• Georgia Supreme Court Finds That, When Insurer Assumes Defense under an Ineffective Reservation Letter, Insurer Can Be Estopped From Disclaimer Based On Noncoverage, Even Absent a Showing of Prejudice by Insured
  • June 7, 2010 | Authors: Blake H. Crawford; Carl J. Pernicone; Brian J. Whiteman
  • Law Firms: Wilson Elser Moskowitz Edelman & Dicker LLP - Dallas Office ; Wilson Elser Moskowitz Edelman & Dicker LLP - New York Office ; Wilson Elser Moskowitz Edelman & Dicker LLP - Newark Office
  • Overview

    In World Harvest Church, Inc. v. GuideOne Mutual Insurance Co., 2010 Ga. LEXIS 365 (May 3, 2010), the Supreme Court of Georgia answered certified questions from the U.S. Court of Appeals for the Eleventh Circuit regarding the specificity required for an effective reservation of rights letter and whether an insured must show prejudice for an insurer to be estopped from denying coverage under Georgia law.

    With respect to the first question, the Georgia high court held that, although a reservation of rights is not required to be in writing, the insurer did not effectively reserve its right to deny coverage under the circumstances because a more unequivocal reservation of rights was necessary.  In answering the second certified inquiry, the Georgia Supreme Court ruled that where an insurer assumed and conducted an initial defense without effectively notifying the insured that it was doing so under a reservation of rights, a court may presume the insured sustained prejudice, and the insurer would be estopped from denying coverage, even where the denial is based on the absence of coverage in the first instance.


    From 1995 to 1999, World Harvest Church (“World Harvest”) received approximately $1.8 million in donations from an individual that, at the time, was running a Ponzi scheme.  After this individual pled guilty to criminal charges for securities fraud, the U.S. Securities and Exchange Commission (“SEC”) appointed a receiver who demanded that World Harvest return the ill-gotten donations.  Subsequently, in November 2002, the receiver sued World Harvest in Illinois federal District Court (the “Illinois suit”).  World Harvest provided notice of this lawsuit to its CGL insurer, GuideOne Mutual Insurance Company (“GuideOne”).  A sister company of GuideOne responded to World Harvest’s demand with a written reservation of rights to deny all liability.

    After the Illinois suit was dismissed for lack of personal jurisdiction, the receiver filed a similar action in January 2004 against World Harvest in Georgia federal District Court (the “Georgia suit”).  Upon notice of this suit, an adjuster for GuideOne orally informed World Harvest’s counsel: “We didn’t see coverage, but we would have to evaluate what we have currently to see if there would be coverage issues.”  GuideOne assumed World Harvest’s defense in the Georgia suit for more than 10 months without issuing a written reservation of rights.  Then, on January 26, 2005, GuideOne informed World Harvest that because the policy did not provide coverage, it would stop defending the Georgia suit in 30 days.  World Harvest subsequently retained its own attorneys to defend the suit.  Shortly thereafter, the receiver obtained summary judgment and was awarded $1.8 million in damages.  World Harvest appealed, but later settled with the receiver for $1 million. 

    In July 2007, World Harvest sued GuideOne for breach of contract and argued on summary judgment that because GuideOne had represented it for almost 11 months without a reservation of rights, GuideOne was equitably estopped from denying coverage.  The federal District Court rejected that argument, finding that GuideOne was free to raise a noncoverage defense because World Harvest had not shown that GuideOne’s participation prejudiced the defense.  World Harvest appealed to the Eleventh Circuit, which certified the following questions to the Georgia Supreme Court:

    (1)     Does an insurer effectively reserve its right to deny coverage if it informs the insured that it does “not see coverage,” after the insured had received a written reservation of rights from the insurer’s sister company in a similar lawsuit in another jurisdiction, or is a written or more unequivocal reservation of rights required?

    (2)     When an insurer assumes and conducts an initial defense without notifying the insured that it is doing so with a reservation of rights, is the insurer estopped from asserting the defense of noncoverage only if the insured can show prejudice, or is prejudice conclusively presumed?

    (3)     If the insured must show prejudice, do the facts and circumstances of this case show it?

    In answering the first certified question, the Georgia Supreme Court held that, although a formal, written reservation of rights was not required, GuideOne did not effectively reserve its right to deny coverage under the circumstances.  Specifically, GuideOne failed to “fairly inform” World Harvest of its coverage position, as the statement that GuideOne “did not see coverage” failed to provide the specific basis for GuideOne’s reservations.  The Georgia high court also found that the failure to unequivocally inform World Harvest of the coverage issues was not overcome by the prior reservation of rights issued by GuideOne’s sister company in the Illinois suit.

    On the second certified question, the Supreme Court held that because GuideOne had conducted the initial defense without effectively reserving its rights, GuideOne was estopped from asserting the defense of noncoverage regardless of whether World Harvest could show prejudice.  Since World Harvest surrendered innumerable rights associated with the control of the defense, including the choice of counsel, the ability to negotiate a settlement, and the ability to decide when and if certain defenses or claims would be asserted, the Supreme Court concluded that prejudice to the insured may be presumed.  The Supreme Court further noted that GuideOne had “irrevocably fixed the course of events concerning the law suit for the first 10 months.”  Based on its answer to the second question, the Supreme Court did not reach the third certified question.


    GuideOne teaches insurers three important lessons about Georgia law.  First, it confirms that in Georgia, an insurer’s reservation-of-rights letter must set out the specific basis for its reservations regarding coverage.  Without informing the insured in unequivocal terms of the details surrounding the insurer’s coverage defenses, the insurer risks having its reservations deemed ineffective.  Second, this case provides guidance regarding the consequences for an insurer of defending an insured without an effective reservation of rights.  Such consequences could include the insurer’s losing the right to disclaim coverage, even in the absence of coverage in the first instance.  Finally, the case establishes this principle:  When an insurer assumes its insured’s defense without specifically reserving its right to deny coverage and later withdraws from the defense, a court may presume the insured has been prejudiced and estop the insurer from denying coverage, even if coverage never existed under the policy.