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Ironical: Late Notice by Insurer of Reservation of Rights in Estoppel of Coverage Defense of Late Notice by Insured

Written by: James H. Fisher II, Esq.

In Auto-Owners Insurance Company v. Cribb, 2019 WL 451555 (N.D. Ga.), Auto Owners, as insurer brought a declaratory judgment action asserting failure of its insured to comply with a coverage condition precedent of notice of a claim. Its insured failed to provide notice until after being served with a lawsuit nearly 2 years following the occurrence of a serious construction related accidental injury. The insured had received notice of the March, 2015, incident within two weeks of its occurrence. The named insured was “Brian Thurman & Richard Davis DBA BR Mountain Homes, LLC.” The underlying tort action was brought by the injured employee of another subcontractor initially against BR Mountain Homes, LLC., only, served April 5, 2017. Citing policy provisions requiring notice of an occurrence “as soon as practicable,” Auto Owners sent a notice of reservation of rights letter to “BR Mountain Homes, LLC, attn: Brian Thurman” on April 20,2017. On April 28, 2017, the tort Plaintiff amended his complaint to add Brian Thurman and Scott Davis, officers and employees of BR Mountain Homes, LLC, as defendants. Auto Owner’s retained defense counsel filed the tort Answer April 24, 2017 on behalf of BR Mountain Homes, LLC. On May 23, 2017, Defense counsel answered the amended complaint on behalf of all parties, BR Mountain Homes, LLC, Thurman and Davis. Auto Owners later issued a second and third Reservation of Rights notice separately to each of the two individuals named employees and officers of the insured on August 10, 2017, again asserting late notice of the occurrence of the underlying tort incident.

Auto Owners initiated the declaratory judgment action to determine its coverage defenses on May 31, 2017, initially only as to the tort plaintiff and BR Mountain Homes, LLC. The declaratory judgment action complaint was amended August 21, 2017 to add Brian Thurman and Scott Davis as parties. On cross motions for summary judgment, Thurman and Davis asserted that the reservation of rights letters to them were of no effect since they were being defended and answers already had been filed in their behalf prior to the notices of reservation of rights by nearly three months. They further took the position that as to BR Mountain Homes LLC, the condition requiring notice as soon as practicable presented questions of fact which could not be determined on summary judgment. The Court agreed that the promptness of notice ought to be determined by a jury based on all the facts and reasonableness of excuse for not providing earlier notice that may be presented by the LLC. As to the individual members, officers and employees, the Court held that the Separation of Insureds Clause required that each insured be treated separately and individually. Each was entitled to being treated independently of the other for purposes of coverage by virtue of policy language, as follows:

7. Separation of Insureds

Except with respect to the Limits of Insurance, and any rights or duties
Specifically assigned in this Coverage Part to the first Named Insured, this
Insurance applies:

a.  As if each Name Insured were the only Named Insured; and

b.  Separately to each insured against who claim is made or “suit” is brought

That the insureds may have had actual notice of the Auto Owners coverage position did not prevent what might appear to be an overly technical construction of policy language to benefit the insureds. The initial reservation of rights bases did not change after the individual members were made parties although they were not named parties at the time of the initial reservation of rights to the LLC. Moreover, estoppel applied to bar reliance on coverage defenses because the individual insureds were provided a defense and answers were filed before the issuance of the reservation of rights addressed to them, individually, in spite of the fact that they each had prior actual notice of the coverage issues.

Courts applying rules of contract construction are reluctant to construe policy language to result in forfeiture of coverage to an insured. Doubt or ambiguity is resolved in favor of the insured where ever possible. Therefore, extreme care must be taken by insurers when dealing with reservations of rights specifically and coverage defenses in general to notify each insured of each coverage defense before taking any steps toward providing a defense or risk being barred from asserting coverage defenses.