Get Your Head in the Game: Georgia Court Warns Insurers About the Consequences of Bench-Warming During a Pending Lawsuit Against the Insured

Written by: Tiffany Winks, Esq. and Breanna Vega, Esq.

The United States District Court for the Middle District of Georgia, recently decided Barrs v. Auto-Owners. In Barrs, in the underlying suit Barrs brought suit against AAA Contractors (“AAA”), the insured of Auto-Owners, for property damage and delays in deconstructing an old mill because an agent of AAA stole Barrs’ lumber and other building materials from the site and because AAA was not timely in completing its deconstruction work. Barrs v. Auto-Owners, 2021 WL 4461559 (2021). The underlying complaint alleged negligent deconstruction, vicarious liability, negligent hiring and retention, and negligent supervision. Id. at *1. Auto-Owners after receiving the underlying Complaint denied all coverage and declined to defend AAA . Id. at *2. AAA proceeded with the litigation and then settled with Barrs for $557,000 for the claims of negligent deconstruction, negligent hiring and retention and negligent supervision. AAA then entered into a Consent Judgment in accord with the settlement agreement and assigned all of its rights under its Auto-Owners insurance policy  to Barrs. Id. at *2. The consent judgment did not specify which damages were awarded for which claims. Id. Barrs then demanded that Auto-Owners pay the Consent Judgment under its policy. Id. Auto-Owners made no response to this demand from Barrs and then Barrs filed the instant suit alleging that the damages awarded in the Consent Judgment were covered and not excluded under of the policy’s exceptions. Id.

A. An Insurer Has Three Choices in a Pending Lawsuit Against its Insured

In determining the outcome of the case, the district court placed the most significance on the insurers refusal to defend the claim against its insured at the outset. The court in Barrs, noted that,

“Under Georgia law, where an insurer is faced with a decision regarding how to handle a claim of coverage at the same time a lawsuit is pending against its insured, the insurer has three options;”

1. 1. First, the insurer can defend the claim but by doing so waives any policy defenses and claims of non-coverage;
   2. Second, the insurer can deny coverage and refuse to defend the claim which leaves policy defenses open for the future; or
   3. Third, the insurer can defend the claim under a reservation of rights.

Id. at *5 (quoting Gant v. State Farm Mut. Auto. Ins. Co., 109 Ga.App. 41 (1964); and Southern Guar. Ins. Co. v. Dowse, 278 Ga. 674 (2004)). The court noted specifically that the second option, chosen by the insurer in Barrs, has consequences. In denying coverage and refusing to defend a claim against the insured when it could have done so under a reservation of rights, the insurer waived its right to contest the liability of the insured. In this case, where after declining coverage a consent judgement was entered against the insured, the insurer was teed up to have to pay out if coverage applied. Barrs, supra, 2021 WL 4461559 at *5. Having denied all coverage, the insurer could not litigate the issue of liability and it was obligated to pay any settlement entered into by its insured, in good faith, within the coverage and limits of the policy. Id.

B. The Insurer Asserted a Policy Defense

In the Barrs coverage action, the only available defense to Auto-Owners was contesting coverage for the Consent Judgment under the policy at issue. The success of that defense hinged on the specific language of the policy. Id. at *6.

• • Contract Law Principles Govern Coverage Disputes

Georgia contract law governs coverage disputes. Id. There are three cardinal rules of contract construction with regard to insurance policies under Georgia Law;

• • • • The contract will be read to ascertain the intent of the parties and where the language is ambiguous, that ambiguity will be construed against the insurer.
      • Any exclusions from coverage in the policy will be construed strictly against the insurer.
      • The insurance contract should be read in accordance with the reasonable expectations of the insured when possible.

• • The Court in Barrs Looked to the Complaint to Construct the Contract

The court held a cardinal rule of policy construction is to ascertain the intent of the parties and that the Court must determine whether the relevant language of the policy is clear and unambiguous. Id. at *7 (citing Knott v. Knott, 277 Ga. 380 (2003). The court stated the “second rule of construction” is that “any exclusion sought to be invoked by the insured is likely to be strictly construed against it.” Id. (citing Am. Strategic Ins. Corp. v. Helm, 327 Ga.App. 482 (2014)).

The court held that the term “property damage” as defined by the contract, meant “physical injury to tangible property, including all resulting loss of use of that property, and loss of use of property that is not physically injured.” Id. at *7. Auto-Owners argued that all damages alleged attributable to AAA’s negligent deconstruction were not within the definition of “property damage” and the only potentially arguable “property damage” alleged was the stolen lumber and other materials. Id. at *7

To determine the nature of damages for which recovery under the policy is sought, the court in Barrs opined that “the Court looks to the allegations of the complaint, as well as those facts supporting the allegations.” Barrs, supra, 2021 WL 4461559 at *8. However, the Court stated its consideration should be appropriately narrowed to only those claims for which the Consent Judgment was entered for which AAA  admitted liability, which were negligent hiring and retention, negligent deconstruction, and negligent supervision. Id.

Applying the definition to the plaintiff’s claims, the court opined that the negligent deconstruction claim, did not result in “property damage” because the injury alleged was one for faulty workmanship and the Plaintiff sought repayment for costs incurred in finishing the job. Id. at *9. There was no physical injury or loss of use of the property. Id. at *9. The court held that Georgia law was clear that damages resulting from faulty workmanship are not claims for “property damage.” Id.  However, as to the negligent hiring and retention claim and the negligent supervision claim, the court held that property damage did result from the insured’s negligence because the Plaintiff lost the use of the property that was stolen by AAA’s agent. Id. at *10.

Nevertheless, the court analyzed another factor in determining whether the theft of property, conversion, was covered under insuring terms of the policy. The policy specified that covered property damage must be caused by an “occurrence.” Id.

• • An Intentional Act Was Considered an “Accident” Under the Language of the Policy

The policy defined “occurrence” as an accident and the Georgia appellate court defines accident as “an event which takes place without one’s foresight.” Id. (quoting Allstate Ins. Co. v. Grayes, 216 Ga.App. 419 (1995). Auto-Owners argued that the agent’s act of stealing the lumber and materials was not an accident because the agent foresaw that he would steal the lumber. He’d planned it. Id. However, the district court, relying on appellate court precedent, noted that when determining whether something is an accident, the relevant inquiry is whether the insured foresaw that the event would occur, not its agent. The court, without reference to any evidence or allegation pled in the underlying Complaint, stated that “[i]t cannot possibly be said that from the standpoint of AAA, it could have foreseen or expected its agent to steal building materials from the site.” Id. at *11. Hence the court concluded the theft, at least from the standpoint of AAA, was an “accident” and thus an “occurrence” as defined by the policy. Id.  (citing Cincinnati Ins. Co. v. Magnolia Estates, Inc., 286 Ga.App. 183 (2007); and Crook v. Ga. Farm Bureau Mut. Ins. Co., 207 Ga.App. 614 (1993)).

C. After Constructing the Contract, the Court Looked to Exceptions

The last step involved the policy’s exclusions. Barrs, supra, 2021 WL 4461559 at *12. An insurer that wants to assert that a policy exclusion applies has the burned of proving its applicability. Id. Exclusions will be narrowly construed against the insurer as drafters of the contract. Id. Auto-Owners first tried to argue that “Exclusion (a)” provided that coverage does not apply to “property damage” expected or intended from the standpoint of the insured. Id. at *12. It argued that employees of the insured are also insured under the policy. Id. However, the court noted that the agent who stole the wood was not an employee of the insured, but rather an independent contractor. Id. As such, the exclusion did not apply. Among other exclusion provisions, the insurer in Barrs interestingly argued that the policy excepts coverage for property damage arising out of the insured’s delay or failure to perform the obligations of the contract. Id. at *14. The insurer argued that because the agent was hired to bind and stack the wood, and did not, the property damage is a result of the breach, thus excepted. Id. The court found that no policy exclusions applied and that the case was not about the agent’s failure to bind or stack the wood. Id.

The court in Barrs ultimately concluded that any portion of the Consent Judgment premised on faulty workmanship or the improper deconstruction of the mill were not covered under the Auto-Owners policy. However, Auto-Owners was obligated to pay those sums awarded in the Consent Judgment for damages for the stolen lumber and other building materials. Id.

D. The Importance of Strategy

Ultimately, the court in Barrs, highlights a very important point; in this case, when the insurer outright denied coverage and refused to defend the suit against its insured and, as a result, failed to play defensively in the action against its insured, it was left open to an assigned right of action against it by the underlying Plaintiff for the full amount of any settlement or Consent Judgment entered into by its insured in good faith. There are certainly cases in which an insurer should deny coverage. However, the court’s decision in Barrs serves to put insurers on notice of their burden in trying to prove non-coverage against an undefined Consent Judgment their insured may enter into conceding liability after the insurer denies coverage and declines to defend ts insured. In this case, Auto-Owners ultimately prevailed over only that part of the damages awarded in the Consent Judgment related to faulty workmanship, but it had to incur the cost of a coverage litigation, ultimately pay that portion of the Consent Judgment related to the theft of building materials and likely also pay additional attorneys’ fees and interest on the covered part of the Consent Judgment. Barrs shows that had Auto-Owners defended the underlying case, properly reserving rights on the faulty workmanship claims, it likely would have come out better than throwing its “all coverage denied” Hail Mary down the field.