Georgia Court of Appeals Finds Insurer is Again Estopped from Raising Misrepresentation Defense

Written by: Patrick Fitzgerald, Esq.

In Penn-Am. Ins. Co. v. Morgan Fleet Servs. Inc., 2020 WL 4726544 (Ga. Ct. App. Aug. 14, 2020), Penn-America Insurance Company (“Penn-America”) sought a declaration that its insurance policy with Morgan Fleet Services Inc. (“MFS”) was void on the ground that MFS’s application for insurance coverage stated that MFS “[i]nstalls seat covers in buses” when, in reality, MFS was engaged in the business of servicing and inspecting busses for Gwinnett County Public Schools (“GCPS”).

On August 24, 2017, Armer Early, a bus driver who was injured while going through the emergency exit of a bus that had burst into flames, brought suit against MFS, claiming that MFS failed to adequately perform its duties regarding GCPS’s buses (the “Early Suit”).

On October 10, 2017, Penn-America sent an email to counsel (who was later appointed as defense counsel), carbon-copying two MFS employees, and stated that the policy only covered a warehouse storing bus seat covers, asked if counsel had inquired about MFS’s other carrier for the fleet services aspect of MFS’s business, and informed counsel that coverage counsel was looking into the matter.  On October 16, 2017, Penn-America wrote to the same counsel, again carbon copying MFS’s employees, and explained that Penn-America would provide a defense to MFS under a reservation of rights which would be forwarded to MFS “shortly” thereafter and Penn-America wished for the counsel to defend MFS from the Early Suit. However, Penn-America failed to serve a formal reservation of rights letter to MFS until March 2018, which ROR letter ultimately reiterated the points raised in the emails sent to defense counsel.

After Penn-America initiated a declaratory action, the trial court denied Penn-America’s motion for summary judgment and granted summary judgment for MFS, finding that Penn-America waived its misrepresentation defense when it assumed MFS’s defense without an effective reservation of rights letter.  Relying on World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 695 S.E.2d 6 (Ga. 2010),  ACCC Ins. Co. of Ga. v. Walker, 832 S.E.2d 878 (Ga. Ct. App. 2019)(insurer waived its coverage defenses despite filing its declaratory judgment setting forth its grounds for noncoverage on the same day that defense counsel filed an answer), and Proudfoot v. Cotton States Mut. Ins. Co., 196 S.E.2d 131 (Ga. 1973), the Georgia Court of Appeals affirmed, concluding that the October 16, 2017 email to counsel appointed as defense counsel was merely a statement of future intent. Because an unambiguous reservation of rights letter had not been forwarded to MFS until six months after Penn-America engaged counsel to defend MFS, Penn-America waived its coverage defenses by its untimely reservation of rights.

The problem with the court’s analysis is that it discounts the fact that the grounds for Penn-America’s coverage defense, MFS’s misrepresentation on the insurance application about the nature of its business, had been generally communicated to MFS’s employees as they were copied on Penn-America’s emails to appointed defense counsel.  In World Harvest, unlike Penn-America, no grounds for the insurer’s coverage defense were communicated to the insured.  Instead, the adjuster merely stated he would have “to see if there would be coverage issues.” World Harvest, 695 S.E.2d at 8.

With Penn-America, the Georgia Court of Appeals makes clear that there is a requirement for the insurer to issue a formal reservation of rights communication directly to the insured best before appointment of defense counsel but certainly no later than before defense counsel undertakes any substantive action on behalf of the insured.