Opinion

Georgia insurance case provides insight for Virginia policyholders

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Print this page by Collin Hite

An ongoing battle continues around the country between insurance companies and policyholders over an insurer’s right to recoup defense costs.  The debate began in 1997 when the issue was raised in a California lawsuit.  In the latest skirmish, a federal district court in Georgia sides with the insurance company (Illinois Union Ins. Co. v. NRI Construction Inc.).  The case provides a stark warning to policyholders to address coverage issues early in a case and take action to protect their rights.  This is particularly true since no court in Virginia has directly taken a side yet in this debate.

The case starts out ordinary enough.  In 2008, NRI Construction retained a painting subcontractor to perform work on a building project in Pennsylvania.  While on the job, one of the subcontractor’s employees fell off a ladder.  He immediately notified NRI’s supervisor onsite of his injuries. NRI in turn notified its insurance agent of the accident.  The agent’s reply was, “Well, if he’s got insurance, and you’re okay, don’t worry about it . . . the guy wasn’t working for you.”  NRI never informed its insurance carrier (and neither did its agent).

Nearly two years later, you guessed it, the injured painter files a personal injury lawsuit against NRI in Pennsylvania.  NRI now informs its Commercial General Liability insurance carrier of the case, and the insurer initially agrees to defend the company under a reservation of rights letter.  That reservation specifically alerts NRI that the insurer is reserving its right to: 1) withdraw from the defense of the underlying case; 2) seek recoupment of defense costs incurred in the case; 3) seek a declaratory judgment of its rights and obligations; and 4) decline to indemnify or defend its insured.  A critical point here is that NRI acknowledges receiving the reservation of rights letter but never objected to its terms.

Well into the litigation of the personal injury case, Illinois Union Insurance files a declaratory judgment action seeking to walk away from its defense obligations for late notice and to recoup its defense costs incurred to date.  The district court easily finds that the nearly two year delay in notifying the insurer of the accident was late notice as a matter of law.  Thus, NRI loses its coverage in the underlying case.  It does not appear that an argument was made, or at least addressed, that notice to the insurance agent constituted notice to the insurer.  Regardless, the point for policyholders here is that most, if not all, insurance policies require that fairly quick notice of an occurrence be given to the insurance company.  Policyholders failing to do so run the risk of losing their insurance coverage.

The more important lesson from this case is that insurers unilaterally continue to seek to impose a right to recoup defense costs in the underlying cases when it is subsequently determined they have no duty to defend their policyholders.  The district court correctly notes that courts around the country are divided on this issue ― thus putting policyholders at a real risk depending on where the issue is raised.  The court goes on to note that the recoupment issue is a case of first impression in Georgia. (There was no precedent to follow in that jurisdiction.)

What is apparently a critical fact in this case is that NRI did not object to the “timely and proper reservation of rights and allowing the insurer to provide its defense” to it.  The court rules that, by failing to object, NRI is deemed to have consented to the terms in the reservation of rights letter, including recoupment. 

Obviously the first lesson to learn from this case is that prompt notice of an occurrence, even in the absence of a claim against the insured, is required.  Policyholders must have a procedure in place to ensure notice is given to their insurers in accordance with the insurance contracts.

More importantly, insureds must not merely accept a reservation of rights letter. Where possible, they must carefully consider what a jurisdiction’s specific law requires to avoid being on the hook for defense costs down the road.  This case demonstrates that, should policyholders receive a reservation of rights letter, they should immediately review the insurer’s unilateral imposition of a right to recoup defense costs and respond to the letter.

The only case to come close to touching on this issue was in the federal district court in Alexandria earlier this year. (Farkas v. National Union Fire Insurance Company of Pittsburgh, PA).  This case involved a directors’ and officers’ policy.  The distinction here is that the actual policy language (the contract) contained a provision that the insurer could recoup defense costs if there was a subsequent finding that the policyholder is not entitled to coverage. This is an important distinction from the NRI situation where the insurer raises the right of recoupment for the first time in its unilateral reservation of rights letter.  How the insurance company preserves the right to recoup such attorneys’ fees is an important component of the debate.  Virginia’s policyholders must be particularly vigilant since it is only a matter of time before one of them becomes the test case in the commonwealth.

Collin Hite is the practice group leader of the Insurance Recovery team at Richmond office of Hirschler Fleischer.  He handles insurance recovery and coverage litigation in the areas of business interruption, all risk, construction, business torts, products liability, directors’ and officers’ liability, employee dishonesty, intellectual property, and environmental matters.

 

 

 


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