Penn-Am. Ins. Co. v. Morgan Fleet Servs. Inc.

• Decision Date: 14 August 2020
• Docket Number: A20A1513
• Citation: 847 S.E.2d 378,356 Ga.App. 372
• Parties: PENN-AMERICA INSURANCE CO. v. MORGAN FLEET SERVICES INC.
• Court: Georgia Court of Appeals

356 Ga.App. 372

847 S.E.2d 378

PENN-AMERICA INSURANCE CO.

v.MORGAN FLEET SERVICES INC.

A20A1513

Court of Appeals of Georgia.

August 14, 2020

John C. Bonnie, Stephen James Rapp, Atlanta, for Appellant.

Michael Charles Kendall, Chad Michael Brock, Douglasville, for Appellee.

Dillard, Presiding Judge.

Penn-America Insurance Co. appeals from the trial court's denial of its motion for summary judgment and grant of Morgan Fleet Services Inc.’s motion for summary judgment. Penn-America argues on appeal that the trial court erred by (1) failing to declare an insurance policy it issued to MFS void due to an admitted misrepresentation, and (2) concluding that it was estopped from seeking to void the policy or waived the right to do so. For the reasons set forth infra , we affirm.

Viewed de novo in the light most favorable to Penn-America (i.e. , the non-moving party),¹ the record shows that on August 24, 2017, Armer Early—a bus driver for the Gwinnett County Board of Education—filed suit against MFS after she was severely injured while going through the emergency exit of a bus that burst into flames. Specifically, Early alleged that MFS was "a party to a contractual agreement to service, maintain, and inspect buses" for the school system and, inter alia , failed to adequately perform its duties, resulting in her injuries.

In 2014, MFS applied for insurance coverage with Penn-America. The application asked for a description of "all business operations conducted by [the] applicant," and MFS responded that it "[i]nstalls seat covers in buses[.]" The form also contained the following certification:

I hereby certify the information contained in this application is true and I agree that a misrepresentation of any facts by me will constitute reason for the Company to void or cancel any policy issued on the basis of this application and I will hold the Company harmless for the action taken. I also agree that if a policy is issued pursuant to this application, the application shall become part of the policy and any renewal or rewrite thereof.

Thereafter, Penn-America issued a policy to MFS. The policy declarations described MFS's business as a "warehouse," and provided "commercial general liability coverage" for an annual premium of $364 and "commercial property coverage" for an annual premium of $650. For the general liability coverage, the policy provided that Penn-America had "no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply." It further provided that, by accepting the policy, MFS was agreeing that, inter alia , the statements in the policy declarations were "accurate and complete," "based upon representations you made to us," and Penn-America "issued this policy in reliance upon your representations." The $364 annual premium for general liability coverage was based on the understanding of MFS's operations as reflected in the application—i.e. , owning a warehouse used to install seat covers in buses.

It is undisputed that MFS performed inspections of school buses for Gwinnett County Public Schools between October 2003 and June 31, 2018,² and inspected the bus at issue in Early's action against MFS.³ But according to Penn-America, it would not have issued the specific policy it provided to MFS if it had been informed that MFS was performing services such as bus inspections, which could give rise to auto-related liability.

On October 6, 2017, after reviewing Early's complaint against MFS, Penn-America contacted its underwriter, noting that the risk for MFS had "always been rated as a private warehouse" and was based on a business description of installing seat covers on buses. Penn-America ultimately asked the underwriter if there were any other policies for MFS or if the exposure of bus inspections was noted anywhere in the file. On October 9, 2017, the underwriter responded that they had no "notes or indication that [MFS's] operations include inspection" of buses and the "original intention of this policy was simply based on storage of seat covers." The underwriter also had no other policies for MFS "for any kind of inspection operations." Penn-America responded the same day that it would forward this information to its claims department.

Subsequently, on October 10, 2017, Penn-America wrote to outside counsel, while carbon copying two MFS employees, advising that the policy it issued to MFS was "only to cover a warehouse storing bus seat covers," asking if outside counsel had inquired of MFS "who their other carrier is for [the fleet services] aspect of the business," and informing outside counsel that "coverage counsel [was] looking at [the] matter." Then, on October 16, 2017, Penn-America notified outside counsel that it would be "providing a defense of this matter under a Reservation of Rights," and that a "letter will be forwarded shortly." The email further indicated that Penn-America wished for outside counsel to defend MFS in Early's lawsuit. Again, two MFS employees were carbon copied on this email.

The letter referenced in Penn-America's October 16, 2017 email was eventually sent to MFS in March 2018 , and provided, inter alia , that,

[f]or the reasons more fully addressed below, and as previously discussed with you, Penn-America will conduct an investigation and provide a defense to [MFS] in the [Early] Litigation, subject to a full reservation of rights, and subject to Penn-America's right to withdraw from the defense of the case if subsequent information indicates that such action is warranted.

Penn-America also expressly reserved "the right to assert additional defenses to any claims for coverage in the future as may be necessary or appropriate." The letter went on to explain that MFS's policy with Penn-America covered the time period outlined in Early's complaint, but MFS's application for the policy identified the business as one that installed seat covers, which "was the risk that Penn-American [sic] intended to insure through the policy." Ultimately, the letter informed MFS that "[i]f the allegations of [Early's] complaint are true, and [MFS] was not only installing seat covers on buses, but was also inspecting and maintaining the buses for the Board [of Education], the application contains a material misrepresentation of the nature of [MFS's] business." As a result, based on that misrepresentation, Penn-America would have "the right to rescind, void, or cancel the Policy, and Penn-America expressly reserves its right to do so."

Thereafter, Penn-America filed suit on October 17, 2018, seeking a declaration that the policy it issued to MFS was void and it had no duty to defend MFS in Early's suit. Penn-America filed for summary judgment in its favor on the basis of MFS's admitted discrepancies between the services it actually performed and the description of its services on the application for coverage. MFS then filed a cross-motion for summary judgment, contending that Penn-America was estopped from asserting the defense of noncoverage because it assumed and conducted an initial defense of Early's suit without effectively notifying MFS that it was doing so under a reservation of rights. The trial court ultimately granted summary judgment in MFS's favor and denied Penn-America's request for summary judgment. This appeal by Penn-America follows.

Setting aside the question of whether MFS's insurance policy was void based on its admitted misrepresentations, Penn-America waived its right to void the policy when it undertook the defense of MFS without first reserving its rights. Indeed, if an insurer fails to properly reserve its rights, the insurer may be estopped from later denying coverage.⁴ It is well established 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 [when] the insurer, without reserving its rights, assumes the defense of an action or continues such defense with knowledge, actual or constructive, of noncoverage.⁵

But the insurer can avoid estoppel by "giving timely notice of its reservation of rights which fairly informs the insured of the insurer's position."⁶

To determine whether an insurer's notice to the insured is sufficient, the reservation of rights must, at a minimum, "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."⁷ Additionally, the reservation of rights should also inform the insured of "the specific basis for the insurer's reservations about coverage."⁸ And importantly, to be effective, a reservation of rights must be "unambiguous; if it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and [forgivingly] in favor of the insured."⁹ Finally, the notice cannot be only a "statement of future intent,"¹⁰ and, once again, must be timely.¹¹

Here, in the October 10, 2017 email to outside counsel, Penn-America indicated that it was aware of and investigating the potential for non-coverage of the claim at issue in Early's action against MFS.¹² So, as of that date, Penn-America knew that the claims by Early against MFS did not comport with the representations MFS made about the nature of its business on the policy application. Nevertheless, on October 16, 2017, Penn-America sent notification that it would "provid[e] a defense of this matter under a Reservation of Rights" and a "letter will be forwarded shortly." The email further indicated that Penn-America wished for outside counsel to defend MFS in Early's lawsuit.¹³ But this October email was only a statement of future intent to "forward shortly" an actual reservation of rights.¹⁴ And the actual unambiguous reservation of rights was not forwarded "shortly," but rather was sent nearly six months later, in March 2018, after Penn-America had already...