafted the winning arguments in this case.

II. Commercial Liability Insurance

A. The Effect of Contractual Indemnification and Insurance Clauses on Additional Insured Coverage

In last year's annual survey, we discussed the court of appeals decision in Ryder Integrated Logistics, Inc. v. BellSouth Telecommunications, Inc. ("Ryder I")¹⁸ and predicted that the supreme court would address the lower court's finding of additional insured coverage for BellSouth based upon the appellate court's very broad interpretation of the language "arising out of operations" in the policy's additional insured endorse-ment.¹⁹ In Ryder Integrated Logistics, Inc. v. BellSouth Telecommunications, Inc. ("Ryder II"),²⁰ the supreme court reversed Ryder I, but not for the reasons we had anticipated.²¹

An employee of Ryder was injured while working at a BellSouth facility. The employee sued BellSouth and claimed that the company's sole negligence caused his injuries. BellSouth then tendered the suit to Ryder and Ryder's commercial general liability ("CGL") carrier. The contract between Ryder and BellSouth contained an indemnification clause in which Ryder agreed to indemnify and hold harmless Bell-South.²² Because the clause did not expressly state that it applied to BellSouth's sole negligence, the lower court correctly held that the clause was void and unenforceable, and Ryder was not obligated to indemnify BellSouth.²³ However, as is typical in many construction agreements, the contract also contained a separate insurance provision that required Ryder to obtain CGL insurance with limits of at least $1 million to cover BellSouth as an additional insured.²⁴ The insurance clause contained the following language: "NOTWITHSTANDING ANY OF THE ABOVE, NO LIMIT OF INSURANCE SHALL IN ANY MANNER SERVE AS A LIMITATION OF [RYDER'S] LIABILITY UNDER ANY PROVISION OF THIS AGREEMENT."²⁵

The court of appeals interpreted this language to mean that Ryder itself had to indemnify BellSouth for any amount that exceeded the $1 million limit provided by the insurance coverage.²⁶ The supreme court disagreed.²⁷ Because the indemnification clause was void and unenforceable, Ryder had no duty to indemnify BellSouth for BellSouth's own negligence, and the insurance clause could not resurrect the void indemnification clause or create any separate obligation or greater liability.²⁸ Therefore, BellSouth was entitled to the additional insured coverage of $1 million provided by Ryder's CGL policy, but BellSouth was responsible for all liability to the injured Ryder employee in excess of the policy limit.²⁹ Only if the indemnification clause had been valid would Ryder have had a duty to indemnify BellSouth beyond the policy limit.³⁰

Ryder II reinforces the principle that insurance clauses cannot be interpreted to create or increase one's duty to indemnify another where no duty to indemnify exists under the separate indemnification clause.³¹ An insurance clause, however, can create additional insured coverage for the indemnitee under the indemnitor's liability policy, regardless of whether the indemnification clause is enforceable.³²

In its 2007 session, the Georgia General Assembly amended O.C.G.A. section 13-8-2³³ to further clarify that a contractual party's obligation to obtain insurance coverage in connection with a construction project is not affected by a void indemnification clause that applies to that same project.³⁴

B. "Arising Out Of Language Interpreted Very Broadly in Finding Additional Insured Coverage; Loss of Subrogation Rights if Insurer Settles Without Insured's Consent

Consistent with its ruling in Ryder I, the court of appeals established in BBL-McCarthy, LLC v. Baldwin Paving Co.,³⁵ that it will continue to take an expansive view of the phrase "arising out of in an additional insured provision to determine if coverage exists.³⁶ BBL, a general contractor, subcontracted with Baldwin Paving and Magnum Development (the "subcontractors") to perform work on a construction project. The indemnification clause in the subcontract required the subcontractors to defend, indemnify, and hold harmless BBL for all claims arising out of the performance of the subcontractors' work. The insurance clause in the subcontract required the subcontractors to obtain liability insurance to cover claims arising out of the subcontractors' work and for which BBL may be liable.³⁷ The subcontractors did obtain policies that named BBL as an additional insured, but the policies contained language limiting coverage to BBL for liability "arising out of" the subcontractors' work or operations.³⁸ Following an auto collision near the construction project, the claimants brought lawsuits alleging that their injuries resulted from BBL's negligent management of the project as well as BBL's and the subcontractors' negligent construction of the project.³⁹

The court held that BBL qualified as an additional insured under the subcontractors' policies, regardless of who was ultimately at fault for the injuries.⁴⁰ Building upon Ryder I, the court broadly construed the phrase "arising out of the subcontractors' work or operations as meaning "arising out of a business transaction" with or "work performed" for BBL.⁴¹ The court noted that it had similarly construed "arising out of as meaning "'had its origins in,'" "'grew out of,'" or "'flowed from,'"⁴² and, therefore, "'[a]lmost any causal connection or relationship will do'" in satisfying the "arising out of" requirement.⁴³ Because the injuries were allegedly related to the subcontractors' work on the construction project, BBL qualified as an additional insured, regardless of whether actual liability for the injuries was attributable to BBL or to the subcontractors.⁴⁴

The court's reinforcement of how broadly it will interpret the "arising out of" language is a cautionary tale for insurers who refuse to defend a purported additional insured entity without first examining the contractual relationship between that entity and the named insured. While only a slight causal connection between the injuries alleged and the contractual scope of the work is required to find additional insured coverage, no relationship whatsoever between the scope of the work and the alleged injuries is required before an insurer can have confidence that additional insured coverage does not exist.⁴⁵

BBL is important for a second reason. An entity that seeks additional insured coverage under a policy must "elect" such coverage by notifying the insurer of the claim and forwarding a copy of the complaint to that insurer.⁴⁶ However, if the insurer already has notice of the claim or suit—for example, from the named insured—then it cannot avoid coverage on the basis that the additional insured did not provide timely notice.⁴⁷

BBL has potentially far-reaching implications for a third reason. According to O.C.G.A. section 33-7-12(a),⁴⁸ when an insurance company settles a claim or claims against the insured without the insured's consent (which it is typically allowed to do under the terms of CGL and automobile policies), the insurer is deemed to be an...