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American Safety Indemnity Co. v. STO Corp.

Court of Appeals of Georgia

June 30, 2017


          McMillian, Judge.

         Sto Corp. ("Sto") filed suit against American Safety Indemnity Company ("ASIC"), asserting breach of contract, declaratory judgment, and bad faith claims arising from ASIC's refusal to defend and indemnify Sto for claims related to stucco products that Sto had supplied to two building projects.[1] ASIC now appeals the trial court's order granting summary judgment to Sto on its breach of contract and declaratory judgment claims and on ASIC's counterclaim for rescission and denying summary judgment to ASIC on Sto's claim for bad faith. We reverse the denial of summary judgment to ASIC on Sto's claim for bad faith, but affirm in all other respects as set forth below.

         1. "We review a grant or denial of summary judgment de novo, construing the evidence in the light most favorable to the nonmovant." (Citation omitted.) Corrugated Replacements, Inc. v. Johnson, 340 Ga.App. 364, 365 (797 S.E.2d 238) (2017). Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. OCGA § 9-11-56 (c). So viewed, the record shows that Sto manufactures and sells exterior cladding products for residential and commercial construction, including stucco products and coating finishes. ASIC issued two sets of insurance policies to Sto. The first, issued annually from September 1, 2009, to September 1, 2012, were policies providing coverage for certain stucco products (the "Stucco Policies"). The second, issued annually from September 1, 2010, to September 1, 2012, were policies providing coverage for Sto's coating products, including a product called Powerflex (the "Coating Policies"). This case arises from ASIC's eventual refusal to defend and indemnify Sto in two separate lawsuits filed against Sto regarding products it supplied in residential building projects.

         (a) Crescent Shores.

         Crescent Shores is a residential complex in South Carolina that was completed in 2004. On November 5, 2010, Sto notified ASIC of a potential claim related to the Crescent Shores complex. David Paight, ASIC's assigned adjuster, responded via letter dated November 18, 2010, requesting additional information and asserting that ASIC's "investigation and evaluation" was to be conducted under a reservation of rights. In January 2011, the Crescent Shores homeowner's association filed a lawsuit against Sto and others (the "Crescent Shores Suit"), alleging that Sto's stucco system had started to delaminate and fall off. On May 20, 2011, ASIC notified Sto via letter that it was denying coverage, which described in detail various bases under the policy for denying coverage.

         However, Paight testified at deposition that ASIC later re-evaluated its position and agreed on September 28, 2011 to defend the claim, thereafter taking control of the litigation.[2] Paight also confirmed at his deposition that his claims notes indicated: "ASIC will provide a defense for this matter. Will update coverage position to [Sto] and their broker." And although Paight's claims notes also indicated "issued N. I. R.O.R., " which he explained stands for "named insured reservation of rights to defend, " he had no recollection of whether he issued a reservation of rights in the Crescent Shores Suit, nor did he recall ever telling anyone at Sto that ASIC was defending Sto subject to a reservation of rights. Paight's records also included a letter addressed to Sto, dated September 20, 2011, which contained a reservation of rights (the "Crescent Shores Reservation of Rights Letter"), but Sto claimed that, despite searching its paper and electronic files, it had no record of ever receiving that letter.[3]ASIC continued to defend the Crescent Shores Suit until April 16, 2013 when it ultimately withdrew coverage, asserting that Sto had misrepresented when it first received notice of a claim for the Crescent Shores complex.

         (b) Canal Side Lofts.

         Canal Side Lofts is a residential complex in Texas completed in 2006. In April 2011, Sto tendered to ASIC a lawsuit filed by the owner of Canal Side Lofts against Sto and other defendants asserting claims arising from the alleged blistering and delaminating of the stucco finish ("Canal Side Suit"). On May 18, 2011, ASIC responded with a letter seeking additional information and stating that ASIC would be conducting its "investigation and evaluation" under a full reservation of rights.[4] On June 16, 2011, Sto provided ASIC with documents detailing the history of the Canal Side project. On August 1, 2011, after reviewing these materials, ASIC denied coverage for the claim on the basis that Sto was aware of problems with the Canal Side Lofts in 2008, prior to the applicable policy period. This letter also set out in detail the grounds for denying coverage under the policy.

         Sto again responded, explaining that it had not received notice of the claim prior to the applicable policy period and enclosing documentation to support its assertion. Subsequently, ASIC reversed its denial and agreed to take over the defense of the Canal Side Suit under the 2009 Stucco Policy. An August 20, 2012 email sent by Paight indicates that this determination was conveyed orally to both Sto and Sto's outside counsel. Several months later, Paight prepared a detailed letter regarding ASIC's agreement to defend Sto that included a reservation of rights (the "Canal Side Reservation of Rights Letter").

         However, as in the Crescent Shores Suit, Sto contends, despite a search of its electronic and paper documents, that it did not receive this letter.[5] In his deposition, Paight explained that in this instance, after drafting the letter, he sent it to a system called "assistant tasks, " where it would have been assigned to an administrative assistant to mail. But he has no way of knowing either who received the assignment or whether that person actually mailed the letter. Paight also deposed that he does not recall whether he orally conveyed ASIC's reservation of rights to Sto, [6] and Sto claims that it received no such oral message from ASIC. ASIC then continued to defend Sto throughout the trial, which on June 13, 2013 resulted in a jury verdict of $918, 000 in favor of the plaintiff against Sto. The morning after the verdict, Paight obtained authority to engage coverage counsel to evaluate whether ASIC would be able to withdraw coverage at that point. Then, on July 3, 2013, ASIC notified Sto that it was denying coverage for the Canal Side Suit.

         (c) This Litigation.

         In September 2013, Sto filed suit against ASIC, asserting breach of contract, declaratory judgment, and bad faith claims. ASIC counterclaimed, seeking to rescind the policies based on alleged misrepresentations Sto made in its policy applications regarding the loss history of Sto's Powerflex product and the introduction of a reformulated coating product. After the parties filed cross-motions for summary judgment, the trial court issued an order granting Sto's motion on its claims for breach of contract and declaratory judgment after finding that ASIC failed to properly convey a reservation of rights and was therefore estopped from denying coverage as a matter of law. In the same order, the trial court also granted summary judgment to Sto on ASIC's rescission counterclaim, finding that Sto did not make any misrepresentations in its applications and that ASIC waived its right to rescind the policies. And finally, the trial court denied ASIC's motion for summary judgment on Sto's claim for bad faith, finding that questions of fact exist as to whether ASIC denied the Crescent Shore and Canal Side claims in bad faith. This appeal followed.

         2. In its first enumeration of error, ASIC asserts that the trial court erred in granting summary judgment to Sto on its contract and declaratory judgment claims because ASIC's "multiple reservations of rights" issued prior to the denial of coverage were sufficient as a matter of law to avoid estoppel.[7] When an insurer is faced with a decision regarding how to handle a claim of coverage at the same time a lawsuit is pending against its insured, the insurer has three options under Georgia law. "First, the insurer can agree to defend the claim, thereby waiving its policy defenses and claims of non-coverage." (Citation omitted.) Hoover v. Maxum Indem. Co., 291 Ga. 402, 404 (1) (730 S.E.2d 413) (2012). On the other end of the spectrum, "the insurer can deny coverage and refuse to defend [the insured], leaving policy defenses open for future litigation." (Citation omitted.) Id. Or, under the third option, the insurer can defend the claim under a "reservation of rights." Id. at 404-05 (1). A reservation of rights is a term of art designed to allow an insurer to provide a defense while still preserving the option to later litigate and ultimately deny coverage. Id. at 405 (1).

         Where an insurer fails to properly reserve its rights, it may be estopped from later denying coverage. It is well established under Georgia law that

risks not covered by the terms of an insurance policy, or risks excluded therefrom, while normally not subject to the doctrine of waiver and estoppel, may be subject to the doctrine where the insurer, without reserving its rights, assumes the defense of an action or continues such defense with knowledge, actual or constructive, of noncoverage[.]

(Citations omitted.) Prescott's Altama Datsun, Inc. v. Monarch Ins. Co. of Ohio, 253 Ga. 317, 318 (319 S.E.2d 445) (1984). "The insurer can avoid estoppel by giving timely notice of its reservation of rights which fairly informs the insured of the insurer's position." (Citations and punctuation omitted.) World Harvest Church, Inc. v. Guideone Mut. Ins. Co., 287 Ga. 149, 152 (1) (695 S.E.2d 6) (2010).

         In determining whether a particular notice is sufficient, our Supreme Court has explained that, "[a]t a minimum, the reservation of rights must fairly inform the insured that, notwithstanding the insurer's defense of the action, it disclaims liability and does not waive the defenses available to it against the insured." (Citation and punctuation omitted.) World Harvest Church, 287 Ga. at 152 (1). "The reservation of rights should also inform the insured of the specific basis for the insurer's reservations about coverage." (Citation and punctuation omitted.) Id. (reservation of rights "cannot be only a statement of future intent"). Furthermore, "the reservation must be unambiguous; if it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured." (Citation and punctuation omitted.) Id. at 152-53 (1).

         We focus our analysis then on the timing and content of the various communications ASIC contends constitute a reservation of rights. It is undisputed that ASIC, following its initial investigation into both the Crescent Shores and Canal Side Suits, denied coverage. The purpose of a reservation of rights is "to protect both the insurer and the insured by allowing an insurer who is uncertain of its obligations under the policy to undertake a defense while reserving its rights to ultimately deny coverage following its investigation." (Citation and punctuation omitted.) Hoover, 291 Ga. at 406 (1). "Thus, a reservation of rights is only available to an insurer who undertakes a defense while questions remain about the validity of the coverage." Id. at 405 (1). For this reason, an insurer cannot both deny a claim and reserve its right to assert other defenses later. Id. Rather, "[w]hen an insurer is presented with a notice of a claim and demand for a defense, the proper and safe course of action is to enter upon a defense under a reservations of rights and then proceed to seek a declaratory judgment in its favor." (Citation and punctuation omitted.) Id.

         Here, ASIC points to several instances where it reserved its rights before it denied coverage in the Crescent Shores and Canal Side litigation. However, under Hoover, ASIC cannot both deny the claims and assert a reservation of rights, and we fail to see how a previous reservation of rights issued while ASIC was still investigating the claims would remain effective post-denial. Hoover, 291 Ga. at 405 (1). As our Supreme Court has explained, where an insurer has denied coverage for the claim at issue, the insurer is no longer "uncertain nor insecure in regard to its rights, status or legal relations." Drawdy v. Direct Gen. Ins. Co., 277 Ga. 107, 109 (586 S.E.2d 228) (2003) (declaratory judgment action not available where insurer denied coverage). See also Hoover, 291 Ga. at 406 (1) ("reservation of rights ...

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