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Providing a defense when the insurer reserves its rights

The most common problem that arises in the “tripartite relationship” occurs when the carrier undertakes the defense of the insured pursuant to a reservation of rights.  In such cases, it is possible for an insurer to take less interest in paying for a vigorous defense, because the insurer may ultimately prevail on the coverage issue and withdraw its defense.  Additionally, if defense counsel is aware of the coverage issues, defense counsel may gather discovery or steer the case toward a coverage result that is favorable to the insurer (for example, by eliciting deposition testimony that supports a particular coverage defense). In these cases, conflicts can generally be avoided where:

• appointed defense counsel withdraws

No Action Clause

Many policies contain a provision limiting the amount of time in which an insured can bring suit against its insurer, effectively reducing the statute of limitations by way of contractual agreement. Such a contractual limitation or “no-action” clause provides that any suit against the insurer arising out of the policy must be brought within a specific time following “inception of the loss” or some other trigger. Such provisions are generally enforceable. The Supreme Court of Georgia has expressly rejected arguments that such clauses are “unfair,” ambiguous when, for example, they are read with other requirements allowing an insurer 60 days to decide on payment after submission of a proof of loss.

An insurer may waive the contractual limitation “where the insurer leads the insured by its actions to rely on its promise to pay, express or implied” or where conduct on the part of the insurer reasonably leads the insured to believe that strict compliance with the limitation provision would not be insisted upon. For example, where settlement negotiations lead the policyholder to believe that payment will be forthcoming without a lawsuit, the insurer cannot require the action to be brought within a certain time.  Also, if an insurer does not deny liability and takes actions indicating an intent to pay the claim without suit, an issue of fact is presented as to whether the insured was lulled into a belief that the limitation for filing suit was waived.  However, “mere negotiation for settlement, unsuccessfully accomplished, is not that type of conduct designed to lull the claimant into a false sense of security so as to constitute a waiver of the limitation defense.”Where suit has been delayed beyond the stipulated time on account of direct promises to pay the claim, the action is not barred by delay.  It is not necessary that there be an actual promise to pay in order for the acts of the insurer to effect a waiver of the time limitation if facts show that negotiations for a settlement have led the insured to believe that the insurer will pay the claim.  In most cases, whether a waiver occurred is a jury issue.

 Duty To Defend Multiple Insureds

Where there are multiple insureds under a single policy, each insured is entitled to a separate defense. An insurer owes a duty of good faith and fair dealing to each insured. An additional insured, however, may have to elect coverage under the policy by notifying the insurer of his election and demanding a defense.

Reservation Of Rights

Duty To Defend And Exhaustion Of Policy Limits

Generally, an insurer does not have a continued duty to defend its insured after the insurer has exhausted policy limits by settling multiple claims with the insured’s consent, even though there might be additional claims arising from the same accident. In Liberty Mutual Ins. Co. v. Mead Corp., the Supreme Court of Georgia held that the insurer had no further duty to defend remaining claims after settling other claims and exhausting policy limits. The insurer had the insured’s consent to settle the claims, and the applicable insurance policy was construed to mean that “the duty to defend is limited by the amount of liability coverage afforded by the policy.”Similarly, if the insurer exhausts policy limits in good faith settlements of several claims, the insurer need not defend its insured on later-filed claims arising from the same accident. The rule is true even if the insurer mistakenly enters a defense on the later-filed claim, so long as the insurer did not prejudice the insured.

Based on a recent ruling by the Georgia Supreme Court, it remains to be seen whether this rule will hold true if the insurer commences to defend several claims arising out of a single accident without clearly reserving its rights to withdraw its defense at such time as policy limits are exhausted by payment to one or more of the claimants. “An insurer’s duty to defend its insured is not satisfied when the insurer settles by paying its policy limits to the wrong party.” The insurance policy in Atkinson v. Atkinson (like the one in Liberty Mutual Ins. Co. v. Mead), provided that the duty to defend would end upon payment of policy limits. The insurer entered a defense and paid policy limits, but to the wrong party. Because the payment did not resolve the case against the insured, the insurer could not withdraw.

Whether reasonableness of late notice can be decided as a matter of law, or whether it should remain in the province of the jury depends on two factors:

• the sufficiency of the excuse
• insured’s diligence after any disability has been removed