In the event an insurer is unsure whether coverage exists, it may issue a “Reservation of Rights” (“ROR”) letter, typically noting that that the insurer will provide legal defense, however, is investigating whether coverage actually exists and reserves its right to withdraw such defense and/or recoup any monies spent on such defense. A case out of the federal Eleventh Circuit Court of Appeals was recently decided analyzing what level of detail is required – or better stated is not required – for the ROR to be effective.
In Wellons, Inc. v. Lexington Insurance Company, 2014 WL 1978412 (11th Cir. May 16, 2014), the Court of Appeals for the Eleventh Circuit upheld a District Court holding that the insurer’s ROR’s were sufficient under Georgia Law. Wellons, Inc., a manufacturing designer and installer, entered into two contracts with Langboard Industries, Inc. The first contract was to design and provide two Energy Systems to provide heat for Langboard’s manufacturing process. The second contract was to erect and install these energy systems.
For the matters in question, three operative insurance policies existed. First, a commercial general liability policy for the period September 1, 2004 to September 1, 2005 (the “2004 CGL Policy”); second a commercial general liability policy for the period of September 1, 2005 to September 1, 2006 (the “2005 CGL Policy”); and finally an umbrella policy with a $10 million liability limit (the “Umbrella Policy”). The Umbrella Policy required that Wellons notify the insurer “immediately” of any occurrence which may reasonable be expected to result in a claim against the policy.
In November 2004, during the construction phase of the Energy Systems, a portion of the system collapsed causing extensive damage. Wellons notified Lexington of the claim under the 2004 CGL Policy on September 23, 2005. One week later, on September 30, 2005, Lexington issued a ROR preserving the “terms, conditions [and] provisions of the Lexington Insurance Company Policy” as well as “any right or policy defense now or hereafter available to the Lexington Insurance Company.” (the “September 23 ROR”). Thereafter, Langboard filed suit against Wellons. On September 18, 2007, Lexington sent Wellons another ROR letter stating “There may be additional policy conditions that may also preclude coverage and this should not be construed as a waiver of other terms and conditions that may apply.”
In February 2006, a leak occurred in the Energy System. A third-party contractor, Hunt Construction, repaired the Energy System, and such systems were put back into service. About two weeks later, a portion of the Energy Systems completely severed. Wellons asserted that it was Hunt’s faulty repair work that caused the severance. On April 4, 2006, Langboard requested a new energy system. Wellons understood the cost for this new system to be $850,000 and agreed to design and install the system. Wellons, however, did not immediately notify Lexington of Langboard’s request to replace the system.
In August 2006, Wellons notified Lexington of Lanboard’s claim for a new Energy System (the “August Notice”). The August Notice specifically referenced the 2005 CGL Policy, but did not reference the Umbrella Policy. On March 5, 2007, Lexington issued a preliminary ROR letter to Wellons, stating that the claimant was Langboard and indicated that the claim involved the failure of the energy system at Langboard’s Georgia facility. Lexington stated that “there may be a coverage question and we are investigating this matter under a reservation of rights.” Lexington referred Wellons to the exclusions for “Damage to Property,” “Damage to Your Product,” and “Damage to Your Work.”
On April 25, 2007, Lexington supplemented its March 2007 Letter with another ROR letter, quoting portions of the 2005 CGL Policy, including the portions which require “property damage” caused by an “occurrence.” Again, Lexington referred Wellons to the exclusions for “Damage to Property,” “Damage to Your Product,” and “Damage to Your Work” and explained why these sections would bar coverage. The April 2007 letter concluded that “Lexington continues to reserve all of its rights in connection with this claim and failure to set forth any policy provision that may be applicable is not intended to construe a waiver of any of Lexington’s rights to rely on any applicable policy provision or law.”
On October 31, 2007, Langboard filed a second suit against Wellons asserting that the Energy Systems which were designed and installed by Wellons never worked as expected, and that Wellons’ improper installation caused leaks to develop, and that Wellons’ attempts to repair the leaks were inadequate. Wellons failed to submit a new claim to Lexington. On November 29, 2007, Wellons was advised that Lexington would defend the second litigation under a ROR. Lexington orally stated that its prior ROR letters were “in the same mode” and “the issues addressed in each of the letters are still applicable.”
Ultimately, Lexington settled the first litigation for $1,000,000.00 – the policy limit of the 2004 CGL Policy. On March 12, 2010, Lexington denied coverage for the second litigation under the 2005 CGL Policy Lexington referenced its September 30, 2005 and March 5, 2007 ROR letters and noted that certain exclusions referenced in those letters may otherwise be applicable if there were an “occurrence” or “property damage.”
On March 15, 2010, the second litigation was tried to a jury and resulted in a verdict of $8,440,764. Although Wellons never provided notice of claim under the Umbrella Policy, Lexington referred the claims to its excess claim unit. On April 22, 2010 Lexington first asserted its coverage position under the Umbrella Policy, denying coverage. In June 2010, Wellons filed suit in the District Court seeking a declaratory judgment that Lexington is required to indemnify Wellons for the jury verdict asserting that Lexington did not adequately reserve its rights and is estopped from asserting coverage defenses under any of the policies. The District Court disagreed and concluded Lexington was not denied from asserting these defenses. Wellons appealed to the 11th Circuit Court of Appeals.
The Court cited a 2010 Georgia Supreme Court case – World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 287 Ga. 149 (2010) – holding that, under Georgia law, “risks not covered by the terms of an insurance policy or risks excluded therefrom, while normally not subject to the doctrine of . . . estoppel, may be subject to the doctrine where the insurer, without reserving its rights, assumes the defense of an action or continues such defense with knowledge, actual or constructive, of noncoverage.” The Georgia Supreme Court made clear that a reservation of rights need not be in writing to avoid estoppel. The reservation must be unambiguous: “At a minimum, the reservation of rights must fairly inform the insured that, notwithstanding the insurer’s defense of the action, it disclaims liability and does not waive the defenses available to it against the insured.” The Court of Appeals concluded that, based on Georgia law, “a reservation of rights need not specific each and every potential basis for contesting coverage, as long as the reservation fairly informs the insured that, notwithstanding the defense of the insured, the insurer does not waive its coverage defenses. The Court went on to note that in World Harvest, the court stated that an insurer must fairly inform the insured that the insurer is providing a defense under a reservation of rights, although it further states only that an insurer should inform the insured of the specific basis for the insurer’s reservation of coverage. Thus, the Court of Appeals read World Harvest to require the insurer fairly inform the insured that it is defending under a reservation of rights, but to only recommend that the insurer provide the specific basis for the reservation. The Court went on to note that Georgia law is clear that an insurer “is not required to list each and every basis for contesting coverage” in the reservation of rights letter.
Applying the law to the facts of the present matter, the Court noted that Lexington orally notified Wellons that it would provide a defense for the second litigation under a ROR, and noted that the reservations in the March 5, 2007 and April 25, 2007 letters were still applicable. Moreover, those two letters identified specific policy provisions that may bar coverage. The most persuasive fact the Court found, however, was that the March 2007 and April 2007 letters both contained nonwaiver clauses that specifically reserved Lexington’s right to assert additional coverage defenses. By permitting Lexington to move forward with Wellons’ defense in the second litigation with no objection, Wellons implicitly consented not only to defense under a ROR, but also to the terms of the reservation, including the nonwaiver clauses. The Court also highlighted the fact that Wellons failed to ever notice the claim under the Umbrella Policy. While Wellons’ notices specifically referenced the 2004 CGL Policy and the 2005 CGL Policy, no notice ever referenced the Umbrella Policy. Wellons’ first mention of the Umbrella Policy to Lexington was in February 2009 – over a one-year delay. Because the Umbrella Policy required that Wellons notify Lexington “immediately” of a potential claim under the Umbrella Policy, failure to do so for over a year cannot be deemed “immediate.” Accordingly, the Court of Appeals upheld the District Court’s decision and found in favor of Lexington.
The importance of this case is that it broadens an insurer’s ability to provide ambiguous ROR letters, which include nonwaiver clauses noting that other and additional defenses may exist. If the insured does not object to this broad and ambiguous ROR language, they can be deemed to accept the terms and be subject to denial later based on these terms. Thus the lesson is to read the ROR very carefully and, in the face of ambiguity, object to the terms and force the insurer to take a solidified position.
Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or firstname.lastname@example.org.
Kristen M. Chatterton