May 29, 2015 Articles

“Waiving” Goodbye to Coverage Defenses: Litigating the Effect of Denial Letters

An analysis of the state of the law concerning denials of coverage and the recent expansion of the waiver doctrine in Georgia

by Seth M. Friedman and Christopher C. Meeks

When presented with a pre-suit claim or request for defense coverage, an insurer generally has three options: defend, deny coverage and refuse to defend, or defend under a reservation of rights and seek a declaratory judgment, if necessary. Each option has its own set of consequences for the insured and the insurer, and a decision as to which option to pursue should be thoroughly considered prior to taking any action. Unfortunately, though, information at the outset of a claim is often limited, making the decision of whether to reserve rights and defend or deny all the more perilous. An overly conservative approach favoring a defense under a reservation of rights will ultimately lead to defending uncovered or excluded claims at a much higher rate and, thus, expending defense dollars and company resources unnecessarily, which may or may not be recoverable. Conversely, an overly cavalier approach favoring the denial of questionable claims could also lead to additional litigation against the insurer and, in some states, extra-contractual liability, if the insurer is found to have wrongfully denied coverage.[1]

While risks exist with either course of action, sometimes a denial is appropriate. In many instances, an insurer’s decision to deny must be made quickly so that it can advise an insured to seek its own counsel to respond to and answer a claim or suit. Accordingly, an insurer intent on denying coverage for a particular claim can only include in its declination letter those grounds of which it is aware or that it believes are applicable at the time the decision to decline is made. However, additional grounds supporting a denial are often discovered after sending the declination letter, including new grounds based on the insuring agreement, exclusions, or conditions that may not have been apparent originally. Therefore, because new defenses can frequently come to an insurer’s attention post-denial, insurers often reserve their rights to raise new or additional grounds for a denial along with the stated grounds for the denial.

Generally, such reservation of rights are the accepted method for an insurer to decline coverage while avoiding any subsequent argument that the insurer waived any grounds for denial not stated in the declination letter.[2] However, a recent decision from the Supreme Court of Georgia specifically disapproved of this practice. The following analysis explores the state of the law concerning denials of coverage and the recent expansion of the waiver doctrine in Georgia and highlights the issues posed by such broad rules concerning waiver.

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