Georgia Interlocal Risk Management Agency v. City of Sandy Springs, Georgia

FIFTH DIVISION
PHIPPS, P. J.,
DILLARD and PETERSON, JJ.
NOTICE: Motions for reconsideration must be
physically received in our clerk’s office within ten
days of the date of decision to be deemed timely filed.
http://www.gaappeals.us/rules
May 24, 2016
In the Court of Appeals of Georgia
A16A0134. GEORGIA INTERLOCAL RISK MANAGEMENT PE-005
AGENCY v. CITY OF SANDY SPRINGS, GEORGIA.
PETERSON, Judge.
Georgia Interlocal Risk Management Agency (“GIRMA”) appeals the grant of
a motion to dismiss its declaratory judgment action. GIRMA argues that an exclusion
in the agreement bars coverage and thus it should not have to continue defending the
lawsuit, and that it is entitled to recoup some of its defense costs. We agree with
GIRMA that the exclusion applies to bar coverage for the underlying lawsuit, thus
freeing GIRMA from its duty to defend.1 However, we affirm the trial court’s finding
1
The City of Sandy Springs requested on its motion for reconsideration that we
make clear our opinion does not decide its affirmative defenses of waiver and
estoppel, which were not raised in the City’s motion to dismiss or before this Court.
It is, of course, axiomatic that “a decision’s holding is limited to the factual context
of the case being decided and the issues that context necessarily raises. Language
that sounds like a holding — but actually exceeds the scope of the case’s factual
that GIRMA is not entitled to recoup defense costs because even if Georgia law
permitted an insurer to recoup defense costs where there is no contractual provision
permitting such recovery, GIRMA did not timely seek to reserve such a right.
GIRMA is a risk-sharing arrangement wherein municipalities contract to pool
their general liability risks. OCGA § 36-85-2. Although technically not an insurance
company or insurer, “[a] municipality that enters a GIRMA coverage agreement in
effect purchases liability insurance.” GIRMA v. Godfrey, 273 Ga. App. 77, 78 (614
SE2d 201) (2005); see also OCGA § 36-85-4. The City of Sandy Springs (the “City”)
participated in the GIRMA program from about December 1, 2005 to May 1, 2012.
The coverage agreement (the “Contract”) obtained by the City provided coverage for
Errors and Omissions — and specifically coverage for money damages incurred by
a Member arising from any Wrongful Act committed during the coverage period
(which includes alleged constitutional violations).
On June 30, 2006, several owners and operators of establishments offering
nude dancing and/or selling sexually explicit merchandise filed suit against the City
context — is not a holding no matter how much it sounds like one.” Classic Commer.
Servs. v. Baldwin, 336 Ga. App. 183, 190 (784 SE2d 44) (2016) (Peterson, J.,
concurring fully and specially). As the City’s defenses of waiver and estoppel are not
at issue on this appeal, nothing in this decision should be understood as deciding
them.
2
in the Northern District of Georgia (“Flanigan’s I”). The suit challenged the
constitutionality of the City’s ordinances regulating adult entertainment industries
within city limits, and sought declaratory and injunctive relief from the City, as well
as compensatory and punitive damages from the then-unidentified city manager.
GIRMA provided the City with a defense in the suit. The plaintiffs subsequently
dismissed the suit voluntarily.
On October 5, 2009, the plaintiffs refiled their federal suit against the City
asserting the same constitutional challenge, but this time seeking only declaratory and
injunctive relief (“Flanigan’s II”). GIRMA again provided a defense to the suit, but
under a reservation of rights. GIRMA’s reservation of rights letter made clear that
GIRMA was providing a defense to the City in Flanigan’s II but was reserving its
right to deny coverage based on an exclusion in the Contract. In particular, GIRMA
cited Exclusion E, which states that coverage does not apply to “any claim arising out
of or in any way connected with any claim seeking equitable relief, redress or any
other claim seeking relief in any form other than money damages.”
The first time the plaintiffs amended their complaint, they still did not seek
money damages. The City then filed a separate nuisance action in Fulton County
3
Superior Court against the plaintiffs, seeking injunctive relief.2 The plaintiffs, in turn,
filed a second amended complaint on June 20, 2012, seeking nominal and
compensatory damages for the City’s allegedly retaliatory conduct in filing the
nuisance action.
GIRMA sent a revised reservation of rights letter on February 1, 2013,
indicating that it was still providing a defense, but reiterated its reservation of the
right to deny coverage under, among other things, Exclusion E. In the revised letter,
GIRMA for the first time explicitly reserved the right to recover future advanced
defense costs from that date forward if it was determined that GIRMA was not
obligated to defend the claim. GIRMA requested that the City consent to the
provision of a defense subject to these reservations by signing and returning the letter,
and indicated that the City’s refusal to consent or return the letter as requested would
result in GIRMA immediately filing a declaratory judgment action to determine its
coverage and defense obligations. The City did not sign or otherwise respond to the
revised reservation of rights letter.
2
The nuisance action also included a catch-all provision in the prayer for relief,
seeking all other relief as the court “deems just and proper[,]” including “damages,
and other monetary relief[.]”
4
Later in Flanigan’s II, on April 9, 2014, the District Court granted the City’s
motion for summary judgment with respect to the plaintiffs’ claims over the filing of
the nuisance action. Neither party appealed the Court’s order.
Following the court’s order in Flanigan’s II, GIRMA filed suit against the City
on July 11, 2014, seeking a declaratory judgment that no coverage exists for
Flanigan’s II, GIRMA is not obligated to provide a defense to the City in that
lawsuit, and it is entitled to defense costs starting from the date of its revised
reservation of rights (the “Declaratory Judgment Action”). The City moved to dismiss
the suit, arguing GIRMA had a duty to defend as a matter of law and could not
withdraw its defense until the City was protected by a final judgment on all
potentially or arguably covered claims. The trial court agreed, granted the City’s
motion, and dismissed GIRMA’s Declaratory Judgment Action. This appeal followed.
“We apply a de novo standard of review to the trial court’s grant of a motion
to dismiss. A motion to dismiss may be granted only where a complaint shows with
certainty that the plaintiff would not be entitled to relief under any state of facts that
could be proven in support of his claim.” Alcatraz Media, LLC v. Yahoo! Inc., 290
Ga. App. 882, 882 (660 SE2d 797) (2008) (citations omitted). Further, in reviewing
the grant of a motion to dismiss, we “must construe the pleadings in the light most
5
favorable to the appellant with all doubts resolved in the appellant’s favor.” Ewing
v. City of Atlanta, 281 Ga. 652, 653 (2) (642 SE2d 100) (2007). Although GIRMA
is not technically an insurance company or insurer, we apply principles of insurance
law in analyzing coverage issues. See, e.g., City of College Park v. Georgia Interlocal
Risk Mgmt. Agency, 313 Ga. App. 239, 243-44 (2) (721 SE2d 97) (2011).
1. The Contract entitled the City to coverage for Errors and Omissions — and
specifically money damages incurred by a Member arising from any Wrongful Act
committed during the coverage period. The Contract’s definition of a “Wrongful Act”
includes alleged constitutional violations, and Flanigan’s II alleged constitutional
violations. GIRMA concedes the allegations in Flanigan’s II constitute a “Wrongful
Act,” bringing the claim within the insuring clause, but argues that Exclusion E
excludes coverage and negates its duty to defend. Therefore, the first issue we must
address is whether Exclusion E operates to exclude coverage for Flanigan’s II under
the policy. If there is no coverage, GIRMA does not have a duty to defend. See Penn-
American Ins. Co. v. Disabled Am. Veterans, Inc., 268 Ga. 564, 565 (490 SE2d 374)
(1997) (where the complaint sets forth true factual allegations showing no coverage,
the insurer is excused from providing a defense). We conclude that the claims arise
6
out of claims seeking equitable relief, Exclusion E applies, and thus GIRMA has no
duty to defend.
Exclusion E of the Contract
Exclusion E states that coverage does not apply to “any claim arising out of or
in any way connected with any claim seeking equitable relief, redress or any other
claim seeking relief in any form other than money damages.” We have previously
defined “arising out of” to mean “had its origins in,” “grew out of,” or “flowed from.”
BBL-McCarthy, LLC v. Baldwin Paving Co., 285 Ga. App. 494, 498 (1) (646 SE2d
682) (2007). “Moreover, we have also held that the term ‘arising out of’ does not
mean proximate cause in the strict legal sense . . . . Almost any causal connection or
relationship will do.” Id. (citations omitted). In determining whether claims “arise out
of” excluded conduct, we conduct a “but for” analysis. See City of College Park, 313
Ga. App. at 243-45 (2); Continental Cas. Co. v. H.S.I. Finan. Svs., Inc., 266 Ga. 260,
262 (466 SE2d 4) (1996). “Claims arise out of excluded conduct when ‘but for’ that
conduct, there could be no claim against the insured.” Video Warehouse, Inc. v.
Southern Trust Ins. Co., 297 Ga. App. 788, 791 (678 SE2d 484) (2009).
Contract Provisions And Their Relation to Exclusion E
7
When interpreting a contract, we look to that contract’s language. In the
Contract, the capitalized term “Claim” is defined as “a demand against a Member or
by a Member for money damages for compensable losses.” Exclusion E uses the word
“claim,” but does not capitalize it. Although failure to capitalize a term does not
always mean that the uncapitalized term lacks the capitalized term’s specifically
defined meaning, under the circumstances here, we conclude that the word should be
interpreted according to its normal and ordinary usage. As defined in the Contract,
the capitalized term “Claim” means a demand for money damages. But as used in the
exclusion, the uncapitalized term “claim” is intended to mean those demands for
something other than money damages. Moreover, GIRMA conceded at oral argument
that the term “claim” as used in the exclusion is intended to have its ordinary
meaning, and the City did not disagree.3 Accordingly, in analyzing the applicability
of Exclusion E in the case at hand, we consider the word “claim” according to its
normal and ordinary usage.
3
This conclusion is bolstered by the bizarre results obtained using the defined
term. Exclusion E would provide that coverage does not apply to: “any [demand . .
. for money damages] arising out of or in any way connected with any [demand . . .
for money damages] seeking equitable relief, redress or any other [demand . . . for
money damages] seeking relief in any form other than money damages.” This
construction would be incoherent.
8
Under its ordinary usage, a claim is defined as “a demand for something
rightfully or allegedly due” or “a right . . . to something.” Webster’s New World
Dictionary 261 (2d College ed. 1972).4 Here, “claim” used in its ordinary sense is
broad enough to encompass the claims made in Flanigan’s II and in the nuisance
action. The nuisance action asserted claims seeking injunctive relief.5 The first two
complaints in Flanigan’s II did not seek monetary damages for any of the plaintiffs’
claims. But the second amended complaint did, and that is the operative complaint
now at issue in Flanigan’s II. The question, then, is whether the claims in the second
amended complaint arose out of a claim seeking equitable relief or relief in a form
4
We previously noted the definition of “claim” under Black’s Law Dictionary
as a “cause of action” or “demand for money or property,” with “demand” being
defined as an “assertion of a legal right.” See Patterman v. Travelers, Inc., 235 Ga.
App. 784, 786 (510 SE2d 307) (1998), aff’d 272 Ga. 251.
5
We acknowledge that the City also included a catch-all prayer for relief
seeking “such other relief . . . as [the] Court deems just and proper[,]” including
“damages, and other monetary relief against Defendants[.]” But this general catch-all
clause in the prayer for relief does not convert the action into one for monetary
damages where the complaint otherwise fails to set forth a basis for money damages.
Otherwise, all lawsuits seeking “such other relief as the court deems necessary, just,
and proper,” or some variation thereof, as is often included as a matter of course,
would precipitate a duty to defend. See, e.g., Clemons v. State Farm Fire and Cas.
Co., 879 S.W.2d 385, 393 (Tex. Ct. App. 1994).
9
other than money damages, such that it would fall within the exclusion at issue here.
We conclude that they did.
The claims in the second amended complaint “grew out of” those asserted in
the first two complaints filed in the Flanigan’s II action that originally sought only
declaratory and injunctive relief. The claims in the second amended complaint also
“flowed from” the filing of the nuisance action, because the second amended
complaint specifically asserted an additional claim pertaining to the alleged
implications from the filing of the nuisance action. But for the filing of Flanigan’s
II and the nuisance action, the claims in the second amended complaint in Flanigan’s
II would not exist. Thus, the claims asserted in the second amended complaint in
Flanigan’s II fall within Exclusion E, and therefore no coverage, and relatedly, no
duty to defend, exists. Insurance coverage is a matter of contract between the insurer
and the insured, and this Court “will not strain to extend coverage where none was
contracted or intended.” Jefferson Ins. Co. of New York v. Dunn, 269 Ga. 213, 216
(496 SE2d 696) (1998). “[A]n insurance company is free to fix the terms of its
policies as it sees fit, so long as such terms are not contrary to law, and it is equally
free to insure against certain risks while excluding others.” Continental Cas. Co., 266
Ga. at 262.
10
The City’s Hypotheticals
The hypothetical scenarios proposed by the City in its brief do not change our
analysis. The City conjured the following scenarios that it says would give rise to a
parade of horribles resulting from our conclusion that Exclusion E applies:
• The City contracts with a business to maintain a park, but the business bans
demonstrations in the park. A lawsuit is filed against the City and the business
seeking money damages. GIRMA defends, but then the City learns the
business made material misrepresentations during contract negotiations, so the
City files a cross-claim in equity to rescind the contract. Coverage vanishes
because the lawsuit is “connected with any claim seeking equitable relief.”
• Employees allege the City negligently administers its benefits program and sue
for money damages, and the employees later threaten to release personnel
records that support their case but also reveal confidential information about
other employees not involved in the suit. GIRMA defends, and the City or the
employees whose personal information is threatened seek a temporary
restraining order. Coverage vanishes because the lawsuit is “connected with
any claim seeking equitable relief.”
11
In each of the proposed scenarios above, the initial action includes a claim for money
damages, out of which a later request for equitable relief arises. But here, the situation
is the converse — that is, the initial action was one for equitable relief that only later
gave rise to a claim for money damages. Prior to Flanigan’s II, the claim at issue did
not only “arise out of” claims seeking equitable relief, they were claims seeking only
equitable relief. Our analysis is limited to specific language in the exclusion: whether
GIRMA’s claim for declaratory judgment “arise[s] out of . . . any claims seeking
equitable relief, redress or any other claim seeking relief in any form other than
money damages.” How coverage may shift under other language in the exclusion in
scenarios imagined by the City does not affect our decision on the actual dispute
before us. The trial court erred in granting the City’s motion to dismiss GIRMA’s
Declaratory Judgment Action, and we reverse.
2. Because we agree that GIRMA does not have a duty to defend, we must
now address GIRMA’s claim that it is entitled to recover litigation costs in
Flanigan’s II incurred subsequent to the issuance of its revised reservation of rights
letter on February 1, 2013. GIRMA does not point to any provision in the insurance
agreement granting it the right to recoup defense costs. GIRMA instead argues that
the City impliedly agreed that GIRMA would be able to recover defense costs by
12
continuing to accept GIRMA’s defense even after the amended reservation of rights
letter that, as of February 1, 2013, included a reservation of the right to seek
reimbursement of defense costs on uncovered claims, thus creating an implied-in-fact
contract. GIRMA alternatively argues that it would constitute unjust enrichment for
the City to receive a free defense where no coverage exists. The issue of whether
insurers are entitled to recoup defense costs where there is no contractual provision
creating such a right is an issue of first impression in Georgia courts, but we need not
reach that issue here.
We recognize that “[n]ationally, courts are split as to whether an insurer has a
right to reimbursement of defense fees paid where it is determined that the insurer had
not duty to defend.” Illinois Union Ins. Co. v. NRI Const. Inc., 846 F. Supp. 2d 1366,
1374 (N.D. Ga. 2012) (citing Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707,
714 (8th Cir. 2009)). The “majority” view held by courts recognizes an insurer’s right
to reimbursement of defense costs and fees where it is determined that the insurer had
no duty to defend. See Westchester, 563 F.3d at 714. This view is typically supported
by two theories — an implied contract or the quasi-contractual theory of unjust
enrichment.
13
GIRMA cites authority from the Northern District of Georgia, Illinois Union
Insurance Co. v. NRI Construction Inc., 846 F. Supp. 2d 1366 (N.D. Ga. 2012), in
which the Northern District predicted how Georgia courts would interpret the issue.
Id. at 1374-77 (II)(C)(1). In Illinois Union, the Northern District found the majority
view among the nation’s courts to be the most persuasive based on theories of implied
in fact contract and unjust enrichment. Id. at 1377 (II) (C) (3). That view holds that
where no contractual provision exists, a right to recoup defense costs still exists
where the insurer timely and explicitly reserved that right. Id. GIRMA argues Georgia
courts should apply the majority rule recognized in Illinois Union.
But even if we were to adopt the rule urged by GIRMA,6 its reservation of the
right to seek reimbursement of defense costs was not timely here. GIRMA first began
providing a defense in Flanigan’s II in 2009, subject to its initial reservation of rights.
It did not send a revised reservation of rights reserving its right to seek defense costs
until 2013.7 That GIRMA limited its request for defense costs to those it would incur
6
We make no such holding here. See PDK Labs. Inc. v. DEA, 362 F.3d 786,
799 (D.C. Cir. 2004) (Roberts, J., concurring in part and concurring in the judgment)
(“if it is not necessary to decide more, it is necessary not to decide more.”).
7
GIRMA sought reimbursement of defense costs from the date of the revised
reservation forward.
14
moving forward from the amended reservation does not change the analysis as to
whether it acted reasonably promptly in reserving the right in the first instance. See,
e.g., Builders Ins. v. Tenenbaum, 327 Ga. App. 204, 210 (1) (757 SE2d 669) (2014)
(an insurer “must act reasonably promptly” in preserving its rights to assert a
particular ground for noncoverage). If GIRMA actually has a right to recoup defense
costs in this case, then such a right would have existed in 2009, four years before it
atempted to reserve that right. GIRMA argues the delay was reasonable because until
the Northern District’s decision in Illinois Union in 2012, it did not have a basis
under Georgia law to make this reservation. But GIRMA’s argument misunderstands
the nature of decisions of federal courts interpreting Georgia law. The Northern
District did not make Georgia law in Illinois Union. The court merely predicted how
Georgia courts would rule, and it based this prediction on the same case law available
to GIRMA. Therefore, GIRMA was in the same position and had the same ability to
make such a prediction itself, and to issue a timely reservation accordingly. It did not
do so and cannot now seek to collect despite its failure.
Judgment affirmed in part and reversed in part. Phipps, P. J., and Dillard, J.,
concur.
15