United States Court of Appeals,
Eleventh Circuit.
No. 95-9603.
COLONIAL OIL INDUSTRIES, INC., Colonial Terminals, Incorporated, Plaintiffs-Counter-defendants-Appellees-Cross-Appellants,
v.
UNDERWRITERS SUBSCRIBING TO POLICY NOS. TO31504670 AND TO31504671, Defendants-Counter-claimants-Appellants-Cross- Appellees.
Feb. 27, 1997.
Appeal from the United States District Court for the Southern District of Georgia. (No. CV-494-10), B. Avant Edenfield, Chief Judge.
Before HATCHETT, Chief Judge, BIRCH, Circuit Judge, and CLARK, Senior Circuit Judge.
PER CURIAM:
CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR THE
ELEVENTH CIRCUIT TO THE SUPREME COURT OF GEORGIA PURSUANT TO
O.C.G.A. § 15-2-9.
TO THE SUPREME COURT OF GEORGIA AND ITS HONORABLE JUSTICES:
This panel of the United States Court of Appeals for the
Eleventh Circuit believes that this case involves unanswered
questions of state law that are determinative of this appeal, and
we can find no clear, controlling precedents in the decisions of
the Supreme Court of Georgia. Therefore, we certify the following
questions of law, based on the facts and procedural history recited
below, to the Supreme Court of Georgia for instructions.
FACTS
Colonial Terminals, Inc., a subsidiary of Colonial Oil
Industries, Inc. (collectively, Colonial), operates several cargo terminals and storage facilities on the Savannah River. Colonial
uses these facilities for the petroleum products operations of the
parent company as well as for third-party shipping and storage. In
1990, Colonial purchased comprehensive general liability (CGL) and
terminal liability insurance coverage from an insurance
underwriters cooperative (the Underwriters) through a local
insurance agent, Palmer & Cay/Carswell, Inc. (Palmer & Cay), and a
broker in London, England, R.L. Harley Insurance Associates, Ltd.
(Harley). The policy period covered the occurrence of the events
at issue herein.
In 1991, Colonial contracted to dredge part of the river in
order to construct a new pier. Colonial contracted to deposit the
dredged materials on a nearby island owned by Charles Gay. On April
17, 1991, Colonial and Gay signed a "Spoilage Disposal Easement"
permitting Colonial to deposit "clean fill" on Gay's property.1
Palmer & Cay, acting on behalf of the Underwriters, issued a
certificate of insurance on August 9, 1991, naming Gay as
additional insured for all work performed by or on behalf of
Colonial relating to the dredging and disposal operations.
Colonial obtained the necessary permits from the United States
Army Corps of Engineers (ACE) and the Georgia Department of Natural
Resources, Environmental Protection Division, and initiated the
dredging in early September 1991. The ACE's permit described the
materials expected to be deposited as ranging from "firm silty sand
to gray sandy clay." Gay inspected the disposal site and found
1 The easement defined "clean fill" as "material which is in full compliance with all Environmental Laws, and does not contain any Hazardous Materials." that the dredge spoil contained bricks, wire cable and lumber
materials. Gay had expected Colonial to deposit only "sandbox
quality" sand. On September 12, 1991, Gay demanded that Colonial
cease the disposal. Colonial inspected the site and determined
that the spoil came within the terms of the agreement, deciding
that those waste materials present could be separated and removed
at a later date.
While Colonial declined to stop the disposal on Gay's
property, it sent a letter to Palmer & Cay on September 19, 1991,
informing them of Gay's objections. On October 7, 1991, Palmer &
Cay forwarded the information to Harley. Harley misplaced the
letter from Palmer & Cay and neglected to inform the Underwriters.
Gay filed an action against Colonial in the United States
District Court for the Southern District of Georgia on April 17,
1992, demanding that Colonial remove the spoil. Gay asserted that
Colonial breached the easement by (1) depositing material other
than the "clean fill" specified in the agreement; (2) allowing
liquid runoff to flood portions of the island; and (3) dumping
hazardous materials onto his property. Gay also claimed damages
for nuisance and trespass.2 Colonial forwarded a copy of the Gay complaint to the
Underwriters. The Underwriters argue that they had no notice of
the dispute prior to receiving the complaint.3 On June 16, 1992,
2 Gay amended the complaint in August 1992 to claim damages under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq., after the Underwriters declined to defend Colonial. 3 The parties contest whether Palmer & Cay's notification to Harley in October 1991 constituted notice to the Underwriters the Underwriters informed Colonial that they would not defend
against Gay's suit, "based on the pleadings in the case which have
been furnished to us," pursuant to the CGL policy's coverage
limitations. The Underwriters' letter denying coverage claimed
that they had based their decision on the "facts as have been
alleged and thus the facts that are known to us thus far." The
Underwriters suggested that Colonial submit to a "standstill
agreement" with them regarding the coverage issue until Colonial
resolved the suit. The Underwriters also acknowledged that "black
letter law dictates" that they obtain a declaratory judgment
affirming their denial of coverage. Colonial neglected to respond
to the letter, and the Underwriters did not seek a declaratory
judgment. On September 18, 1992, Colonial settled with Gay,
agreeing to purchase the property for $900,000 and to pay $850,000
as a settlement, $400,000 of which constituted reimbursement for
attorney's fees.
PROCEDURAL HISTORY
On November 10, 1993, Colonial brought a subsequent defense
and indemnity action against the Underwriters in the Superior Court
of Chatham County, Georgia, seeking (1) reimbursement for the
$850,000 settlement, (2) attorney's fees for the Gay defense, (3)
prejudgment interest, and (4) a 25-percent statutory penalty under
Georgia law.4 The Underwriters removed the action to the United
States District Court for the Southern District of Georgia on
regarding the dispute. 4 See O.C.G.A. § 33-4-6 (imposing a penalty for an insurer's bad faith refusal to pay a covered claim within sixty days). January 14, 1994. On August 9, 1994, the Underwriters moved for
summary judgment asserting coverage defenses.5 The district court
denied the Underwriters' motion on January 18, 1995, and directed
Colonial to file a summary judgment motion. On February 7, 1995,
Colonial complied with the court's request and moved for partial
summary judgment regarding the Underwriters' duties to defend and
indemnify Colonial.
On August 15, 1995, the district court issued an order denying
both parties' motions in limine regarding evidentiary materials.
In its order, the court analyzed the CGL coverage. The court also
discussed the Underwriters' duty to defend Colonial, and the
potential waiver and estoppel ramifications arising from a breach
thereof. The court suggested that the Underwriters' unjustifiable
failure to defend Colonial or obtain a protective declaratory
judgment constituted a waiver of the policy defenses, thus
estopping the Underwriters from raising these defenses in the
indemnification action. Acknowledging that Colonial framed the
estoppel issue differently than the court discussed, however, the
court provided the Underwriters with notice of the estoppel issue
and directed the parties to brief the issue along with the question
of the type and amount of damages. The parties thereafter complied
with the court's directive.
On November 6, 1995, the court granted Colonial summary
judgment and awarded Colonial $1,284,381.48. The court reiterated
5 Specifically, the Underwriters contended that the waste, disposal and contamination exclusions precluded coverage of the Gay action. These provisions excluded coverage for liability due to the disposal of contaminated or polluted dredge materials. its finding in the August 15 order, holding that the Underwriters
breached their duty to defend in (1) relying solely on the terms of
the Gay complaint in declining to defend Colonial, and (2) failing
to obtain a declaratory judgment affirming their decision. The
court held, citing Loftin v. United States Fire Insurance Co., 106
Ga.App. 287, 127 S.E.2d 53 (1962), that Georgia law imposes a duty
on an insurer to investigate and thus does not permit the insurer
to rely solely on the terms of the complaint in determining its
duty to defend. As a result of the Underwriters' unjustified
breach, the court estopped them from raising policy defenses in the
indemnification action. The court recognized thatMcCraney v. Fire
& Casualty Insurance Co., 182 Ga.App. 895, 357 S.E.2d 327 (1987),
and Eason v. Weaver, 557 F.2d 1202 (5th Cir.1977), reject the
complete estoppel doctrine, but the court distinguished those cases
on the ground that the plaintiffs therein were not in direct
privity with the insurer. The court awarded Colonial settlement
and defense costs, and prejudgment interest. The court denied,
however, Colonial's request for the 25-percent statutory penalty.
As to that issue, the court held that the Underwriters' actions did
not warrant a penalty because they had not acted in bad faith. The
court later granted the Underwriters' motion to amend the judgment
and denied Colonial attorney's fees for the coverage suit, reducing
the judgment to $1,148,052.90. The Underwriters appeal and Colonial
cross-appeals the rulings of the district court.
DISCUSSION
It is well-settled under Georgia law that the insurance
contract determines whether the insurer has a duty to defend its insured. See Great Am. Ins. Co. v. McKemie, 244 Ga. 84, 259 S.E.2d
39, 40 (1979). It is less clear, however, what duty Georgia law
imposes on an insurer to investigate a third-party's claim against
its insured in order to determine whether the insurer is required
to defend the action. Georgia law also remains unclear on the
issue of whether, and to what extent, an insurer should be estopped
from raising coverage defenses following a breach of its duty to
defend. We ask the Georgia Supreme Court to address these two
issues.
The Underwriters contend that Georgia law does not impose a
duty on an insurer to investigate—in order to determine whether the
policy language imposes a duty to defend—a claim brought against
its insured beyond the third party's complaint and supporting
materials. The Underwriters rely primarily on McKemie. In that
case, a landlord sued her insurer for wrongful refusal to defend a
suit that tenants brought against her. After the trial court held
that the complaint failed to allege liability covered under the
policy, the Georgia Court of Appeals reversed, holding that the
insurer had a duty to defend because "later-revealed facts" could
have arisen to impose a duty to defend. The Georgia Supreme Court
reversed the appeals court, however, holding that the law only
requires an insurer to rely on "the information it had at the
outset" to determine its duty to defend. McKemie, 259 S.E.2d at
40. The decision noted the distinction between groundless suits,
which the insurer is obligated to defend, and suits "which, even if
successful would not be within the policy coverage." McKemie, 259
S.E.2d at 40 (citation omitted). The Underwriters find support in the McKemie decision for the
proposition that an insurer need only look to the four corners of
the complaint to determine its duty to defend. See McKemie, 259
S.E.2d at 41 ("[T]he allegations of the complaint are looked to to
determine whether a liability covered by the policy is asserted.")
(internal quotation marks omitted). McKemie also noted with
approval Morgan v. New York Casualty Co., 54 Ga.App. 620, 188 S.E.
581 (1936), in which "the complaint showed on its face that the
injuries were not covered by the policy." McKemie, 259 S.E.2d at
40 n. 3. In addition, the Underwriters assert that McKemie places
the burden on the insured, not the insurer, to discover facts
creating the duty to defend. See McKemie, 259 S.E.2d at 41 (if
insured finds later-revealed facts creating coverage, "she [is]
under a duty to send this information to [the insurer] and again
call upon it to defend"). Finally, the Underwriters point to
supporting language from the Georgia courts of appeals suggesting
that McKemie supports the conclusion that Georgia adheres to the
exclusive pleading rule. See Al Who Enters. Inc. v. Capitol Indem.
Corp., 217 Ga.App. 423, 457 S.E.2d 696, 698 (1995); Brayman v.
Allstate Ins. Co., 212 Ga.App. 96, 441 S.E.2d 285, 285-86 (1994);
Hames Contracting, Inc. v. Georgia Ins. Co., 211 Ga.App. 852, 440
S.E.2d 738, 739 (1994); Glens Falls Ins. Co. v. Donmac Golf
Shaping Co., 203 Ga.App. 508, 417 S.E.2d 197, 198 (1992); Cantrell
v. Allstate Ins. Co., 202 Ga.App. 859, 415 S.E.2d 711, 712 (1992);
Batson-Cook Co. v. Aetna Ins. Co., 200 Ga.App. 571, 409 S.E.2d 41,
42 (1991); Presidential Hotel v. Canal Ins. Co., 188 Ga.App. 609,
373 S.E.2d 671, 672 (1988). In response, Colonial argues that the insured's notice to the
insurer that the "true facts" bring the claims within the coverage
provisions of the policy imposes a duty on the insurer to conduct
a reasonable investigation of the claim. Colonial relies on the
decision in Loftin for support. Loftin involved an insured's suit
against his insurer seeking reimbursement for attorney's fees that
the insured paid after the insurer refused to defend. In finding
for the insured, the Georgia Court of Appeals held that "when the
complaint against the insured alleges untrue facts placing the
claim within an exception in the policy, but the true facts, known
or ascertainable to insurer, are within coverage, the insurer is
obligated to defend the suit." Loftin, 127 S.E.2d at 59.
It is the term "ascertainable" upon which Colonial bases its
argument. Colonial contends that Loftin requires an insurer to
conduct a reasonable investigation when the insured provides notice
that the claim actually falls within the policy's coverage. 6 As
Loftin stated, "[w]ith respect to an exception to the duty to
defend, this burden [on an insurer to prove that an exception
exists] is not carried merely by proving that the allegations of
the complaint allege[ ] facts excluding the claim from the policy."
Loftin, 127 S.E.2d at 58. Colonial argues that McKemie also
provides support for this proposition through its discussion of
"true facts." Moreover, Colonial asserts that the cases which the
Underwriters cite should be distinguished because they fail to cite
6 Colonial also avers that the duty to defend arises where the third-party's complaint contains covered claims and noncovered claims pleaded in the alternative, as in the Gay complaint. Loftin or discuss factual situations where the insured charges that
the allegations in the complaint falsely preclude coverage.
Colonial avers that the decisions of the Georgia courts of appeals
support imposing a duty to investigate. See Associated Petroleum
Carriers, Inc. v. Pan American Fire & Cas. Co., 117 Ga.App. 714,
161 S.E.2d 411, 413 (1968); State Farm Mut. Auto. Ins. Co. v.
Keene, 111 Ga.App. 480, 142 S.E.2d 90, 91-92 (1965). Furthermore,
Colonial argues that a duty to investigate provides protection for
the insured, while the insurer can obtain a declaratory judgment or
stipulate to a reservation of rights, neither of which the
Underwriters chose to pursue. Finally, Colonial contends that
public policy requires the imposition of a duty to investigate
because a contrary rule would allow insurers to rely unreasonably
on the averments of a third party rather than its insured.
The second issue we certify is whether the Underwriters'
failure to defend here effectuates a waiver of the defenses and
exclusions available pursuant to the policy, and thus estops them
from raising such policy defenses. The Underwriters contend that
the Georgia courts of appeals have consistently rejected the
complete estoppel theory. See Keene, 142 S.E.2d at 92-93
(specifically rejecting complete estoppel theory); see also Aetna
Cas. & Sur. Co. v. Empire Fire & Marine Ins. Co., 212 Ga.App. 642,
442 S.E.2d 778, 783 (1994); Moore v. State Farm Mut. Auto. Ins.
Co., 196 Ga.App. 755, 397 S.E.2d 127, 129 (1990); Robertson v.
Central Mut. Ins. Co., 165 Ga.App. 167, 299 S.E.2d 894, 895 (1983).
The Underwriters argue that the Georgia courts have instead
accepted a more limited estoppel doctrine, which precludes the insurer from objecting to the outcome of the litigation against its
insured or the manner in which the parties concluded the action.
See McCraney v. Fire & Cas. Ins. Co., 182 Ga.App. 895, 357 S.E.2d
327, 328 (1987) (insurer estopped from contesting determination of
liability against insured); Argonaut Ins. Co. v. Atlantic Wood
Indus., Inc., 187 Ga.App. 471, 370 S.E.2d 765, 770 (1988) (insurer
estopped from exercising "no action clause" contained in the
policy), rev'd on other grounds, 258 Ga. 800, 375 S.E.2d 221
(1989); Georgia S. & Fla. Ry. Co. v. United States Cas. Co., 97
Ga.App. 242, 102 S.E.2d 500, 502 (1958) (insurer estopped from
challenging good faith settlement). As stated in Aetna, "[w]hile
it is true that an insurer loses its opportunity to contest the
negligence of the insured or the injured person's right to recover
by refusing to defend, the insurer does not lose its right to
contest the insured's entitlement to a recovery under its policy."
Aetna, 442 S.E.2d at 783.
Colonial counters that Georgia law estops an insurer who
unjustifiably declines to defend its insured. Cf. Loftin, 127
S.E.2d at 59. Colonial contends that the cases the Underwriters
cite can be distinguished because they involve claims of
third-party subrogees against the insurer, rather than claims of
first-party insureds as in the case at bar. Colonial also argues
that case law exists to support the complete estoppel theory.
Colonial specifically looks to the decision in Keene, which held
that "[b]y an unjustified refusal to defend an action against the
insured the insurer becomes subject to certain new and positive
obligations, including liability for the amount of the judgment rendered against the insured." Keene, 142 S.E.2d at 92. Finally,
Colonial contends that the cases applying the doctrine of partial
estoppel to liability, settlements and no-action clauses provide
support for complete estoppel.
We, therefore, request the assistance of the Georgia Supreme
Court to resolve the estoppel issue. It appears to this court that
the Georgia courts of appeals oppose the complete estoppel doctrine
and we acknowledge that previous decisions of this circuit have
refused to estop insurers from raising policy defenses. See
Spencer v. Assurance Co., 39 F.3d 1146, 1149 n. 5 (11th Cir.1994);
Stahl v. Northern Assurance Co., 716 F.Supp. 626, 630 n. 2
(M.D.Ga.1989), aff'd, 894 F.2d 413 (11th Cir.1990); Eason v.
Weaver, 557 F.2d 1202, 1206 (5th Cir.1977). We note, however, that
the Georgia Supreme Court has not yet ruled on this issue, and we
prefer to defer to its authority on matters of state law.
Accordingly, we certify the following questions to the
Supreme Court of Georgia:
1) Does an insurer have a duty to conduct a reasonable investigation of facts outside those presented in the complaint, or otherwise presented to the insurer by its insured, prior to determining whether to defend a claim brought against the insured?
2) To what extent does Georgia law estop an insurer from raising coverage defenses after the insurer, without performing an investigation into the third-party's allegations, seeking a declaratory judgment, or stipulating to a reservation of rights, refuses to defend the insured?
The phrasing of these questions is to be used for guidance and is
not intended to limit the Supreme Court of Georgia in considering
the issues presented or the manner in which it gives its answers.
Martinez v. Rodriquez, 394 F.2d 156, 159 n. 6 (5th Cir.1968). The clerk of this court shall transfer this certificate, the briefs of
the parties and the entire record in this case to the Supreme Court
of Georgia for assistance in answering these questions.
QUESTIONS CERTIFIED.