The Georgia Court of Appeals recently affirmed a grant of summary judgment in favor of Mountain Express Oil Company on its breach of contract claim against liability insurer, Southern Trust Insurance Company. Empire Petroleum brought claims against Mountain Express for breach of contract, injunctive relief, and libel or slander, among others. Mountain Express sought a defense to that lawsuit under its insurance policy with Southern Trust. Southern Trust contended that the insurance policy did not cover Empire’s non-libel/slander claims, and therefore reimbursed Mountain Express for only a portion of its attorneys’ fees. After the Empire lawsuit settled, Mountain Express sued Southern Trust for breach of contract and bad faith for failing to pay the remaining defense costs, contending that Southern Trust had a duty to defend the entire lawsuit.

The Georgia Court of Appeals affirmed the trial court’s grant of summary judgment to Mountain Express on its breach of contract claim. Citing policy language stating that “[the insurer] will have the right and duty to defend the insured against any ‘suit’ seeking those damages,” the court held that Southern Trust was obligated to defend the entire lawsuit. Specifically, in reaching that conclusion, the court noted that by agreeing to defend any “suit,” not any “claim,” Southern Trust obligated itself to defend the entire lawsuit if any claim could be covered under the policy. Accordingly, Southern Trust breached the policy when it only agreed to defend some of the claims against its insured.

The Georgia Court of Appeals also held that Southern Trust waived its defenses by failing to file a declaratory judgment action. Under Georgia law, when responding to a coverage claim while a lawsuit is pending against its insured, an insurer has three options: the insurer can (1) defend the claim, thereby waiving its policy defenses; (2) deny coverage and refuse to defend; or (3) defend under a reservation of rights. If an insurer chooses to defend under a reservation of rights and the policyholder refuses to consent to a defense agreement, the insurer must seek declaratory relief. The court found that Mountain Express did not accept the defense provided by Southern Trust and thus Southern Trust was required to seek declaratory relief. According to the court, Southern Trust’s failure to do so was “fatal to its claims.”

The Mountain Express decision illustrates that use of the term “suit” as opposed to “claim” in a liability policy’s broad duty to defend provision requires the insurer to defend the entire lawsuit, even where some claims may not be covered under the policy. The decision also illustrates that where the insurer must defend all of the claims in the lawsuit, the insurer faces a severe risk if it deviates from the prescribed methods for responding to a claim that requires a defense. Accordingly, where a policyholder has been sued, it should pay close attention to the scope of the insurer’s proffered defense and challenge the insurer where it fails to fully honor its contractual and legal obligations.