[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
Oct. 30, 2009
No. 08-17258 THOMAS K. KAHN
________________________ CLERK
D. C. Docket No. 07-01675-CV-RWS-1
WORLD HARVEST CHURCH, INC.,
Plaintiff-Appellant,
versus
GUIDEONE MUTUAL INSURANCE COMPANY,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(October 30, 2009)
Before CARNES, FAY and ALARCÓN,* Circuit Judges.
CARNES, Circuit Judge:
This is an insurance case raising some questions of Georgia law.
*
Honorable Arthur L. Alarcón, United States Circuit Judge for the Ninth Circuit, sitting
by designation.
Without issuing a written reservation of rights, an insurer assumed the
defense of a lawsuit for almost eleven months but stopped defending near the end
of the discovery period because it decided that there was no coverage. At that
point the policy holder hired its own attorneys to defend the lawsuit. About one
month after the new attorneys entered an appearance in the lawsuit, the insurer
filed a motion for summary judgment. The policy holder’s new attorneys filed a
motion requesting more time for discovery, and that motion was denied. The case
was transferred to another judge, who partially granted summary judgment to the
plaintiff and awarded damages. The final judgment was entered about 17 months
after the policy holder’s new lawyers had filed notice of their appearance in the
case. An appeal was taken but the plaintiff and policy holder later settled for a
damage award of $1 million.
The policy holder, who is the plaintiff in this case, has filed this lawsuit
against the insurer in an attempt to force the insurer to treat the earlier judgment as
covered under the policy even though it actually was not.1 Whether that attempt
will succeed depends on the doctrine of waiver and estoppel.
1
The district court agreed with the insurer that the claims in the underlying lawsuit
against the insured were not covered by the policy. Although the insured refers to “purported
noncoverage issues,” it does not actually argue that the claims were covered. We take as a given
that there was no coverage. See, e.g., Greenbriar, Ltd. v. City of Alabaster, 881 F.2d 1570, 1573
n.6 (11th Cir. 1989) (holding that issues not raised on appeal are deemed waived).
2
Under Georgia law, “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 where the insurer, without reserving
its rights, assumes the defense of an action or continues such defense with
knowledge, actual or constructive, of noncoverage.” Prescott’s Altama Datsun,
Inc. v. Monarch Ins. Co., 319 S.E.2d 445, 446 (Ga. 1984) (emphasis added)
(citations omitted). The first issue this case presents is whether the insurer’s
actions effectively reserved its rights. If the answer to that issue is, as we believe,
that they did not reserve its rights, the second and more difficult issue is whether
the waiver and estoppel doctrine requires a showing that the insured actually was
prejudiced by the insurer’s assumption of the defense. And, if actual prejudice
must be shown, the third issue is whether the facts of this case do show it.
The only way we can be sure that the state law questions that underlie those
three issues are answered correctly is to certify them to the Georgia Supreme
Court. See Blue Cross & Blue Shield of Ala., Inc. v. Nielsen, 116 F.3d 1406,
1413 (11th Cir. 1997) (noting that the final arbiter of state law is the state supreme
court, which means it is the only authoritative voice on that state’s law).
3
I.
Between 1995 and 1999, Michael E. Gause and Charles Richard Homa
operated an automobile title lending business called Cash 4 Titles or C4T, which
was actually an elaborate Ponzi scheme. See SEC v. Homa, 514 F.3d 661, 664
(7th Cir. 2008). Innocent investors in that scheme lost more than $165,000,000.
Id. During that time Gause, who was a member of World Harvest Church, donated
a great deal of money to it. His donations included a $1 million wire transfer from
a Cayman Islands bank account.
In October 1999 government officials arrested Gause and Homa for
operating the Ponzi scheme. SEC v. Homa, No. 99 C 6895, 2004 WL 1093492, at
*1 (N.D. Ill. May 13, 2004) (unpublished). The Securities and Exchange
Commission then filed a civil enforcement lawsuit against Gause, Homa, and the
other Ponzi scheme participants.2 Id. World Harvest was not a defendant in the
SEC lawsuit. See id.
The SEC lawsuit proceeded in federal district court in Illinois, and in
November 1999 that court appointed Phillip Stenger as Receiver to marshal and
conserve for the benefit of investors the assets of the individuals and the entities
involved in the Ponzi scheme. Id. (“The Receiver’s general mandate is to marshal
2
The SEC lawsuit was originally filed in federal district court in New York but was
transferred to federal district court in Illinois. See Homa, 2004 WL 1093492, at *1.
4
C4T related assets for the benefit of investors.”). At the conclusion of the SEC
lawsuit, Homa consented to a civil judgment in the amount of $157,993,830.25,
plus $35,248,523.55 in prejudgment interest. Homa, 514 F.3d at 665 n.3. Gause
also agreed to make a civil disgorgement in the amount of $193,242,353.80.
Stenger v. World Harvest Church, Inc. , No. Civ.A.1:04CV00151-RW, 2006 WL
870310, at *1 (N.D. Ga. March 31, 2006) (unpublished). In 2000 Homa pleaded
guilty to criminal charges of securities fraud and served time in prison. See id.;
Homa, 514 F.3d at 665 n.4. In 2001 Gause pleaded guilty to securities fraud in
federal district court in New York and was also sentenced to prison. Stenger, 2006
WL 870310, at *1.
Continuing his work as Receiver, Stenger sought to recover additional
money for the people who had invested in the Ponzi scheme. In February 2001
Stenger demanded that World Harvest return about $1.8 million of Gause’s
donations. He sent World Harvest a letter asserting that:
[s]ince the money contributed by Gause and Pearson through their
related entities was fraudulently obtained from the Cash 4 Titles ponzi
scheme, the transfers were clearly fraudulent conveyances. It makes
no difference that the church may have received the funds in good
faith or that the money may have already been spent on religious or
charitable activities. Controlling case law makes it clear that under
such circumstances the Receiver is entitled to recover all funds and
assets that the church received from Michael Gause, Dean Pearson
and their related entities.
5
World Harvest did not return the money, so in November of 2002 Stenger
filed a lawsuit against it in federal court in Illinois asserting fraudulent transfer and
unjust enrichment claims. In February of 2003, Julie Loehr, Office Administrator
for World Harvest, sent a letter to GuideOne Mutual on behalf of Pastor Mirek
Hufton, informing GuideOne Mutual that the church had been named as a
defendant in the Illinois lawsuit. Loehr’s letter asked GuideOne Mutual to
“provide clarification concerning either coverage for litigation costs or any
indemnification coverage.” Because the lawsuit had been filed in Illinois,
GuideOne Mutual’s Indianapolis office, GuideOne Elite Insurance Company,
reviewed the claim.3 In February 2003 GuideOne Elite responded with a certified
letter to Loehr at World Harvest expressing concern about whether World
Harvest’s insurance policy covered the claims in the Illinois lawsuit. The letter
explained to Loehr and to World Harvest that GuideOne Elite “reserve[d] the right
to deny any and all liability.” GuideOne Elite ultimately concluded that the policy
did not cover the Illinois action. The Illinois federal lawsuit was later dismissed
for lack of personal jurisdiction.
3
World Harvest describes GuideOne Elite as GuideOne Mutual Insurance Company’s
sister company. GuideOne Mutual refers to GuideOne Elite as Guide One’s “Indianapolis
office.” The difference does not matter to any of the issues on appeal. GuideOne Elite has since
been dismissed from this suit.
6
In January 2004 Stenger filed a similar lawsuit (the lawsuit that would lead
to this one) against World Harvest in the United States District Court for the
Northern District of Georgia. The day after the lawsuit was filed, counsel for
World Harvest called Dale Hubbell, who worked in the GuideOne Mutual Claims
Department, and informed him about that lawsuit. World Harvest’s counsel
followed up his phone call with a letter to Hubbell, enclosing a copy of the
complaint and the other documents that had been served on World Harvest.
GuideOne Mutual determined that there were potential “coverage issues,” so it
“split the file.” What that means is that GuideOne Mutual assigned one claims
adjuster, Doug Sleezer, to address liability issues and a different adjuster, Dale
Hubbell, to address coverage issues.
Hubbell testified in his deposition that he was assigned to determine whether
the insurance policy covered “[a]ny or some of the claims” that had been made
against World Harvest in the lawsuit Stenger had filed against World Harvest in
Georgia. He also testified that Sleezer was assigned to “be in charge of handling
the defense of this particular case for the underlying liability claims being made
against the policy holder.” In the present lawsuit Hubbell testified as follows about
his conversation with World Harvest’s counsel about the split file:
My only conversation with [World Harvest’s counsel] was, you know,
we discussed early on that my handling of the case would be strictly
7
on any coverage issues and that if he needed to talk to someone in the
office about liability issues it would have to go to Mr. Doug Sleezer
who would be handling the defense of the case while myself would be
undertaking the issues presented under the policy discussing with
[World Harvest’s counsel] that, you know, we didn’t see coverage but
we would have to evaluate what we have currently to see if there
would be coverage issues.
In March 2004 the liability adjuster hired a law firm to defend World
Harvest in the Georgia lawsuit. Neither at that time nor at any time thereafter did
GuideOne Mutual send World Harvest a written reservation of its right to deny
coverage. On January 26, 2005, Hubbell finally did send World Harvest a letter
informing it that “GuideOne will not be in a position to indemnify World Harvest
Church against the claims in [Stenger’s Georgia lawsuit] because the damages
sought by Phillip S. Stenger are not covered under the policy.” Hubbell also
informed World Harvest that “effective thirty (30) days from the date of this letter,
GuideOne will no longer provide World Harvest Church with a defense.” In light
of that decision World Harvest hired some attorneys to represent it, and they
entered an appearance in the lawsuit on March 15, 2005.
At the time the new attorneys came into the lawsuit, discovery had been
underway for about 11 months, ever since the court had approved the parties’
preliminary report and discovery schedule on April 22, 2004. On two separate
occasions, the court granted joint motions by the parties to extend the discovery
8
period, ultimately setting the discovery deadline for January 17, 2005 and setting a
deadline for summary judgment of February 7, 2005. On January 13, 2005,
however, the parties filed a third joint motion for extension of time to complete
discovery, and the court granted it, giving the parties until March 17, 2005 to
complete discovery and setting summary judgment motion deadlines for April 6,
2005.
After those three extensions of the discovery deadline already had been
granted, World Harvest’s new attorneys made their appearance in the lawsuit,
when there was a month remaining in the discovery period. They moved the court
to extend the discovery deadline until May 17, 2005, but the court denied their
motion. The judge presiding over the case recused himself on August 8, 2005, and
the case was reassigned to another judge, who granted summary judgment in favor
of Stenger on March 31, 2006. In July 2006 judgment was entered against World
Harvest in the amount of $1.8 million, an amount later settled down to $1 million.
In July 2007, which was three months after that settlement,World Harvest
filed this lawsuit against GuideOne Mutual in the United States District Court for
the Northern District of Georgia. It claimed that GuideOne Mutual had breached
the insurance contract and its duty to indemnify and defend the lawsuit that Stenger
had filed against it in Georgia, had denied coverage in “bad faith” in violation of
9
Ga. Code § 33-4-6, and owed World Harvest attorney’s fees and litigation
expenses pursuant to Ga. Code § 13-6-11. World Harvest requested relief in the
form of damages to include the $1 million settlement amount it had paid to
Stenger, all of its litigation expenses from Stenger’s Georgia lawsuit against it, and
pre-judgment and post-judgment interest.4 The parties filed cross-motions for
summary judgment.
World Harvest’s claims were based on its contention that GuideOne Mutual
should be equitably estopped from denying coverage because it had represented
World Harvest throughout much of Stenger’s Georgia lawsuit without issuing a
“reservation of rights.” The district court rejected that contention, deciding that
under Georgia law an insured had to show that “the insurer’s participation
prejudiced [its] defense” of the lawsuit before the insurer would be estopped from
asserting the defense of noncoverage. The court found that World Harvest had not
“demonstrated prejudice resulting from [GuideOne Mutual’s] actions,” which left
GuideOne Mutual free to raise a noncoverage defense. World Harvest did not
4
To pay the $1 million settlement to Stenger, World Harvest obtained a bank loan for
$1,835,000 along with a $275,000 revolving line of credit, and as security for that loan it
assigned to the bank “any proceeds arising from [World Harvest’s] contemplated litigation
against Guide One Insurance Company . . . for Guide One’s failure, as [World Harvest’s]
insurer, to defend [World Harvest]” in Stenger’s Georgia lawsuit. R3:39 Ex. O, “Assignment of
Litigation Proceeds.”
10
argue that the Stenger lawsuit actually was covered by the policy, and the court
found that it was not.
The district court also rejected World Harvest’s claim that GuideOne Mutual
denied the insurance claim in “bad faith.” The court reasoned that under Ga. Code
§ 33-4-6 and the case law interpreting it an insured could prevail on a bad faith
refusal to pay theory only when the loss actually was “covered under the insurance
policy in dispute.” Based on its earlier finding that the Stenger action was not
covered under the policy, the court concluded that World Harvest could not prevail
on its § 33-4-6 bad faith refusal to pay claim.
Finally, the court rejected World Harvest’s claim for attorney’s fees under
Ga. Code § 13-6-11. In doing so it noted that § 33-4-6 is the “exclusive procedure
to recover attorney’s fees against an insurance company for a bad faith refusal to
pay insurance proceeds.” The failure of World Harvest’s § 33-4-6 claim doomed
its § 13-6-11 claim for attorney’s fees.
This is World Harvest’s appeal from the grant of summary judgment to
GuideOne Mutual.
II.
World Harvest contends that the district court erred when it concluded that
before estoppel applies, an insured must show it was prejudiced by the insurer’s
11
participation in its defense. Pointing to our decision in Fidelity and Casualty
Company v. Riley, 380 F.2d 153, 156 (5th Cir. 1967),5 World Harvest argues that
prejudice should be “conclusively presumed.” World Harvest alternatively
contends that it was prejudiced because GuideOne Mutual’s participation
“precluded [it] from using counsel of its choice” and “deprived [it] of its right to
control its own defense.”
GuideOne Mutual responds that estoppel cannot apply in this case because
its claims adjuster told World Harvest that he “did not see coverage,” even though
GuideOne Mutual never sent World Harvest a written document reserving its
rights. Guideone Mutual essentially argues that it made an effective reservation of
rights in Stenger’s Georgia lawsuit because it told World Harvest there was
potentially a problem with coverage in that lawsuit, and GuideOne Elite, its sister
company, had sent World Harvest an actual, written reservation of rights in the
earlier Illinois Stenger lawsuit. GuideOne Mutual also argues that proving
estoppel generally requires a showing of prejudice, and it asserts that general
principle applies in this insurance-specific situation. It contends that World
Harvest was not harmed by the fact that GuideOne Mutual provided and paid for
5
After we came to be the Eleventh Circuit, we adopted as binding precedent all decisions
of the Fifth Circuit handed down before October 1, 1981. Bonner v. City of Prichard, 661 F.2d
1206, 1209 (11th Cir. 1981) (en banc).
12
the law firm that conducted World Harvest’s defense until Guide One Mutual
determined there was no coverage. It points out that World Harvest never
complained about the law firm it had hired or the quality of representation it was
receiving. GuideOne Mutual also argues that there is no evidence that its actions
caused World Harvest to suffer a judgment and then settle for $1 million.
A.
“In this diversity case, we must apply Georgia law.” Sales v. State Farm
Fire & Cas. Co., 849 F.2d 1383, 1384 (11th Cir. 1988). We first consider whether,
under Georgia law, GuideOne Mutual made an effective reservation of its right to
deny coverage when it assumed World Harvest’s defense in Stenger’s Georgia
lawsuit. It is undisputed that a GuideOne Mutual claims adjuster told counsel for
World Harvest that GuideOne “did not see coverage,” but GuideOne Mutual did
not provide notification in writing that it was defending World Harvest under a
reservation of rights. At oral argument both parties agreed that Georgia law does
not necessarily require that a notice of reservation of rights be communicated in
13
writing.6 The Georgia Court of Appeals has explained the requirements for a
reservation of rights as follows:
The general rule of estoppel is limited by the principle that a liability
insurer may avoid the operation of the rule by giving the insured
timely notice that, notwithstanding its defense of the action against
him it has not waived the defenses available to it against the insured.
Such notice, to be effective, must fairly inform the insured of the
insurer’s position, and must be timely, although delay in giving notice
will be excused where it is traceable to the insurer’s lack of actual or
constructive knowledge of the available defense.
6
There is one Georgia Court of Appeals decision that specifically refers to the
requirement as one of written notification, but that reference is dicta. Vara v. Essex Ins. Co., 604
S.E.2d 260, 262 (Ga. Ct. App. 2004). The Vara opinion states that “with full knowledge of the
facts, an insurer who assumes and conducts an initial defense without written notification to the
insured that such defense is tendered under a reservation of rights by the insurer, is deemed
estopped to assert the defense of noncoverage and is deemed to have waived its right to deny
liability under the policy.” (emphasis added). Following that statement, the Vara opinion cites
another Georgia Court of Appeals decision that does not expressly require notification in
writing. See id. (citing State Farm Mut. Auto. Ins. Co. v. Wright, 224 S.E.2d 796, 798 (Ga. Ct.
App. 1976) (“[T]he insurer may avoid the estoppel by informing the insured that,
notwithstanding its defense of the action, it disclaims liability and does not waive the defenses
available to it against the insured.” (emphasis added)). In Vara the question of whether
notification had to be in writing was not presented because it was undisputed in that case that the
insurer had given “written notice to [the named insured] that there was no coverage; that [it]
would not cover the claims; that it would not provide a defense; and that the attorney had been
instructed to abandon the case.” Id. at 261.
We note that the Georgia Court of Appeals has urged insurers to take certain steps after
discovering that coverage is in doubt: “A proper and safe course of action for an insurer in this
position is to enter upon a defense under a reservation of rights and then proceed to seek a
declaratory judgment in its favor.” Richmond v. Ga. Farm Bureau Mut. Ins. Co., 231 S.E.2d
245, 247 (Ga. Ct. App. 1976).
14
State Farm Mut. Auto. Ins. Co. v. Anderson, 123 S.E.2d 191, 193 (Ga. Ct. App.
1961) (alteration omitted). As we understand it, Georgia law does not require a
reservation of rights to be in writing. See id. Instead, the effectiveness of the
notice depends on whether it is timely and “fairly inform[s] the insured of the
insurer’s position.” Id.
Although World Harvest concedes that it did not have to be notified in
writing, it contends that the notice it received was ineffective. According to World
Harvest, a statement that there are issues about coverage is not enough to reserve
the right to deny coverage. GuideOne Mutual argues to the contrary. The district
court concluded that “[a]n insured’s knowledge of the coverage issue may be a
factor in evaluating whether the insured was prejudiced by the insurer’s actions,
but that knowledge alone does not nullify the estoppel issue.” That seems right to
us.
It is undisputed that World Harvest knew that there were coverage issues
and that GuideOne Mutual did not enter into a reservation of rights agreement with
World Harvest, did not send it a reservation of rights letter, and did not explicitly
state that to World Harvest that it was reserving its rights. The fact that GuideOne
Mutual informed World Harvest that there were “coverage issues” may, however,
15
be relevant to whether World Harvest was prejudiced by GuideOne Mutual’s
actions.
B.
We turn now to the question of whether World Harvest must show prejudice
in order to establish that estoppel applies. We have addressed that issue before, but
Georgia law may well have changed since then. When we address issues of state
law, like the ones in this case, we are bound by the decisions of the state supreme
court. See Flintkote Co. v. Dravo Corp., 678 F.2d 942, 945 (11th Cir. 1982). Of
course, our prior panel precedent rule still applies even when we are dealing with
state law issues. See Venn v. St. Paul Fire & Marine Ins. Co., 99 F.3d 1058, 1066
(11th Cir. 1996). But “[i]f state law changes or is clarified in a way that is
inconsistent with the state law premise of one of our earlier decisions, the prior
panel precedent rule does not bind us to follow our earlier decision.” United States
v. Johnson, 528 F.3d 1318, 1320 (11th Cir. 2008); see also Venn, 99 F.3d at 1066
(“[I]f subsequent decisions of the . . . [state] courts cast doubt on our interpretation
of state law, a panel would be free to reinterpret state law in light of the new
precedents.” (quotation marks omitted)). Instead, we follow the latest statement of
state law by the state supreme court.
16
We have held that “[i]t is the law of Georgia and the general rule supported
by the great weight of authority that if a liability insurer, with knowledge of a
ground of forfeiture or noncoverage under the policy, assumes and conducts the
defense of an action brought against the insured, without disclaiming liability and
giving notice of its reservation of rights, it is thereafter precluded in an action upon
the policy from setting up such ground of forfeiture or noncoverage.” Riley, 380
F.2d at 156 (quoting State Farm Mut. Auto. Ins. Co, v. Anderson, 123 S.E.2d 191,
193 (Ga. Ct. App. 1961) (alterations and quotation marks omitted)). In the Riley
case we said that in such a situation, “prejudice to the insured by the assumption
and the conduct of the defense [by the insurer] is conclusively presumed.” Id. In
the forty-two years since Riley, it appears the law of Georgia is that insurers “may
be” subject to estoppel if they defend the insured without a timely and effective
reservation of their rights, but it is not as clear as our statement in Riley implies
that they always will be estopped from denying coverage in that situation. See
Prescott’s, 319 S.E.2d at 446; Vara v. Essex Ins. Co., 604 S.E.2d 260, 262 (Ga. Ct.
App. 2004); VFH Captive Ins. Co. v. Cielinski, 581 S.E.2d 335, 338 (Ga. Ct. App.
2003); see also Henning v. Cont’l Cas. Co., 254 F.3d 1291, 1295 (11th Cir. 2001).
In 1984 the Georgia Supreme Court decided Prescott’s, in which counsel
hired by an insurer filed a notice of appearance in a lawsuit against its insured
17
without first issuing a reservation of rights. 319 S.E.2d at 446. Because the
insured’s personal attorney had already answered the complaint, the counsel hired
by the insurer did nothing beyond entering an appearance. Id. The insured made a
written demand that counsel hired by the insurer take over as the lead lawyer in
defending the insured, but the insurer refused. Id. Three months later, just a few
days after the plaintiff in the lawsuit had initiated discovery, the insurer sent a
reservation of rights letter to the insured. Id. The insured did not contest the
reservation of rights as unjustified or untimely. Id. at 447.
After noting that an insurer may be estopped from asserting a noncoverage
defense if it knowingly defends an insured without first issuing a reservation of
rights, the Georgia Supreme Court concluded that the insurer was not estopped
based on the facts of that case. Id. The Court held that the insurer’s “attorney
entered only an appearance, and entry of an appearance alone does not create an
estoppel.” Id. Later the Court added: “Moreover, [the insured] has failed to
demonstrate how [the insurer’s] participation has prejudiced [the insured’s]
defense of [the plaintiff’s] suit.” Id.
While the Court could have rested its decision in Prescott’s solely on its
determination that “entry of an appearance alone does not create an estoppel,” it
does not follow that its statement about the insured’s failure to show prejudice is
18
merely dicta. The decisional law of Georgia appears to recognize alternative
holdings as binding. See, e.g., Grantham v. State, 262 S.E.2d 777, 777 (Ga. 1979)
(granting certiorari to review an alternative holding); QOS Networks Ltd. v.
Warburg, Pincus & Co., 669 S.E.2d 536, 541 (Ga. Ct. App. 2008) (“A ruling is not
dictum merely because the disposition of the case is or might have been made on
some other ground. Where a case presents two or more points, any one of which is
sufficient to determine the ultimate issue, but the court actually decides all such
points, the case is an authoritative precedent as to every point decided, and none of
such points can be regarded as having merely the status of a dictum.” (citation
omitted)); Vann v. Am. Credit Co., 155 S.E.2d 459, 460 (Ga. Ct. App. 1967).
The Georgia Supreme Court’s additional or alternative reason for concluding
that the insurer in Prescott’s was not estopped—the insured had failed to show
prejudice—appears to be a binding holding. The apparent holding is that before an
insurer can be estopped from using a noncoverage defense in Georgia, the insured
must prove prejudice. See generally Prescott’s Altama Datsun, Inc. v. Monarch
Ins. Co, 317 S.E.2d 845, 848 (Ga. Ct. App. 1984) (noting that “it must be shown
that prejudice resulted from the insurer’s conduct in defending its action against
the insured” and then explaining: “The key word is ‘prejudice.’ [The insurer’s] sole
activity prior to the filing of its reservation of rights was the neutral act of filing a
19
notice of appearance. Thus there was nothing done by [the insurer] that could have
prejudiced [the insured’s] rights or jeopardized its defense by the release of [the
insurer].” (citation and some quotation marks omitted)). If that is a holding of
Prescott’s, our earlier holding in Riley that prejudice is conclusively presumed
must give way. See Johnson, 528 F.3d at 1320; Venn, 99 F.3d at 1066. The result
would be that under Georgia law, an insured who wants to estop an insurer from
using a noncoverage defense must prove that it was prejudiced by the insurer’s
participation in the lawsuit against it; prejudice will not be conclusively presumed.
C.
Anticipating that we might interpret Prescott’s to require a showing of actual
prejudice, World Harvest argues in the alternative that it has shown that GuideOne
Mutual’s actions did prejudice it. It argues that GuideOne Mutual’s “sudden and
wholly unexpected abandonment” of its defense after “eleven months of
voluminous discovery and active defense” and “only approximately two weeks
before the end of discovery” harmed its ability to defend the lawsuit.
Specifically, World Harvest argues that, because of GuideOne Mutual’s
participation, it did not get to use “counsel of its choice” or to “control its own
defense.” World Harvest, however, does not point to any evidence that it could not
have hired its own counsel or insisted on controlling the defense. Without
20
explaining how, World Harvest concludes that GuideOne Mutual’s actions
“resulted in a judgment against [it before settlement] of nearly two million
dollars.”
GuideOne Mutual responds that World Harvest has not proved prejudice
because the law firm GuideOne Mutual hired conducted “an extensive amount of
discovery” for World Harvest, which never “complain[ed] about the defense being
provided” and which “admitted that . . . [World Harvest] would have been content
to stay with the defense firm” GuideOne Mutual had selected if only it would have
continued to pay that firm. GuideOne Mutual argues that World Harvest’s
assertion that its actions led to the judgment is “entirely unsubstantiated” because
World Harvest has offered no evidence that “had certain actions been taken a
judgment would have been avoided or that certain actions by counsel inevitably led
to the judgment.” GuideOne Mutual also points out that after it withdrew, World
Harvest hired the same law firm that had represented World Harvest in the related
Illinois action and that one of the lawyers from that law firm had called GuideOne
Mutual when the Georgia lawsuit was filed against World Harvest. GuideOne
Mutual’s position is that any prejudice from its withdrawal was minimal at most.
If we are reading Prescott’s correctly to require a showing of prejudice,
Georgia law is not clear about what facts or circumstances will satisfy that
21
requirement. No Georgia decision actually holding that an insured has succeeded
in showing prejudice has been cited to us, and we have not found any.7 We have
found only a few offering any guidance about what is not enough to show
prejudice. See, e.g., Prescott’s, 319 S.E.2d at 447; Adams v. Atlanta Cas. Co., 509
S.E.2d 66, 68 (Ga. Ct. App. 1998); Home Indem. Co. v. Godley, 177 S.E.2d 105,
110 (Ga. Ct. App. 1970).
As we discussed earlier, in Prescott’s the Georgia Supreme Court held that
an insured had not shown prejudice when the attorney hired by the insurer had
merely entered an appearance. 319 S.E.2d at 446–47. In that case, the insured’s
own personal attorney filed an answer to the complaint and the insurer issued a
reservation of rights just as discovery was beginning. Id. at 446. The attorney
hired by the insurer refused to take over as lead counsel for the insured’s defense
and, other than entering an appearance, did nothing that could be construed as
7
We did find one decision in which the Georgia Court of Appeals has concluded that
“[o]n the face of it” there was a question of material fact about whether an insurer’s actions
prejudiced the insured’s ability to defend himself in the following circumstances: “By not
providing defense counsel after telling [the insured’s] personal attorney that it would, [the
insurer] could have deprived [the insured] of the opportunity of defending the case against him
or settling the case before trial. Instead, [the insurer] rejected settlement offers, and after suit
was filed, allowed the case to proceed to a default judgment, without informing [the insured].”
Ponse v. Atlanta Cas. Co., 563 S.E.2d 499, 502 (Ga. Ct. App. 2002). Those, however, are not
our facts.
22
defending the insured. Id. Given those facts, the Georgia Supreme Court stated
that the insured had failed to demonstrate how the insurer’s participation had
prejudiced the defense of the lawsuit. Id. at 447. Those, however, are not our
facts.
The insurer in Adams, after issuing a reservation of rights, initially told its
insured that it had hired and would pay for an attorney to defend him. 509 S.E.2d
at 67. The insurer later “decided not to assume and conduct any defense because
[another party’s uninsured motorist carrier] was doing so.” Id. The Georgia Court
of Appeals noted that the insurer “did not retain counsel, file pleadings, or conduct
a defense on behalf of” the insured and that no evidence had been offered to show
how the insurer’s participation in the case prejudiced the insured’s defense. Id. at
68. Those, however, are not our facts.
In Godley, a case that predated Prescott’s by fourteen years, the attorney
hired by the insurer defended the insured against a Georgia lawsuit for four months
but withdrew from representation when the insurer discovered facts that led it to
conclude there was no coverage. 177 S.E.2d at 110. Five months after the
withdrawal, an identical lawsuit was filed in Florida. Id. A month after that, the
Georgia lawsuit was voluntarily dismissed by the plaintiffs. Id. The Georgia
Court of Appeals held:
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There is no estoppel by virtue of the fact that [the insurer’s attorney] .
. . entered an appearance for the insured in the [Georgia] cases. . . .
His action in withdrawing himself and [the insurer] from the defense
and turning the defense over to [another insurer’s attorney] did not
prejudice the rights of [the insured] because some time thereafter
these suits were voluntarily dismissed by the plaintiffs. The Florida
suits were not filed until five months after the time [the insurer’s
attorney] withdrew from the case.
Id. Those, however, are not our facts.
From those three decisions, it seems that an insured fails to show that the
insurer’s participation in its defense prejudiced it if: (1) the insurer never provides
an attorney; (2) the attorney hired by the insurer only enters an appearance and
does no more; or (3) the lawsuit in which the attorney for the insurer has
participated is later dismissed. More than that we do not know. And none of those
decisions provides the answer to the question of whether prejudice has been shown
in this case.
Fortunately, there is the certification procedure, “a valuable tool for
promoting the interests of cooperative federalism,” Nielsen, 116 F.3d at 1413. It
helps save “time, energy, and resources” and produces “authoritative answers” to
“novel or unsettled questions of state law.” Arizonans for Official English v.
Arizona, 520 U.S. 43, 77, 117 S. Ct. 1055, 1073 (1997). The Georgia Supreme
Court has been generous and gracious in answering our certified questions before,
and we ask its favor in doing so again.
24
If this case presented only the issues of whether there was a sufficient
reservation of rights and whether prejudice must be shown or is presumed, we
probably would decide, without asking the Georgia Supreme Court for help, that
GuideOne Mutual did not effectively reserve its rights and that Prescott’s requires
World Harvest to show prejudice. But the issue of what constitutes an adequate
showing of prejudice is a state law question on which we do need help. Because
the three issues are intertwined, we definitely need help on one of them, and we
also recognize the possibility our answers to the other two may be wrong, we think
the best course is to certify all three state law questions as a package to the Georgia
Supreme Court.8 We will decide this appeal in accordance with its answers.
We certify the following questions to the Georgia Supreme 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?
8
We recall another case in which we thought we knew the answer to some state law
questions and answered them, but we were uncertain about the answers to other questions. See
Spain v. Brown & Williamson Tobacco Corp., 230 F.3d 1300, 1312 (11th Cir. 2000). So we
certified the state law questions about which we were uncertain and also invited the state
supreme court to let us know if we were wrong in our answers to the other ones. Id. It did, and
we were. Spain v. Brown & Williamson Tobacco Corp., 363 F.3d 1183, 1195–96 (11th Cir.
2004). The lesson we learned is that if we are going to certify one state law question in a case, it
probably is better to go ahead and certify all of them.
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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?
As we have been careful to emphasize before:
[T]he particular phrasing used in the certified question is not to
restrict the Supreme Court’s consideration of the problems involved
and the issues as the Supreme Court perceives them to be in its
analysis of the record certified in this case. This latitude extends to the
Supreme Court’s restatement of the issue or issues and the manner in
which the answers are to be given, whether as a comprehensive whole
or in subordinate or even contingent parts.
Martinez v. Rodriquez, 394 F.2d 156, 159 n. 6 (5th Cir. 1968) (citations omitted);
accord Essex Ins. Co. v. Zota, 466 F.3d 981, 990 (11th Cir. 2006).
The entire record on appeal in this case, including copies of the parties’
briefs, is transmitted along with this certification.
QUESTIONS CERTIFIED.
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