March 4, 2019
The U.S. District Court for the Northern District of Georgia found that a reservation of rights (ROR) issued to the named insured was ineffective as to two individual insureds who became defendants, who were not explicitly included in the original ROR. The case is Auto-Owners Ins. Co. v. Cribb, No. 2:17-CV-106-RWS, 2019 U.S. Dist. LEXIS 17785 (N.D. Ga. Feb. 5, 2019).
On November 26, 2014, Richard Nielson (Nielson) entered into a contract with Appalachian Log Homes of Georgia (ALH of Georgia) for the installation of a log home on his property. ALH of Georgia then entered into a contract with Appalachian Log Homes, Inc. (ALH) who would be installing the home. ALH informed Nielson that before the log cabin could be built he would have to install a foundation and sub-floor. Nielson contracted with Defendant B.R. Mountain Homes (BRMH) for the construction of the foundation and sub-floor as well as for various other construction projects on the property. The Defendant obtained permits for the whole project. In early spring of 2015, BRMH began working on the property. By May they had completed the work that was necessary to begin the log cabin. BRMH left the worksite, planning on returning to finish the rest of the project after ALH finished assembling the log home. ALH hired Jerry Taylor Construction to install the log home. Several Jerry Taylor employees worked on the project, including Jimmy Cribb (Cribb).
While working on constructing a second floor of the log home, a wall panel started to slide toward Cribb, and his co-worker Jerry Smith. Cribb jumped from the second floor to the first floor, breaking through a portion of unsupported sub-floor, and sustaining significant injuries. Cribb initially just sued BRMH and later amended his complaint to add claims against two of BRMH's officers and employees Brian Thurman and Richard Davis, alleging that they constructed the plywood subfloor of the first floor of the home, through which they partially cut an opening for a future staircase. Cribb also alleges that BRMH failed either to place supports under this opening or to place warning signs to alert workers of the weakened structural integrity of the subfloor. When Cribb jumped and landed on the compromised section of the subfloor, he fell to the basement maintaining injuries significant enough to render him a paraplegic. Cribb also claimed that BRMH acted negligently in several ways including failure to maintain and inspect the job site and failure to train employees on safety precautions. He also asserted a gross negligence claim.
At the time of the incident, BRMH had a general liability policy issued by Auto-Owners Insurance (Auto-Owners). At first, Auto-Owners decided to defend BRMH under a reservation of rights that was issued and addressed to BRMH, and Auto-Owners retained defense to file an answer for the company. When the complaint was amended to add Thurman and Davis, defense counsel filed an answer on their behalf and began to defend them. Auto-Owners did not immediately any reservation of rights (ROR) or coverage position letter to Thurman and Davis, who were included as named insureds on the policy. Auto-Owners filed an action seeking a declaratory judgment that due to a failure to notify of an occurrence or offense they had no duty to defend or indemnify. Auto-Owners also argued that Cribb was an employee of BRMH so they had no duty to defend due to the Workers' Compensation exclusion, and because the policy does not apply to bodily injury to an employee and the claims did not include any claim for personal or advertising injury.
In the coverage action, the BRMH argued that Auto-Owners was estopped from denying coverage to Thurman and Davis due to BRMH's failure to effectively reserve their rights prior to providing the defense to Thurman and Davis. The District Court agreed, stating that an insurer that defends an insured in the absence of an express and specific ROR to deny coverage is estopped from later denying coverage.
The District Court pointed out that Davis and Thurman were listed on the policy as doing business as BR Mountain Homes, LLC. As the policy specifically stated, each insured is treated separately for purposes of coverage, due to the "separation of insureds" provision in the policy. The first ROR letter was addressed to BR Mountain Homes, Attn: Mr. Brian Thurman., and the second and third were addressed to Thurman and Davis c/o B.R. Mountain Homes, LLC. The second and third letters were not sent until months after Auto-Owners began defending Thurman and Davis. When Auto-Owners sent out the first ROR letter, it was not addressed to Thurman or Davis, and was sent before they were even named in the suit, so the court determined that the defense of Thurman and Davis in the absence of an effective ROR served as an estoppel to Auto-Owners from denying coverage, regardless of the defenses that Auto-Owners brought.
Editors Note: In Georgia, an insurer that defends an insured in the absence of an express and specific reservation of rights to deny coverage is estopped from later denying coverage. The court, in this case, held this rule very strictly and determined that Auto-Owners was estopped from denying coverage. Insurers should be very cautious when they review amended pleadings and it would be prudent for insurers to make sure to raise coverage issues to their insureds in writing as soon as any coverage issues become known in order to protect themselves from a ruling like Auto-Owners received here. Even though Auto-Owners defenses had some merit, the court still found that they had to continue to provide coverage for Thurman and Davis in the absence of an effective reservation of rights.