A recent Daily Report story by Greg Land, “Failure to Defend Entire Lawsuit Leaves Insurer on Hook for $1.2M in Legal Fees,” reports that the Georgia Court of Appeals agreed with a Macon judge that an insurer is on the hook for some $1.2 million in legal fees after it improperly denied coverage for a commercial policyholder facing a lawsuit. Southern Trust Insurance agreed to cover some of the claims in a 2014 lawsuit but said others were not its responsibility. Instead of agreeing to defend the suit and reserving its right to later deny coverage, the insurer instead “sat on its hands” and failed to seek declaratory judgment as to what its policy covered while its insured ran up legal fees.
“This case presents interesting questions regarding the duty to defend and the propriety of a declaratory action to settle disputes over the extent of the insurance company’s obligations,” wrote Judge Todd Markle for a panel including Judges Sara Doyle and Christian Coomer. As detailed in the opinion and underlying documents, the case began when a petroleum distribution company, Mountain Express Oil, was sued by a supplier in August 2014 for claims including breach of contract, unjust enrichment, injunctive relief and slander/libel, among others.
Mountain Express had a policy with Southern Trust under which the insurer agreed to pay damages resulting from claims for “personal and advertising injury,” the definition of which included claims for libel/slander. “However,” the contract said, “we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury’ to which this insurance does not apply.” Mountain Express “immediately” retained legal counsel with Bondurant, Mixson & Elmore and Atlanta solo James Johnston Jr.
Mountain Express’ lawyers filed an answer to the complaint in October 2014, and the next day the company notified Southern Trust in writing about the lawsuit. On Dec. 29, 2014, Southern Trust told Mountain Express that it was denying coverage for the claims except those for libel/slander and had retained lawyers with Swift, Currie, McGhee & Hiers to defend those claims. It also said it was reserving its rights to deny coverage on those claims.
Mountain Express sent the insurer a letter in January 2015 asserting that the policy covered all of the claims. “Although the letter gave written notice of [Mountain Express’] objections,” it “acknowledged a possible compromise, to be drafted by Southern Trust, allowing the Bondurant firm to continue handling the defense with reimbursement from Southern Trust at Swift Currie’s rates,” the opinion said.
That agreement was never in writing, but Southern Trust nonetheless reimbursed its client more than $40,000 in the following months for work Bondurant did on the libel and slander claim. That claim was dropped in an amended complaint filed in late 2015. Mountain Express paid for its lawyers’ work on the other claims separately.
The lawsuit settled in 2016, and Mountain Express demanded that Southern Trust pay all of its litigation expenses minus what the insurer had already paid, which ultimately totaled almost $1.2 million. When Southern Trust refused, Mountain Express filed a complaint for breach of contract and bad faith in Bibb County Superior Court, arguing that the insurer had a duty to defend the entire lawsuit. Both sides moved for summary judgment, with Mountain Express “arguing that Southern Trust’s failure to file a declaratory action to determine its duty to defend all claims barred it from contesting the full amount of attorney fees.”
Southern Trust countered that it had fulfilled its contractual duties, but in 2018 Macon Judicial Circuit Chief Judge Edgar Ennis Jr. ruled for Mountain Express. While Mountain Express could have informed its insurer earlier of the suit, wrote Ennis, “Southern Trust has made no explanation for why it sat on its hands from notification in late September until the issuance of its reservation of rights letter on December 29,” Ennis wrote.
“Furthermore, when it was clear that accepting a defense under a reservation of rights was not agreeable to Mountain Express, particularly a partial defense … Southern Trust should have taken the path that Georgia case law has previously laid out: an action for declaratory judgment” and an effort to stay the proceedings “while the coverage question is resolved.”
“Instead, it entertained negotiations with Mountain Express with a view toward letting the Bondurant firm handle representation of all claims while agreeing to pay only for its work on some of the claims at the lower rate it had negotiated with Swift Currie firm,” Ennis said. “However, Georgia law is clear that, if an insurer is in for a penny it is in for a pound, when it comes to what claims it must defend.”
In upholding Ennis’ ruling, Markle said the language of the policy specified that Southern Trust had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” “By using the term ‘suit,’ instead of ‘claim,’” Markle said, “Southern Trust obligated itself to defend the entire suit if any of the individual claims could be covered under the policy.”
“But Southern Trust failed to perform its obligation,” he wrote, when it reserved its rights “only with respect to the libel/slander claim and retained counsel to defend that portion of the suit. By refusing to defend the entire suit under the terms of the policy, Southern Trust was in breach.”
When Mountain Express “objected to its refusal to provide coverage, indemnification, and a defense to the entire suit, as well as to the reservation of rights with regard to the libel/slander claim … Southern Trust was obligated to file a declaratory action to determine the scope of its responsibilities,” Markle wrote. “As the trial court found, the failure to do so is fatal to its claims,” he said.