Ga. Interlocal Risk Mgmt. Agency v. City of Sandy Springs, A16A0134

• Court: United States Court of Appeals (Georgia)
• Writing for the Court: Peterson, Judge.
• Citation: 337 Ga.App. 340,788 S.E.2d 74
• Docket Number: A16A0134
• Decision Date: 24 May 2016
• Parties: Georgia Interlocal Risk Management Agency v. City of Sandy Springs, Georgia.

337 Ga.App. 340
788 S.E.2d 74

Georgia Interlocal Risk Management Agency
v.
City of Sandy Springs, Georgia.

A16A0134

Court of Appeals of Georgia.

May 24, 2016
Reconsideration Denied June 9, 2016

788 S.E.2d 75

Matthew Herbert Bennett, Senoia, James Richard Westbury Jr., Griffin, for Appellant.

Richard English Dolder Jr., Atlanta, James Nicholas Sadd, for Appellee.

Peterson, Judge.

337 Ga.App. 340

Georgia Interlocal Risk Management Agency (“GIRMA”) appeals the grant of a motion to dismiss its declaratory judgment action. GIRMA argues that an exclusion in the agreement bars coverage and thus it should not have to continue defending the lawsuit, and that it is entitled to recoup some of its defense costs. We agree with GIRMA that the exclusion applies to bar coverage for the underlying lawsuit, thus freeing GIRMA from its duty to defend.¹ However, we affirm the trial court's finding that GIRMA is not entitled to recoup

337 Ga.App. 341

defense costs because even if Georgia law permitted an insurer to recoup defense costs where there is no contractual provision permitting such recovery, GIRMA did not timely seek to reserve such a right.

GIRMA is a risk-sharing arrangement wherein municipalities contract to pool their general liability risks. OCGA § 36–85–2. Although technically not an insurance company or insurer, “[a] municipality that enters a GIRMA coverage agreement in effect purchases liability insurance.” GIRMA v. Godfrey , 273 Ga.App. 77, 78, 614 S.E.2d 201 (2005) ; see also OCGA § 36–85–4. The City of Sandy Springs (the “City”) participated in the GIRMA program from about December 1, 2005 to May 1, 2012. The coverage agreement (the “Contract”) obtained by the City provided coverage for Errors and Omissions—and specifically coverage for money damages incurred by a Member arising from any Wrongful Act committed during the coverage period (which includes alleged constitutional violations).

788 S.E.2d 76

On June 30, 2006, several owners and operators of establishments offering nude dancing and/or selling sexually explicit merchandise filed suit against the City in the Northern District of Georgia (“Flanigan's I ”). The suit challenged the constitutionality of the City's ordinances regulating adult entertainment industries within city limits, and sought declaratory and injunctive relief from the City, as well as compensatory and punitive damages from the then-unidentified city manager. GIRMA provided the City with a defense in the suit. The plaintiffs subsequently dismissed the suit voluntarily.

On October 5, 2009, the plaintiffs refiled their federal suit against the City asserting the same constitutional challenge, but this time seeking only declaratory and injunctive relief (“Flanigan's II ”). GIRMA again provided a defense to the suit, but under a reservation of rights. GIRMA's reservation of rights letter made clear that GIRMA was providing a defense to the City in Flanigan's II but was reserving its right to deny coverage based on an exclusion in the Contract. In particular, GIRMA cited Exclusion E, which states that coverage does not apply to “any claim arising out of or in any way connected with any claim seeking equitable relief, redress or any other claim seeking relief in any form other than money damages.”

The first time the plaintiffs amended their complaint, they still did not seek money damages. The City then filed a separate nuisance

337 Ga.App. 342

action in Fulton County Superior Court against the plaintiffs, seeking injunctive relief.² The plaintiffs, in turn, filed a second amended complaint on June 20, 2012, seeking nominal and compensatory damages for the City's allegedly retaliatory conduct in filing the nuisance action.

GIRMA sent a revised reservation of rights letter on February 1, 2013, indicating that it was still providing a defense, but reiterated its reservation of the right to deny coverage under, among other things, Exclusion E. In the revised letter, GIRMA for the first time explicitly reserved the right to recover future advanced defense costs from that date forward if it was determined that GIRMA was not obligated to defend the claim. GIRMA requested that the City consent to the provision of a defense subject to these reservations by signing and returning the letter, and indicated that the City's refusal to consent or return the letter as requested would result in GIRMA immediately filing a declaratory judgment action to determine its coverage and defense obligations. The City did not sign or otherwise respond to the revised reservation of rights letter.

Later in Flanigan's II , on April 9, 2014, the District Court granted the City's motion for summary judgment with respect to the plaintiffs' claims over the filing of the nuisance action. Neither party appealed the Court's order.

Following the court's order in Flanigan's II , GIRMA filed suit against the City on July 11, 2014, seeking a declaratory judgment that no coverage exists for Flanigan's II , GIRMA is not obligated to provide a defense to the City in that lawsuit, and it is entitled to defense costs starting from the date of its revised reservation of rights (the “Declaratory Judgment Action”). The City moved to dismiss the suit, arguing GIRMA had a duty to defend as a matter of law and could not withdraw its defense until the City was protected by a final judgment on all potentially or arguably covered claims. The trial court agreed, granted the City's motion, and dismissed GIRMA's Declaratory Judgment Action. This appeal followed.

“We apply a de novo standard of review to the trial court's grant of a motion to dismiss. A motion to dismiss may be granted only where a complaint shows with certainty that the plaintiff would not be entitled to relief under any state of facts that could be proven in support of his claim.”

337 Ga.App. 343

Alcatraz Media, LLC v. Yahoo! Inc. , 290 Ga.App. 882, 882, 660 S.E.2d 797 (2008) (citations omitted). Further, in reviewing the grant of a motion to dismiss, we “must construe the pleadings in the light most favorable

788 S.E.2d 77

to the appellant with all doubts resolved in the appellant's favor.” Ewing v. City of Atlanta , 281 Ga. 652, 653, 642 S.E.2d 100 (2007). Although GIRMA is not technically an insurance company or insurer, we apply principles of insurance law in analyzing coverage issues. See, e.g. , City of College Park v. Georgia Interlocal Risk Mgmt. Agency , 313 Ga.App. 239, 243–44, 721 S.E.2d 97 (2011).

1. The Contract entitled the City to coverage for Errors and Omissions—and specifically money damages incurred by a Member arising from any Wrongful Act committed during the coverage period. The Contract's definition of a “Wrongful Act” includes alleged constitutional violations, and Flanigan's II alleged constitutional violations. GIRMA concedes the allegations in Flanigan's II constitute a “Wrongful Act,” bringing the claim within the insuring clause, but argues that Exclusion E excludes coverage and negates its duty to defend. Therefore, the first issue we must address is whether Exclusion E operates to exclude coverage for Flanigan's II under the policy. If there is no coverage, GIRMA does not have a duty to defend. See Penn–American Ins. Co. v. Disabled Am. Veterans, Inc. , 268 Ga. 564, 565, 490 S.E.2d 374 (1997) (where the complaint sets forth true factual allegations showing no coverage, the insurer is excused from providing a defense). We conclude that the claims arise out of claims seeking equitable relief, Exclusion E applies, and thus GIRMA has no duty to defend.

Exclusion E of the Contract

Exclusion E states that coverage does not apply to “any claim arising out of or in any way connected with any claim seeking equitable relief, redress or any other claim seeking relief in any form other than money damages.” We have previously defined “arising out of” to mean “had its origins in,” “grew out of,” or “flowed from.” BBL–McCarthy, LLC v. Baldwin Paving Co. , 285 Ga.App. 494, 498, 646 S.E.2d 682 (2007). “Moreover, we have also held that the term ‘arising out of’ does not mean proximate cause in the strict legal sense.... Almost any causal connection or relationship will do.” Id. (citations omitted). In determining whether claims “arise out of” excluded conduct, we conduct a “but for” analysis. See City of College Park , 313 Ga.App. at 243–45 (2), 721 S.E.2d 97 ; Continental Cas. Co. v. H.S.I. Finan. Svs., Inc. , 266 Ga. 260, 262, 466 S.E.2d 4 (1996). “Claims arise out of excluded conduct when ‘but for’ that conduct, there could be no claim

337 Ga.App. 344

against the insured.” Video Warehouse, Inc. v. Southern Trust Ins. Co. , 297 Ga.App. 788, 791, ...