In evaluating whether an insurer made a proper reservation of rights (ROR), the Eleventh Circuit Court of Appeals, in an unpublished opinion, held that whether the insurer fairly informed the insured of its coverage position is the proper standard in assessing whether coverage defenses were properly reserved.Wellons, Inc. v. Lexington Ins. Co., 2014 WL 1978412 (11th Cir. May 16, 2014).
Lexington insured Wellons, a company that designed and installed an Energy System for Langboard Industries, Inc., a company that manufactures oriented strand board. On November 20, 2004, during the construction phase of the Energy System, a tube bundle collapsed, resulting in extensive property damage. The Energy System was ultimately placed in service by June 2005.
On September 23, 2005 Wellons provided notice to Lexington, pursuant to the 2004 policy, of the tube bundle collapse. Lexington issued a reservation of rights letter on September 30, 2005. The reservation of rights stated, “this letter is not to be construed as a waiver of any of the terms, conditions, or provisions of the Lexington Insurance Company policy, or of any right or policy defense now or hereafter available to the Lexington Insurance Company.”
Wellons was sued, and on September 18, 2007, Lexington sent a second reservation of rights letter. The second reservation of rights stated, “there may be additional policy conditions that may also preclude coverage and this should not be construed as a waiver of other terms and conditions that may apply.” But Lexington retained counsel to defend Wellons against Langboard, and eventually paid limits under the 2004 policy to resolve this suit.
In February of 2006, after the Energy System had been in operation, leaks developed. Wellons retained a consultant, but the superheater ultimately failed. Langboard demanded that Wellons design and install a new superheater. Wellons agreed, but failed to notify Lexington. On August 17, 2006 Wellons notified Lexington of Langboard’s claim for a new superheater, but also of the consultant’s suit filed June 16, 2006, for non-payment for its services to repair the superheater.
On March 2, 2007, Lexington responded to the August 2006 notice by noting two separate claims were embedded in the notice. And, on March 3, 2007, Lexington sent a third reservation of rights letter – noting that Lexington was investigating this matter under a reservation of rights. Lexington further noted the policy required, for coverage to trigger, that “property damage” be caused by an “occurrence” and also highlighted certain exclusions for “Damage to Property,” “Damage to Your Product”, and “Damage to Your Work.” Lexington also stated that the agreement to replace the superheater was without authorization.
On April 25, 2007, Lexington supplemented its March 2007 letter with another reservation of rights letter. This letter stated there was no duty to indemnify or defend Wellons. Specifically, as no suit was filed, the duty to defend was not triggered. Regarding the duty to indemnify, there was no demand beyond the demand to replace the superheater. This letter also quoted pertinent portions of the policy including definitions of “property damage,” “occurrence” and various exclusions – as in the March reservation of rights letter. This position, however, was disputed by Wellons.
Langboard eventually filed a second suit against Wellons, and Lexington defended Wellons under the aforementioned reservation of rights. A jury awarded Langboard $8.5 million in damages. Wellons sued Lexington for indemnification, arguing that Lexington waived its coverage defenses because it did not adequately reserve its rights.
The Eleventh Circuit thoroughly reviewed Georgia law. Specifically, the court examined World Harvest Church, Inc. v. GuideOne Mutual Ins. Co. 287 Ga. 149, 695 S.E.2d 6, (2010) and Hoover v. Maxum Indemnity Co., 291 Ga. 402, 730 S.E.2d 413 (2012). The Eleventh Circuit held that it did not read World Harvest to overrule Georgia authority on specificity. It noted that Georgia law has repeatedly held that an “insurer” is not required to list each and every basis for contesting coverage in the reservation of rights letter. Kay-Lex Co. v. Essex Ins. Co., 286 Ga. App. 484, 649 S.E.2d 602 (2007).
The Court then held that Lexington’s reservation of rights letters were adequate; “a reservation of rights need not specify each and every potential basis for contesting coverage, as long as the reservation fairly informs the insured that, notwithstanding the defense of the insured, the insurer does not waive its coverage defenses.” The Court also noted that Wellons’ failure to object to the defense provided in the second suit provided implied consent to the defense under a reservation, and thereby implicitly consented to the terms of the reservation, including the non-waiver clauses.
The use of multiple reservations of rights with non-waiver clauses proved critical to avoiding costly indemnity obligations for the insurer, Lexington. Most important to the Court’s analysis was that the reservation of rights letters contained non-waiver clauses that specifically reserved Lexington’s right to assert additional coverage defenses. Caution should be noted with respect to reliance on this opinion as it is not binding precedent upon a Georgia Court. The reasoning, however, is very instructive and useful.