In 2000, a man was involved in an auto collision in Georgia inwhich a couple were injured. They filed suit not only against theman but also his employer, a tree surgery service, claiming thatthe man was acting within the scope of his employment at the timeof the collision.

After the owner of the tree surgery service was notified of thesuit, he contacted his agent. He told her that at the time of thecollision, the employee was off duty and driving his own car. Theagent told the employer that she would take care of the lawsuit andforwarded notice of the suit to her client's business auto insurer.She did not send notice to the employer's CGL carrier, however.

The agent didn't represent the CGL carrier directly but ratherdid business with it through a general agent to which she routinelyhad submitted claims. She said she didn't submit a claim to the CGLcarrier (via the general agent) on this occasion because she didn'tbelieve it would provide coverage for the collision.

The business auto insurer informed the agency and the insured'sCEO that there was no coverage under its policy and that it wouldnot defend the claim. The auto insurer advised the employer to seekcoverage from the employee's auto carrier. If it refused, the autocarrier said the employer would need to hire an attorney to file ananswer in the suit.

The employer did not hire his own lawyer, however, because hethought his agent had forwarded notice of the claim to his CGLinsurer and assumed it would defend him. No one from the agencyinformed the employer that notice had not been sent to the CGLcarrier.

In 2002, a trial court issued a default judgment against theemployee and the employer obligating them jointly and severally topay the injured couple $1,250,000. After learning of the defaultjudgment, the employer filed a motion to set it aside. The employerand the claimants subsequently agreed on a settlement that, amongother things, required the employer to dismiss the motion to setaside the default judgment. According to the settlement agreement,the insured lacked the funds to satisfy the default judgment andwould have been compelled to file bankruptcy if the claimant soughtto collect on it.

Following the default judgment, but before entering into thesettlement agreement with the claimants, the employer sued his CGLcarrier and the agency for the amount of the default judgment, plusattorney fees and bad faith penalties. The complaint charged thatthe carrier received notice of the suit through its agency andbreached its obligation to provide coverage and a defense. It alsoalleged that the carrier and the agency failed to investigate thefacts and circumstances surrounding the suit and that a reasonableinvestigation, combined with the information the employer had giventhe agent, would have demonstrated the potential for coverage underthe carrier's policy and the carrier's obligation to defend.

The carrier filed a motion for summary judgment, which a trialcourt granted. It concluded that there was no evidence that theagency was an agent of the insurer and therefore no evidence thatthe insurer received notice of the suit. That decision was reversedby an appeals court. It cited evidence that the agency “customarilyaccepted premiums and notices of claims on (the carrier's) behalf”and added there was “no indication that (the insurer) ever voicedany objection.” The appellate court concluded that the nature ofthe agency's relationship with the carrier and its ability toaccept claims on the carrier's behalf “as a fiduciary and dualagent” were issues for a jury to consider.

After the case was sent back to the trial court for adetermination of the aforementioned issues, the employer moved forpartial summary judgment on the issue of whether the insurer wasobligated to provide coverage and defense. The trial court grantedthe motion, concluding that the complaint, combined with theemployer's statements to his agent when he informed her of thelawsuit, established a claim for an “occurrence,” as defined in thecarrier's CGL policy and that no exclusions applied to theclaim.

Meanwhile, the jury trial concerning the nature of the agency'srelationship with the carrier and its ability to accept claims onthe insurer's behalf resulted in a verdict that the carrier hadreceived constructive notice of the suit. The jury awarded theemployer $1,550,000 against the agency. The insurer and the agencyappealed.The appellate court first upheld the trial court's partialsummary judgment in favor of the employer, affirming that the CGLinsurer had a duty to defend.

The appellate court cited another case that said, “The issue isnot whether the insured is actually liable to the plaintiffs; theissue is whether a claim has been asserted which falls within thepolicy coverage and which the insurer has a duty to defend.” Thecourt noted that the state Supreme Court had ruled that an insurerhas a “duty to defend its insured against all claims covered undera policy, even those that are groundless, false, or fraudulent.”Southern Guaranty Ins. Co. v. Dowse, 278 Ga. 674, 676 (1) (605SE2d 27) (2004). This, the appellate court said, is because“an insurer's duty to pay and its duty to defend are separate andindependent obligations.” Penn-America Ins. Co. v. DisabledAmerican Veterans, 224 Ga. App. at 559.

In the case at hand, the appellate court said the insurer's CGLpolicy included an obligation to defend the business against anysuit seeking damages for bodily injuries “to which this insuranceapplies.” The policy applied to any “bodily injury” that was causedby an “occurrence,” subject to certain exclusions. The policydefined an “occurrence” as an “accident.” The policy did excludecoverage for a bodily injury that arose out of the use of anautomobile that was owned or operated by any insured. The policydefinition of an “insured” included an employee of the namedinsured if the employee was acting within the scope of hisemployment at the time of the occurrence that caused the injury.But it was undisputed that the employee was driving his own caroutside the scope of his employment at the time of the collision,the court noted. Therefore, it said, he was not an “insured,” andthe exclusion did not apply.

The appellate court said whether the employer was liable for thecouple's injuries was irrelevant to whether the insurer wasobligated to defend the employer. Had it defended the action, thecourt said, the insurer would have had the opportunity to show thatthe employer was not liable for the couple's injuries. The factthat the employer ultimately may have prevailed in the suit,however, did not relieve the insurer of its obligation to defendthe business. As the court had put it earlier, “It was (theinsurer's) duty to seek that favorable decision on its insureds'behalf.”

The carrier also argued that it had no duty to defend becausethe injured couple's complaint alleged that the employee was actingin the scope of his employment at the time of the collision;therefore, the incident fell under the exclusion for an insured'suse of an automobile. The appellate court countered that it wasundisputed that the employer told his agent that the employee wasoff duty and driving his own car at the time of the collision.Thus, the appellate court said, the insurer could not rely solelyon the language in the couple's complaint in arguing that it had noduty to defend. “When a complaint on its face shows that there isno coverage, but the insured notifies the insurer or the insurer'sagent of additional facts that would place the claim within thepolicy coverage, the insurer must consider such facts when decidingwhether it has an obligation to defend the claim. [Colonial OilIndus. v. Underwriters, etc., 268 Ga. 561, 562 (2) (491 SE2d 337)(1997)]. Accordingly, the appellate court upheld the trialcourt's conclusion that the collision was an “occurrence” under thepolicy and that the insurer therefore had a duty to defend.

The insurer also claimed that it was entitled to a directedverdict on the issue of whether there was an agency relationshipbetween it and the agency. The appellate court replied thatevidence had been presented at the trial from which the jury couldfind that an agency relationship existed between the agency and thecarrier and that it therefore received constructive notice of thesuit. The court also cited another Georgia case in which an agentcollected premiums for a carrier and was its only contact with theinsured. Therefore the agent had apparent authority to acceptnotice of claims on the insurer's behalf, and the carrier wasestopped from claiming otherwise.

The carrier also said the insured should not have entered into asettlement agreement with the injured couple. It argued that thesettlement agreement was relevant to showing the jury that theemployer violated the terms of the policy by settling with theinsured claimants without getting the carrier's consent. But theappellate court found that the insurer consistently had denied thatit was obligated to defend the insured. Had the carrier, in fact,defended its insured, it could have directed the course of thatdefense and perhaps have helped the business avoid a defaultjudgment or a judgment on the merits, the court said. Following theinsurer's failure to defend, however, the business suffered adefault judgment for a substantial amount of money–enough to forcethe business into bankruptcy. At that point, the employer tooksteps that he believed necessary to protect his business'sinterests, the court said. Under these circumstances, the appellatecourt said, the insurer was estopped from arguing that the employerviolated the insurance policy by settling a claim without itsconsent.

Next, the court considered the agency's position. The agencyargued that the trial court erred in allowing into evidence thesummary judgment order that found that the carrier's policy gavethe employer coverage for the injured couple's lawsuit. The agencycomplained that the order should not have been used to suggest tothe jury that the agent was wrong about whether the policy coveredthe collision.

The appellate court disagreed: “We find the trial court's rulingwas relevant to the issues of whether there was coverage under the… policy, whether (the agency) owed a duty to (its insured) toforward the notice of the … suit to (the insurer), whether (theagency) breached its duty by failing to forward the suit to (thecarrier), and whether that breach caused the plaintiffs' damages,specifically, the default judgment. Accordingly, we find the trialcourt did not abuse its discretion in admitting the order.”

The agency also argued that the trial court erred in chargingthe jury regarding the amount of potential damages for which theagency could be responsible. Prior to trial, the court ruled that,if the jury found that the agency breached a duty to theplaintiffs, the plaintiffs could recover the full amount of anydamages that the jury concluded was warranted by the evidence, upto and including the full amount of the default judgment, plusinterest and costs. At trial, the court instructed the jury asfollows: “When an insurance agent breaches his duty to (an)insured, it may be liable to its insured beyond the policy limitsto the full amount of the judgment.”

In this case, the appellate court said, the agent told theemployer that she would take care of the suit, but she decided notto send the notice to the CGL insurer. The jury was authorized tofind that, in failing to notify the insurer, the agent breached herduty to the insured and that her negligence caused the insured tosuffer a default judgment when the insurer failed to provide adefense for the business. “Therefore, the plaintiffs' damages inthis case, the amount of the default judgment, were attributable to(the agent's) negligence, not from the lack of insurance coveragefor the claim,” the court said. “Accordingly, we find that thetrial court did not err in giving the jury instruction.”

There were excellent dissenting opinions. One justice said, “Imust respectfully dissent because the trial court improperlygranted (the employer's) motion for partial summary judgment on thecoverage issue. Further, even if the policy could be said toprovide coverage, (the employee) failed to prove that (the agency)was the agent of (the insurer) for purposes of notice under thepolicy, and (the insurer) was entitled to a directed verdict onthis ground.” He said that when the business auto carrier deniedcoverage and told the insured to retain his own attorney, theemployer did not then contact his agency regarding the litigation,retain his own attorney, contact the employee's carrier or contacthis CGL insurer. Instead, the CEO allowed the suit against him togo into default. There was another dissent by the appellate court'schief justice. Dissents, however, don't make law.

Yeomans & Associates Agency, Inc. v. Bowen TreeSurgeons, Inc., No. A05A0637 (Ga.App. 07/15/2005) 2005. GA.0001002(www.versuslaw.com).