Insurance companies and those who represent them say a recent 4-3 ruling presents insurers with difficult choices.

The majority said essentially that insurers either have to defend their customers in court or assert all of their reasons they aren’t obligated to do so up front.

Marietta lawyer Lance Cooper, who won the appeal for a man trying to collect on a $16.5 million personal injury verdict, said the court’s ruling is consistent with recent Georgia case law and creates a bright-line rule for insurance companies alike: “They have to present all of their defenses, and they can’t hold anything back.”

But insurance companies and their lawyers say the decision by Chief Justice Carol Hunstein — joined by now-retired Justice George Carley and Justices Robert Benham and Hugh Thompson — simply creates a mess. Justices Harold Melton, P. Harris Hines and David Nahmias dissented in part, with Melton writing for the group that the decision is based on a misreading of case law and that no good will come of it.

Atlanta lawyer Philip Savrin of Freeman Mathis & Gary, who represented the insurance company in the appeal, said that the decision puts an insurer who is called on to defend a customer but doesn’t have all the facts germane to determining coverage in a difficult situation. “In representing insurance companies you want to make sure that you can support your positions with facts,” said Savrin.

FALL FROM A LADDER

The underlying lawsuit was filed by James Hoover against his employer, Emergency Water Extraction Services (EWES). According to the Supreme Court’s majority opinion, in October 2004, Hoover’s supervisor asked Hoover, a water extraction technician, to deliver a ladder to a job site where an independent contractor was making roof repairs. The contractor asked Hoover to come on the roof to help, and Hoover fell while descending the ladder later, suffering brain damage.

EWES had a $1 million policy with Maxum Indemnity Co. According to court opinions in the case, EWES’ co-owner said he thought Hoover’s stepfather had contacted Maxum within a week of the accident to verify coverage under the policy.

But Maxum said it learned of Hoover’s accident, and EWES’ claim for coverage, shortly after Hoover sued EWES in September 2006. On Oct. 23, 2006, Maxum responded to EWES in a letter saying it would not defend EWES or indemnify it in the lawsuit.

According to Hunstein’s majority opinion, Maxum told EWES that its policy excluded coverage for bodily injury to an employee of EWES “arising out of and in the course of: (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured’s business.”

The letter from Maxum also said it was reserving the insurer’s right to claim a number of other defenses, including EWES’ possible non-compliance with the policy’s requirement that the insured notify Maxum of possible claims “as soon as practicable.”

Hoover’s case against EWES proceeded, but even before the suit was filed, the small company had dissolved, and it barely put up a fight in court. An attorney hired by EWES’ co-owner to represent the company was present during the 2009 bench trial before Cobb County State Court Judge Toby Prodgers, but the company put on no evidence in its defense. The jury awarded $16,465,501 to Hoover.

With EWES essentially judgment-proof, Hoover sued Maxum, claiming the insurance company had breached its duties to EWES. Ruling on the parties’ summary judgment motions, Prodgers found that Maxum had breached its duty to defend EWES in the case. But Prodgers also ruled that Maxum did not breach a duty to indemnify EWES because EWES had failed to provide Maxum with timely notice of the accident.

Both Hoover and the insurer appealed, and a panel of Judges M. Yvette Miller, John Ellington and Sara Doyle ruled against Hoover. Miller wrote that there wasn’t enough evidence Maxum was notified of the accident early enough to meet EWES’ obligations under its insurance policy. Miller added that Maxum hadn’t waived its defense against covering EWES based on not having timely notice. The appeals panel also reversed Prodgers on the duty to defend question, saying the lack of timely notice justified Maxum’s failure to defend EWES from Hoover’s personal injury case.

AT THE HIGH COURT

But Hoover persuaded the state Supreme Court to hear his case and won it on June 18.

Where Maxum went wrong, Hunstein wrote for the majority, was by both denying EWES’ claim outright under the employer’s liability exclusion and simultaneously attempting to reserve the right to assert a notice defense in the future. An insurer can deny coverage and refuse to defend, or it can defend under a reservation of rights, but it cannot do some combination of the two, Hunstein wrote.

“A reservation of rights does not exist so that an insurer who has denied coverage may continue to investigate to come up with additional reasons on which the denial could be based if challenged,” Hunstein wrote. “Rather, a reservation of rights exists 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 [of the insured] while reserving its rights to ultimately deny coverage.”

The majority went on to say Prodgers correctly had determined that Maxum had a duty to defend the underlying tort case, finding that the nature of EWES’ business and the circumstances of the accident made clear Hoover wasn’t performing duties related to EWES’ business at the time of the accident.

The opinion written by Melton agreed with the majority on a key point — that Maxum wasn’t entitled to summary judgment on saying it didn’t have to cover EWES because it didn’t get timely notice of the accident; Melton said that posed a factual dispute.

But Melton, Hines and Nahmias said the majority was wrong to declare that Georgia law doesn’t allow an insurer to deny a claim for one reason and reserve the right to assert different reasons later. Melton wrote that the majority was basing its ruling on an incorrect reading of a 1972 Court of Appeals decision.

Maxum asked the court to reconsider, backed by amicus briefs filed by Carlton Fields attorneys on behalf of the Georgia Defense Lawyers Association and McKenna Long & Aldridge lawyers representing the American Insurance Association. They told the court that the majority would put Georgia out of step with the vast majority of other states and create an unworkable, expensive situation for insurers.

The majority was unmoved and the 4-3 vote remained the same. By the time that decision was issued, Carley officially had been replaced by Justice Keith Blackwell. But Carley, not Blackwell, participated in the reconsideration vote, acting in his status as senior justice to hear motions for reconsideration in cases in which he already had participated.

DISSENT BEEFED UP

When the reconsideration was denied, Melton beefed up his dissent, lamenting the practical effects of the majority’s ruling.

“Based on the majority’s new rule of law,” wrote Melton, “insurers who wish to deny coverage will be forced to attempt to list all defenses in their initial denial letter. They must do so blindly, in the absence of necessary information and the discovery later litigation might provide. This result helps neither the insurance company, which must scramble to come up with all possible defenses in good faith, nor the insured, who will have no good context of where he or she stands in the face of a laundry list of defenses. The result may also increase the number of instances in which an insurance company seeks to reserve rights, rather than deny a claim, and subsequently seek a declaratory judgment regarding coverage. This will only serve to further clog trial courts. Simply put, no good will come from the majority’s unprecedented new rule of law.”

Cooper, the plaintiff’s lawyer, said the decision simply reaffirms that insurance companies refuse to defend their customers at their peril. But Savrin, who was hired by Maxum after Hoover won the $16.5 million judgment, said the decision doesn’t give leeway to an insurer who never has a duty to defend under a given policy, such as an excess carrier.

Next, Hoover’s battle with Maxum will head back to Cobb County to settle whether Maxum actually has to cover the verdict. Savrin explained that although the Supreme Court has found his client had a duty to defend EWES, Maxum still can argue that under the employer’s liability exclusion it doesn’t have to indemnify EWES on the verdict.

Even if Maxum loses that argument, the parties will battle over how much Maxum has to pay. Cooper argued the insurance company is on the hook for the entire $16.5 million because it had an opportunity to settle the case within the $1 million policy limit; Savrin said his client has many defenses to that bad faith claim.

The case is Hoover v. Maxum Indemnity Co., Nos. S11G1681, S11G1683.