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

• Publication year: 2006

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

I. Introduction

For the second year in a row, Georgia appellate courts have emphasized that even if the slightest doubt exists as to whether a liability insurance policy provides coverage for a loss, an insurer should provide a defense to the insured for the lawsuit or face potentially detrimental consequences out of the insurer's control, which the insurer will have little or no ability to alter after a judgment has been rendered against the insured. Several other recent decisions have made significant changes to insurance law as well. Some of the decisions indicate that it is becoming increasingly difficult for an insurer to prevail on the defense of a lack of timely notice as a matter of law. In other cases, the courts have interpreted the phrases "arising out of" and "using" in insurance policies very broadly to find coverage. In one interesting case, a divided court of appeals upheld the enforceability of appraisal provisions in auto policies, distinguishing them from invalid arbitration clauses and further held that an insurer's payment of the appraised value of the auto precluded claims of fraud, breach of contract, and RICo violations.

In other insurance developments, Georgia's Insurance Commissioner promulgated emergency regulations barring an insurance company from using a twelve-month suit limitation and imposing two years as the minimum time for bringing suit on a policy. These emergency regulations have changed the longstanding prior practice that had been consistently enforced by the courts.

II. Commercial Liability Insurance

A. Insurers Can Be Bound By Acts of Dual Agent and Have Duty to Defend Even Though Undisputed Facts Show No Duty to Indemnify

In Yeomans & Associates Agency, Inc. v. Bowen Tree Surgeons, Inc.,¹ the Georgia Court of Appeals tackled two noteworthy issues: (1) an agent's relationship to an insurer under the dual agency doctrine and (2) an insurer's duty to defend an insured against groundless allegations, even though it is undisputed that the company will have no duty to indemnify under the policy at the conclusion of the lawsuit.² The insured, Bowen, and its employee, Black, were sued for Black's alleged negligence in causing a collision. The suit alleged that Black was acting within the scope of his employment at the time of the collision, making Bowen liable under the doctrine of respondeat superior. However, the undisputed "true fact" was that Black was driving his own car on personal business outside the scope of his employment when the collision occurred. Bowen provided notice of the lawsuit to its independent insurance agency, Yeomans. Bowen had auto liability insurance and commercial general liability insurance. The agent notified the auto liability carrier of the suit but did not provide any notice to the commercial general liability carrier, Canal Indemnity Company. In the past, when Yeomans received a claim from Bowen that could be covered under Canal's policy, Yeomans would forward the claim to the brokerage firm that had issued the policy on behalf of Canal, and the brokerage firm would then send the claim to Canal. In this case, however, Canal did not receive notice from Yeomans and therefore did not provide a defense for this lawsuit. In addition, the auto liability carrier disclaimed coverage.³ As a result, the trial court entered a default judgment against Bowen and Black. Bowen then filed suit against Yeomans and Canal for failing to provide coverage and a defense, seeking the amount of the default judgment plus attorney fees and bad faith penalties. After a jury trial, the court entered a judgment against Yeomans and Canal for joint and several liability in the amount of $1,550,000.⁴

With respect to the dual agency doctrine, Canal contended that it was entitled to a directed verdict because no agency relationship existed between Canal and Yeomans.⁵ The court disagreed, holding that the evidence presented at trial justified the jury finding an agency relationship between Yeomans and Canal.⁶ The court also held that Canal received constructive notice of the claim because Yeomans received notice of the claim from Bowen.⁷ The court so ruled despite the fact that, as Judge Andrews pointed out in his dissent (joined by Judge Johnson), Yeomans had no contractual relationship with Canal authorizing Yeomans to accept notice on Canal's behalf.⁸ Instead, Yeomans had a contract with Canal's broker, had obtained coverage only through the broker and not through Canal directly, and in the past had sent notices of claims to the broker, not Canal.⁹ In ruling in Bowman's favor, the court focused on Yeomans's role as a dual agent for the insured and insurer.¹⁰ Because the evidence demonstrated that Yeomans had accepted premiums and notices of claims on Canal's behalf in the past, and because no evidence indicated that Canal had ever objected to this "custom," a jury question existed as to the extent of Yeomans's authorization to accept notices of claims on Canal's behalf"as a fiduciary and a dual agent."¹¹

Yeomans has serious potential ramifications for insurers who disclaim coverage on the basis of the insured's breach of the timely notice condition. If there is even the slightest indication that an independent agent has sent notice or premiums to the insurer or the insurer's broker in the past which were accepted by the insurer without any objection, then the court will likely conclude that a question of fact exists as to whether the agent is a dual agent. Under such circumstances, insurers would be better served by providing a defense under a reservation of rights and bringing a declaratory judgment action on the issue of whether any agency relationship exists. If the jury concludes that an agency relationship exists, then the insurer can pursue a separate action against the agent for its failure to provide the insurer actual notice of the claim.¹²

With respect to the second issue—an insurer's broad duty to defend its insured—Canal's policy excluded bodily injury that arose out of the use of an automobile by any "insured" ("the auto exclusion"). The policy defined "insured" as an employee of the named insured (Bowen) if the employee (Black) was acting within the scope of his employment at the time of the "occurrence" (the collision). It was undisputed that Black was not acting within the scope of his employment with Bowen at the time of the collision and was not an "insured" under the policy.¹³ Therefore, the court concluded that the auto exclusion did not apply, and Canal had a duty to defend Bowen because the plaintiffs had alleged bodily injury caused by an occurrence in their complaint.¹⁴ The court so held despite the fact that none of this would be at issue if the underlying case had not gone into default. If there were no default judgment, Bowen would not have been liable under the doctrine of respondeat superior, and therefore Canal would have had no duty to indemnify Bowen under the policy.¹⁵ In doing so, the court emphasized that an insurer's duty to defend is separate from its duty to indemnify under the policy, and the insurer must consider whether the alleged claim falls within policy coverages, regardless of whether the insured could actually be held liable to the plaintiffs.¹⁶ Also important to the court's decision was the insurer's duty to conduct a "reasonable investigation" into the insured's contentions to determine whether a duty to defend had been triggered.¹⁷ Therefore, even though the four corners of the complaint indicated that the auto exclusion should apply, Canal's duty to defend was triggered when Bowen told Yeomans that Black was not acting within the scope of his employment.¹⁸

Judge Blackburn's dissent suggests that the decision does not give due consideration to the intent of the insured and insurer as reflected by the clear and unambiguous language of the auto exclusion.¹⁹ Neither Bowen nor Canal should have reasonably expected coverage under the commercial general liability policy because the alleged injury occurred outside the scope of Black's employment while he was in his personal automobile.²⁰ Instead, the parties would reasonably expect for coverage to fall entirely under Black's personal auto liability policy.²¹

Despite Judge Blackburn's dissent, Yeomans provides a clear warning to insurers as to how they should proceed in such claims in the future. An insurer should provide a defense to the insured under a reservation of rights. As pointed out by the court, this course of action gives the insurer the opportunity to prove that the insured was not liable under respondeat superior, thereby satisfying the insurer's "duty to seek that favorable decision on its insureds' behalf."²² If the jury (or court on motion for summary judgment) agrees that the driver was not acting within the scope of his employment, then the insured employer will not be held liable, and the insurer will have no duty to indemnify and will have incurred only the cost of defense. If, on the other hand, the jury determines that the driver was acting within the scope of his employment, then the auto exclusion will apply to prevent any duty to indemnify the insured for an adverse verdict. The insurer should also make sure the driver's personal liability carrier is on notice of the claim because in the event the driver was not acting within the scope of his employment, the personal auto policy typically will provide primary coverage.

B. Insurance Broker's Liability Limited by Policy Limits

In J. Smith Lanier & Co. v. Southeastern Forge, Inc.,²³ the Georgia Supreme Court held that an insurance broker cannot be held liable for damages suffered by a client in excess of the policy limits based upon the broker's breach of contract to obtain insurance coverage.²⁴ Last year, prior to this holding, the court of appeals in J. Smith Lanier & Co. v. Acceptance Indemnity Insurance Co.²⁵ held that a...