FIREARMS EXCLUSION ELIMINATES COVERAGE

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Great American Alliance Insurance Company (“GAAIC”) was granted summary judgment when the trial court determined that a GAAIC umbrella insurance policy did not cover an insurance claim made by Star Residential, LLC (“Star”), and Terraces at Brookhaven, LLC (“Terraces,” collectively, the “Insureds”), based on a shooting injury suffered by Manuel Hernandez (collectively with the Insured, the “Claimants”).

In Hernandez v. Great American Alliance Insurance Company Star Residential, LLC et al. v. Great American Alliance Insurance Company, Nos. A22A1147, A22A1211, Court of Appeals of Georgia, Third Division (October 4, 2022) the Court of Appeals resolved the dispute.

Contents

The Issue

The Claimants argued that the trial court erred by ruling that the umbrella policy did not cover the Insureds’ claims because:

GAAIC’s conduct waived its policy defenses, and
the GAAIC umbrella policy did not “follow form” to certain underlying insurance that excluded coverage for events using firearms.

Facts

The undisputed record showed that Star and Terraces own and/or operate an apartment complex where Hernandez lived. In May 2017, Hernandez was shot twice in the back by two assailants as he approached the door to his apartment one night.

Within days, Star generated an incident report, notified Terraces about the shooting, and notified its primary insurance carrier, Associated Industries Insurance Company, Inc. (a/k/a AmTrust North America, herein “AIIC”). Two weeks after that, counsel for Hernandez notified the Insureds that he represented Hernandez. At that time, the Insureds did not notify GAAIC about any potential claim.

In early December 2017, primary carrier AIIC received a formal demand letter from Hernandez seeking $1.5 million in compensation. The Insureds gave GAAIC notice of the claim on February 2, 2018. A few days later, GAAIC acknowledged the notice and stated that it had logged the matter as “incident only,” and it did not expect to take any further action at this time, reminding the Insureds to report the claim to their primary insurance carrier if they had not already.

Hernandez sued the Insureds and served them in April 2018. In May 2018, AIIC sent the Insureds a letter denying coverage and declining to represent the Insureds in the litigation. In June 2018, GAAIC began paying for legal representation for the Insureds. Within a day of initiating representation, on June 20, 2018, GAAIC sent the first of three reservation of rights letters to the Insureds.

Among other things, GAAIC’s June 2018 reservation of rights letter noted AIIC’s denial of primary insurance coverage of bodily injury because: AAIC only covered injury due to “accident,” as opposed to intentional conduct, and AAIC’s primary policy also excluded coverage for bodily injury arising from the use of firearms.

The GAAIC policy defines it as an accident, as opposed to intentional conduct, similar to the AIIC policy. In May 2020, GAAIC sent a second supplemental reservation of rights letter. In that letter, GAAIC explained that for the Insureds, “the [GAAIC] policy states that ‘coverage applies only if the organization is included under coverage provided by the [underlying policies] . . . and then for no broader coverage than is provided under such ‘underlying insurance.’” Therefore, the letter explained, the AIIC exclusions “apply equally to bar coverage in the [GAAIC] policy,” including the firearms exclusion in the AIIC policy.

THE DECLARATORY RELIEF ACTION

GAAIC sued seeking declaratory judgment resolving the coverage issue with respect to GAAIC’s policy. The trial court granted GAAIC’s motion for summary judgment and denied the Insured’s cross-motion for summary judgment. The Claimants now appeal.

It is undisputed that within 24 hours of a discussion about assuming the Insured’s defense, GAAIC sent the Insureds its first reservation of rights letter. This letter was sufficiently prompt and quoted the firearms exclusion in the underlying AIIC policy, as well as GAAIC’s umbrella coverage provision triggered by an “occurrence,” which is defined in GAAIC’s policy as “an accident.”

This prompt reservation of rights letter was sufficient to notify the Insureds that even though GAAIC had initiated its coverage of a legal defense, it would still rely on the terms, definitions, and provisions of the umbrella policy; that the underlying insurance (quoted in the reservation of rights letter) likely did not cover injuries caused by firearms; and that GAAIC was not waiving its policy defenses implicated by the terms of the GAAIC policy or the underlying AIIC policy, which policy GAAIC quoted in the reservation of rights letter.

In sum, the record showed that GAAIC was acting in good faith to provide a defense under a reservation of rights, and in light of the specific language in the initial reservation of rights letter, the court of appeal declined to penalize GAAIC for further clarifying those positions in supplemental reservations of rights.

The Court of Appeal concluded that the trial court correctly concluded that:

the Insureds are properly identified as members of the DPUM risk purchasing group covered by the umbrella policy,
the Insureds purchased AIIC as underlying insurance for purposes of the umbrella policy, and
the umbrella policy coverage is no broader than the underlying AIIC insurance purchased.
Otherwise, according to the GAAIC’s definition of “Insured,” if the AIIC policy is not included as underlying insurance, then the umbrella policy does not apply.

Accordingly, in light of the controlling language and structure of the GAAIC insurance contract, the trial court did not err by holding that GAAIC’s umbrella coverage could not be expanded beyond the underlying coverage and the trial court correctly granted summary judgment to GAAIC and denied the Insureds’ motion for partial summary judgment.

Insurance policies are contracts whether primary or umbrella/excess policies. Since the claim was based on the fact that Hernandez was shot in the back twice the firearms exclusion applied and since it applied in the underlying coverage it did not apply in the umbrella. A Reservation of rights letter, even if it doesn’t cover every possibility against coverage, especially when covered by supplemental reservations, cannot act as a waiver of the insurer’s rights and obligations since its intent is the opposite: preventing waiver.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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