World Harvest Church Inc v. Guideone Mut. Ins. Co.

Decision Date03 May 2010
Docket NumberNo. S10Q0341.,S10Q0341.
PartiesWORLD HARVEST CHURCH, INC.v.GUIDEONE MUTUAL INSURANCE COMPANY.
CourtGeorgia Supreme Court

287 Ga. 149
695 S.E.2d 6

WORLD HARVEST CHURCH, INC.
v.
GUIDEONE MUTUAL INSURANCE COMPANY.

No. S10Q0341.

Supreme Court of Georgia.

May 3, 2010.


695 S.E.2d 7

COPYRIGHT MATERIAL OMITTED

695 S.E.2d 8
Ekonomou, Atkinson & Lambros, Andrew J. Ekonomou, Michael G. Lambros, Paul E. Nystrom, III, Amy L. Hadra, Kenneth B. Hodges, III, Atlanta, for appellant.

Weissman, Nowack, Curry & Wilco, Linda B. Foster, Rahul Karnani, Atlanta, for appellee.

William T. Maxson, III, Washington, Washington DC, amicus curiae.

CARLEY, Presiding Justice.

Between 1995 and 1999, Charles Richard Homa and Michael E. Gause operated an automobile title lending business which actually constituted a huge Ponzi scheme. See SEC v. Homa, 514 F.3d 661, 664(I)(A) (7th Cir. 2008). During that time, Gause donated large sums of money to World Harvest Church (Church), including a $1,000,000 wire transfer from an offshore bank account. The Securities and Exchange Commission (SEC) filed a civil enforcement action in federal district court, Phillip Stenger was appointed Receiver, Homa and Gause consented to a civil judgment, and they also pled guilty to criminal charges of securities fraud.

The Receiver demanded that the Church return about $1.8 million of Gause's donations and, in November 2002, brought suit against the Church in an Illinois federal district court asserting claims of fraudulent transfer and unjust enrichment. GuideOne Mutual Insurance Company, who was the Church's commercial general liability insurer, was informed of that lawsuit. A sister company of GuideOne responded with a written reservation of the right to deny any and all liability, and ultimately concluded that the policy did not cover the Illinois action.

After that action was dismissed for lack of personal jurisdiction, the Receiver filed a similar action in January 2004 against the Church in the United States District Court for the Northern District of Georgia. Upon being informed thereof, GuideOne “split the file” between two claims adjusters, assigning coverage issues to Dale Hubbell and liability issues to Doug Sleezer. Hubbell testified that he explained the assignment of two claims adjusters to the Church's counsel and stated that “we didn't see coverage but we would have to evaluate what we have currently to see if there would be coverage issues.” Without issuing a written reservation of rights, GuideOne then assumed the defense of the lawsuit for over 10 months, during which the time for discovery was extended to March 17, 2005.

On January 26, 2005, GuideOne informed the Church that it would stop defending the action in 30 days because there was no coverage. The Church hired its own attorneys to defend the lawsuit. When there was a month remaining in the discovery period, the new attorneys entered an appearance in the case, and they made a request to extend the discovery deadline, which the district court denied. About one month after that initial appearance, the Receiver filed a motion for summary judgment. The district court granted that motion and, about 17 months

695 S.E.2d 9
after the notice of appearance by the new lawyers, awarded damages in the amount of $1.8 million. An appeal was taken, but the Receiver and the Church later settled for a damages award of $1,000,000.

Three months later, in July 2007, the Church brought this action in the United States District Court for the Northern District of Georgia against GuideOne, alleging breach of the insurance contract and of its duty to indemnify and defend the lawsuit filed by the Receiver. The Church thereby attempted to force GuideOne to treat the earlier judgment in favor of the Receiver as covered under the Church's policy, even though it is undisputed that such judgment actually does not come within the terms of that policy. On cross-motions for summary judgment, the district court rejected the Church's contention that GuideOne should be equitably estopped from denying coverage because it had represented the Church for almost 11 months without issuing a “reservation of rights.” The district court found that GuideOne was free to raise a noncoverage defense because the Church had not shown that GuideOne's participation prejudiced the Church's defense. On appeal, the United States Court of Appeals for the Eleventh Circuit certified the following three questions to this court:

(1) Does an insurer effectively reserve its right to deny coverage if it informs the insured that it does “not see coverage,” after the insured had received a written reservation of rights from the insurer's sister company in a similar lawsuit in another jurisdiction, or is a written or more unequivocal reservation of rights required?
(2) When an insurer assumes and conducts an initial defense without notifying the insured that it is doing so with a reservation of rights, is the insurer estopped from asserting the defense of noncoverage only if the insured can show prejudice, or is prejudice conclusively presumed?
(3) If the insured must show prejudice, do the facts and circumstances of this case show it?

World Harvest Church v. GuideOne Mut. Ins. Co., 586 F.3d 950, 961(II)(C) (11th Cir.2009).

Prior to 1984, the precedent which is relevant to these issues was found only in previous opinions of the Court of Appeals of Georgia. Citing many of those opinions, this Court held in 1984

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, [cits.], 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, [cits.]

Prescott's Altama Datsun v. Monarch Ins. Co. of Ohio, 253 Ga. 317, 318, 319 S.E.2d 445 (1984).

1. The first question posed by the Eleventh Circuit is whether an insurer effectively reserves its rights to deny coverage under the circumstances set forth therein. The Church argues that Vara v. Essex Ins. Co., 269 Ga.App. 417, 419(a), 604 S.E.2d 260 (2004) requires that a reservation of rights be in writing. As the Eleventh Circuit recognized, however, the reference in Vara to written notification is an isolated dictum which is unsupported by any other Georgia law. World Harvest Church v. GuideOne Mut. Ins. Co., supra at 956(II)(A), fn. 6. Although written notification is preferable, the complaint that the reservation of rights was inadequate because it was oral...

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