Down To Cases

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

After the owner of the tree surgery service was notified of the suit, he contacted his agent. He told her that at the time of the collision, the employee was off duty and driving his own car. The agent told the employer that she would take care of the lawsuit and forwarded 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 rather did business with it through a general agent to which she routinely had submitted claims. She said she didn't submit a claim to the CGL carrier (via the general agent) on this occasion because she didn't believe it would provide coverage for the collision.

The business auto insurer informed the agency and the insured's CEO that there was no coverage under its policy and that it would not defend the claim. The auto insurer advised the employer to seek coverage from the employee's auto carrier. If it refused, the auto carrier said the employer would need to hire an attorney to file an answer in the suit.

The employer did not hire his own lawyer, however, because he thought his agent had forwarded notice of the claim to his CGL insurer and assumed it would defend him. No one from the agency informed the employer that notice had not been sent to the CGL carrier.

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

Following the default judgment, but before entering into the settlement agreement with the claimants, the employer sued his CGL carrier and the agency for the amount of the default judgment, plus attorney fees and bad faith penalties. The complaint charged that the carrier received notice of the suit through its agency and breached its obligation to provide coverage and a defense. It also alleged that the carrier and the agency failed to investigate the facts and circumstances surrounding the suit and that a reasonable investigation, combined with the information the employer had given the agent, would have demonstrated the potential for coverage under the carrier's policy and the carrier's obligation to defend.

The carrier filed a motion for summary judgment, which a trial court granted. It concluded that there was no evidence that the agency was an agent of the insurer and therefore no evidence that the insurer received notice of the suit. That decision was reversed by an appeals court. It cited evidence that the agency “customarily accepted premiums and notices of claims on (the carrier's) behalf” and added there was “no indication that (the insurer) ever voiced any objection.” The appellate court concluded that the nature of the agency's relationship with the carrier and its ability to accept claims on the carrier's behalf “as a fiduciary and dual agent” were issues for a jury to consider.

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

Meanwhile, the jury trial concerning the nature of the agency's relationship with the carrier and its ability to accept claims on the insurer's behalf resulted in a verdict that the carrier had received constructive notice of the suit. The jury awarded the employer $1,550,000 against the agency. The insurer and the agency appealed.The appellate court first upheld the trial court's partial summary judgment in favor of the employer, affirming that the CGL insurer had a duty to defend.

The appellate court cited another case that said, “The issue is not whether the insured is actually liable to the plaintiffs; the issue is whether a claim has been asserted which falls within the policy coverage and which the insurer has a duty to defend.” The court noted that the state Supreme Court had ruled that an insurer has a “duty to defend its insured against all claims covered under a policy, even those that are groundless, false, or fraudulent.” Southern Guaranty Ins. Co. v. Dowse, 278 Ga. 674, 676 (1) (605 SE2d 27) (2004). This, the appellate court said, is because “an insurer's duty to pay and its duty to defend are separate and independent obligations.” Penn-America Ins. Co. v. Disabled American Veterans, 224 Ga. App. at 559.

In the case at hand, the appellate court said the insurer's CGL policy included an obligation to defend the business against any suit seeking damages for bodily injuries “to which this insurance applies.” The policy applied to any “bodily injury” that was caused by an “occurrence,” subject to certain exclusions. The policy defined an “occurrence” as an “accident.” The policy did exclude coverage for a bodily injury that arose out of the use of an automobile that was owned or operated by any insured. The policy definition of an “insured” included an employee of the named insured if the employee was acting within the scope of his employment at the time of the occurrence that caused the injury. But it was undisputed that the employee was driving his own car outside the scope of his employment at the time of the collision, the court noted. Therefore, it said, he was not an “insured,” and the exclusion did not apply.

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

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

The insurer also claimed that it was entitled to a directed verdict on the issue of whether there was an agency relationship between it and the agency. The appellate court replied that evidence had been presented at the trial from which the jury could find that an agency relationship existed between the agency and the carrier and that it therefore received constructive notice of the suit. The court also cited another Georgia case in which an agent collected premiums for a carrier and was its only contact with the insured. Therefore the agent had apparent authority to accept notice of claims on the insurer's behalf, and the carrier was estopped from claiming otherwise.

The carrier also said the insured should not have entered into a settlement agreement with the injured couple. It argued that the settlement agreement was relevant to showing the jury that the employer violated the terms of the policy by settling with the insured claimants without getting the carrier's consent. But the appellate court found that the insurer consistently had denied that it was obligated to defend the insured. Had the carrier, in fact, defended its insured, it could have directed the course of that defense and perhaps have helped the business avoid a default judgment or a judgment on the merits, the court said. Following the insurer's failure to defend, however, the business suffered a default judgment for a substantial amount of money–enough to force the business into bankruptcy. At that point, the employer took steps that he believed necessary to protect his business's interests, the court said. Under these circumstances, the appellate court said, the insurer was estopped from arguing that the employer violated the insurance policy by settling a claim without its consent.

Next, the court considered the agency's position. The agency argued that the trial court erred in allowing into evidence the summary judgment order that found that the carrier's policy gave the employer coverage for the injured couple's lawsuit. The agency complained that the order should not have been used to suggest to the jury that the agent was wrong about whether the policy covered the collision.

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

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

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

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

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