Winder Laboratories and Steven Pressman were insured by Continental Casualty Company and Valley Forge Insurance Company when Winder and Pressman were sued by Concordia Pharmaceuticals Inc. for allegedly “falsely or misleadingly advertis[ing] their [products] . . . as generic equivalents to Concordia’s product.”

The insureds sought coverage under the insurers’ policies, both of which included a provision requiring defense “against any ‘suit’ seeking damages for ‘personal and advertising injury.’” ‘Personal and advertising injury’ was defined as “an injury ‘arising out of’ either ‘oral or written publication in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services’ or ‘the use of another’s advertising idea in the insureds’ advertisement.’” Importantly, the policies’ ‘failure to conform’ provisions “excluded coverage for injuries ‘arising out of the failure of goods, products or services to conform with any statement of quality or performance made in the insureds’ advertisement.”

After the insureds sought coverage from the insurers, the insurers responded with a joint letter that included both a “fairly standard reservation of rights” and “not-so-standard reimbursement provision” which, in its final form, stated that “[t]he insurers reserve their rights to disclaim coverage and seek reimbursement of legal fees and costs.” The insureds then elected to retain independent counsel subject to the reservation of rights.

During the pendency of the Concordia action, the insurers filed suit seeking a declaratory judgment that they did not have a duty to defend or indemnify the insureds and were entitled to reimbursement of any legal fees and costs spent to defend insurers. As to the duty to defend or indemnify, the district court found that the Concordia action was in fact excluded from coverage because “Concordia’s allegations were ‘squarely’ excluded by the ‘failure to conform’ provision” because the complaint was “‘based entirely upon allegations that [the insured] misrepresented the quality’ of [its] products.” As to reimbursement, the district court found that the insurers “had ‘not shown entitlement to reimbursement for defense costs already paid.’” After the parties failed to reach an agreement on reimbursement, they cross-moved for summary judgment on the issue.

The district court granted summary judgment in favor of the insureds, noting that “whether an insurer had a right to reimbursement when that right was included only in a reservation of rights letter but not the parties’ insurance contract[]was an open question under Georgia law.” The district court concluded that “an effective reservation of rights necessarily required a preexisting contract right”; without that, “an insurer who issued an otherwise valid, unilateral reservation of rights cannot recoup its defense fees or costs.”

The insurers appealed as to the reimbursement question, and the insureds cross-appealed as to the duty to defend. In an opinion written by Judge Branch, the Eleventh Circuit affirmed the district court on both issues. Continental Casualty Co. v. Winder Labs., LLC, 73 F.4th 934 (11th Cir. 2023).

As to the non-existence of a duty to defend, the court first noted that a plain and ambiguous policy exclusion must be given effect, and that an “insurer’s duty to defend is determined by ‘comparing the allegations of the complaint with the provisions of the policy.’” If the complaint “‘does not assert any claims upon which there would be insurance coverage, the insurer is justified in refusing to defend the insured’s lawsuit.’” Considering the plain language of the policies and comparing the allegations of the complaint with the provisions of the policy, the court reasoned that Concordia’s “false advertising claim clearly rested on [the insureds’] false and misleading representations[] not its label copying.” The court rejected the insureds’ label copying argument on the basis that the label copying allegations related to previously dismissed claims and the only “tangential” relation to the false advertising claims was incorporation by reference. Accordingly, the court held that “the allegations in the complaint do not arise out of a ‘personal and advertising injury’ stemming from ‘the use of another’s advertising idea,’” but rather the “allegedly false and misleading representations about [the insureds’] products,” triggering the ‘failure to conform’ exclusion.

As to the reimbursement issue, the court considered, first, whether the reservation of rights letters created a new contract; and, second, whether the Supreme Court of Georgia would recognize a right to reimbursement absent a contractual right to such reimbursement – a novel question under Georgia law.

The court determined that the reservation of rights letters did not create a new contract. For this question, “the issue of consideration [was] dispositive.” The insurers argued that there was adequate consideration, such that the reservation of rights letters bound the parties to the right to reimbursement terms not in the original contract, because they defended the insureds and the insureds were able to choose their own defense counsel. The court rejected this argument, holding that “because the parties’ contracts already required the insurers to defend the insureds against certain third-party lawsuits, there is no new consideration for the reimbursement provision in the reservations of rights letters and thus no new contract under Georgia law.”

As to a potential free-standing right to reimbursement, the court considered both the national trend and the “structure of Georgia’s insurance law,” including its broad duty to defend. The court noted the recent trend of state courts to declare that no right to reimbursement exists because of the potential “‘retroactive erosion of the broad duty to defend . . . [that] would . . . narrow the . . . view that the duty to defend is broader than the duty to indemnify.’” In other words, state courts have been reluctant to make the duty to defend “contingent upon a court’s determination that a complaint alleged covered claims.”

The court then considered Georgia’s insurance law, particularly the broad duty to defend. It reasoned that adopting “a rule allowing for broadscale reimbursement without any contractual provision securing that right” would collapse “the duty to defend . . . into the duty to indemnify.” Reimbursement is thus inappropriate in a system “predicated on a broad duty to defend and a more limited duty to indemnify.” Thus, based on Georgia’s insurance law and insurance framework, the court predicted that the Supreme Court of Georgia “would not allow an insurer to recoup its expenses based on a reservation of rights letter without any contractual provision allowing for reimbursement.”