Keeping The (Good) Faith: A Survey Of The Law For Avoiding Bad Faith In Handling Insurance Claims

Robert L. Walker
JENKINS & BOWEN, P.C.
15 South Public Square
Cartersville, Georgia  30120
(770) 387-1373
rwalker@ga-lawyers.pro

The specter of a successful claim against an insurer for bad faith is every claims handler’s worst nightmare.  This is because a bad faith claim can potentially work to multiply an insurer’s minimal liability policy limits into a multi-million dollar claims liability for the insurer.  Understanding what Georgia courts have said about an insurer’s duty of good faith to its insureds can help insurers and their claims examiners and handlers make the right decisions to avoid the pitfalls of such bad faith claims.

  1. Bad Faith Generally
    1. Bad Faith under Tort and Contract Principles

      “Misfeasance in the performance of a contractual duty may give rise to a tort action.”  “A liability insurance company may be held liable to its insured for negligence in failing to adjust a claim against the insured which is covered by its policy. As to liability insurance, the company owes to the insured a duty independent of the contract not to injure him, and when, from its negligent failure or refusal to adjust a claim, or from fraud or other bad faith, he sustains damages other than damages covered by the insurance contract, then an action in tort would be appropriate.”  To recover in such a case, an insured must “establish to the jury's satisfaction that [the insurer’s] refusal to defend the issue of damages or settle within the policy limits . . . was motivated or caused by negligence, fraud, or bad faith.”

    2. Bad Faith under O.C.G.A. § 33-4-6

    O.C.G.A. § 33-4-6(a) provides that “in the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liable to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $ 5,000.00, whichever is greater, and all reasonable attorney's fees for the prosecution of the action against the insurer.”  (emphasis added).  “Under OCGA § 33-4-6, ‘bad faith’ of the insurer means a frivolous and unfounded refusal to pay a claim.”  “A defense going far enough to show reasonable and probable cause for making it would vindicate the good faith of the company as effectually as would a complete defense to the action. Penalties for bad faith are not authorized where the insurance company has any reasonable ground to contest the claim and where there is a disputed question of fact.” As is clear from the language of the statute, a 60-day time limit on any demand for coverage is a prerequisite under the statute, and the penalties for bad faith under this code section are capped at the amount of the loss plus 50% of the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees in bringing the action.

  2. Bad Faith under O.C.G.A. § 33-4-7

Pursuant to O.C.G.A. § 33-4-7(a), “in the event of a loss because of injury to or destruction of property covered by a motor vehicle liability insurance policy, the insurer issuing such policy has an affirmative duty to adjust that loss fairly and promptly, to make a reasonable effort to investigate and evaluate the claim, and, where liability is reasonably clear, to make a good faith effort to settle with the claimant potentially entitled to recover against the insured under such policy. Any insurer who breaches this duty may be liable to pay the claimant, in addition to the loss, not more than 50 percent of the liability of the insured for the loss or $5,000.00, whichever is greater, and all reasonable attorney's fees for the prosecution of the action.”

“An insurer breaches the duty of [good faith] when, after investigation of the claim, liability has become reasonably clear and the insurer in bad faith offers less than the amount reasonably owed under all the circumstances of which the insurer is aware.”  “A claimant shall be entitled to recover [for the insurer’s bad faith] if the claimant or the claimant's attorney has delivered to the insurer a demand letter, by statutory overnight delivery or certified mail, return receipt requested, offering to settle for an amount certain; the insurer has refused or declined to do so within 60 days of receipt of such demand, thereby compelling the claimant to institute or continue suit to recover; and the claimant ultimately recovers an amount equal to or in excess of the claimant's demand.”

O.C.G.A. § 33-4-7 applies only in one very limited circumstance – where a claim for property damage has been made by a third-party claimant under a motor vehicle liability policy.  The purpose for the statute is to facilitate the quick and fair adjustment of automobile property damage claims so as to get damaged claimants back on the road as quickly as possible.  If a demand is not met within the 60-day time period provided by the statute, the claimant can file a lawsuit and serve the insurer with the suit as an unnamed party.  Thereafter, a trial of the case will be had, and if the judgment rendered is equal to or exceeds the claimant’s demand, the trier of fact (typically a jury) will then determine if the insurer exhibited bad faith in handling, adjusting, or attempting to settle the claim.  Again, a 60-day time limit on any demand for property damage coverage is a prerequisite under the statute, and the penalties for bad faith under this code section are capped at the amount of the loss plus 50% of the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees in bringing the action.

  • Bad Faith under O.C.G.A. § 33-7-11

Finally, O.C.G.A. § 33-7-11(j) provides that “if the insurer shall refuse to pay any insured any loss covered by this Code section within 60 days after a demand has been made by the insured and a finding has been made that such refusal was made in bad faith, the insurer shall be liable to the insured in addition to any recovery under this Code section for not more than 25 percent of the recovery and all reasonable attorney's fees for the prosecution of the case under this Code section. The question of bad faith, the amount of the penalty, if any, and the reasonable attorney's fees, if any, shall be determined in a separate action filed by the insured against the insurer after a judgment has been rendered against the uninsured motorist in the original tort action.”  This code section only applies to claims made under an automobile uninsured/ underinsured liability insurance policy.  Once again, a 60-day time limit on any demand for UM coverage is a prerequisite under the statute, and the penalties for bad faith under this code section are capped at the amount of the recovery plus 25% of the recovery and all reasonable attorney’s fees.

There are generally four ways by which an insurer can be found liable for bad faith under an insurance contract:  (1) bad faith under general provisions of tort or contract law; (2) bad faith under O.C.G.A. § 33-4-6 for refusal to pay first-coverage after a demand for payment has been made by the policy holder; (3) bad faith under O.C.G.A. § 33-4-7 for refusal to pay property damage coverage made under a motor vehicle liability policy after a demand for payment has been made by any claimant; and (4) bad faith under O.C.G.A. § 33-7-11(j) for refusal to pay first-party uninsured/underinsured motorist claim after a demand for payment has been made by the policy holder.  With the exception of the claim provided by O.C.G.A. § 33-4-7, the potential bad faith claim belongs to the insured, as opposed to the claimant.  However, it is common practice for an insured to assign the bad faith claim to a third-party claimant in a tort or contract bad faith claim to pursue against the insurer, often in exchange for an agreement by the claimant not to pursue any deficiency judgment against the insured.  In each of these situations, the first-party insured or the third-party claimant bears the burden of proving that the refusal to pay the claim was made in bad faith.

  • Situations Where Potential Bad Faith Claims May Arise
    1. Bad Faith in Refusing to Settle or Compromise a Claim

    “An insurance company may be liable for damages to its insured for failing to settle the claim of an injured person where the insurer is guilty of negligence, fraud, or bad faith in failing to compromise the claim.”  “In deciding whether to settle a claim within the policy limits, the insurance company must give equal consideration to the interests of the insured.”  Ultimately, “the jury generally must decide whether the insurer, in view of the existing circumstances, has accorded the insured “the same faithful consideration it gives its own interest.”  “The insurer's actions must be “judged by the standard of the ordinarily prudent insurer.”

    “An insurance company does not act in bad faith solely because it fails to accept a settlement offer within the deadline set by the injured person's attorney.”  For instance, if an unreasonably short deadline is given for responding to a settlement offer such that the insurer has no way to reasonably and thoughtfully evaluate the claim, an insurer would not be in bad faith by failing to meet such deadline.  However, the question of what is an “unreasonably short” deadline is a factual question which largely must be answered based upon the circumstances of a specific claim.  The Courts have held as little as ten (10) days is generally not an “unreasonably short” deadline.  However, the question of whether some period of time of less than ten (10) days is an “unreasonably short” deadline is undecided and would likely be determined by the facts of the specific case.  Finally, the Courts have made clear that an insurer has a “duty to its insured to respond to a deadline to settle a claim within policy limits when the company has knowledge of clear liability and special damages exceeding the policy limits.”

    Another common situation that arises is where a settlement demand is made on an insurer and conditions are imposed upon the insurer over which the insurer has no control.  The seminal case dealing with this situation is Cotton States Mutual Ins. Co. v. Brightman.  There, a $300,000 liability policy had been issued by Cotton States, as well as a $100,000 liability policy issued by State Farm.  The plaintiff had suffered a traumatic brain injury and had medical bills of over $329,000.  A demand was made by the plaintiff to Cotton States for their $300,000 policy limits, but the demand was contingent upon State Farm also tendering its $100,000 policy limits.  Neither insurer responded to the demand within the applicable time limit.  The case proceeded to trial, where a judgment of $1.8 million was awarded to the Plaintiff.

    The question presented by the case was whether a bad faith claim could be pursued against Cotton States based upon its failure to meet the plaintiff’s policy limits demand.  Despite Cotton States’ claims that the demand imposed conditions upon it over which Cotton States had no control, the Court held that the bad faith claim could go forward.  In doing so, the Court provided guidance for insurers faced with similar situations, holding that “an insurance company faced with a demand involving multiple insurers can create a safe harbor from liability for an insured’s bad faith claim . . . by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured.”  In doing so, the Court made clear that insurers do not have an affirmative duty “to engage in negotiations concerning a settlement demand that is in excess of the insurance policy’s limits” or “to make a counteroffer to every settlement demand that involves a condition beyond their control.”  However, the decision is remarkably clear that when a demand is made upon an insurer, even if the demand imposes a duty beyond the control of the insurer, the insurer should take action to meet the part of the demand over which it has control, i.e. tender its own limits, and by doing so creates a safe harbor for itself from any bad faith claim against the insurer. 

  • Bad Faith in Refusing Coverage or a Legal Defense For an Insured

Another area where an insurer faces a risk of a potential bad faith claim is where coverage and/or a legal defense are questionable, and particularly when a lawsuit has been filed against the insured.  From the outset, one of the key duties placed upon an insurer in deciding whether a claim is covered under the policy is to undertake a reasonable investigation.  Failing to do so can in and of itself constitute bad faith on the part of an insurer.  In United Services Auto Association v. Carroll, the Court found that an insurer had exhibited bad faith based upon the fact that both the claims examiner and claims adjuster “failed to talk to the eyewitnesses and instead relied solely upon the statement of the insured, an injured, elderly woman, because such limited statement, without questions that explored the presence or absence of a factual basis for coverage, seemed to exclude coverage.”

While it is true that insurers and their policy holders are generally free to contract for whatever policy exclusions they see fit, in evaluating coverage, insurers must keep in mind that public policy considerations may often trump this general freedom to contract, thus working to defeat certain policy exclusions that would otherwise apply to preclude coverage.  Georgia courts have repeatedly made clear that Georgia’s “compulsory insurance law established the public policy that innocent persons who are injured should have an adequate recourse for the recovery of their damages.”  However, “the compulsory insurance law does not establish public policy as to sums greater than those required by such law.”  Therefore, if there is other insurance coverage available to the innocent third-party claimant, such as additional liability coverage or uninsured motorist coverage, the public policy considerations do not apply to defeat the otherwise enforceable policy exclusions.  And even if there is no other coverage and the public policy considerations do work to preclude the application of otherwise enforceable policy exclusions, generally the insurer is only responsible to provide coverage up to the minimum coverage amount required by law.  Unfortunately, to add to the insurer’s difficulty in evaluating coverage under a particular policy, there are a number of coverage exclusions that apply regardless of public policy considerations.

In determining whether the insurer has a duty to provide coverage and/or a legal defense, the bedrock rule underlying the construction of insurance policies is that “where language of an insurance policy is ambiguous, it must be construed most strongly against the insurer and in favor of the insured.”  As such, if there is any ambiguity in the policy, it will automatically be construed towards the insurer providing coverage and/or a legal defense to its insured.  Also, in determining an insurer’s duty to defend, “since the [insurance] contract obligates the insurer to defend claims asserting liability under the policy, even if groundless, the allegations of the complaint (against the insured) are looked to determine whether a liability covered by the policy is asserted. Thus, it is only where the complaint sets forth true factual allegations showing no coverage, [or where the insurer learns of facts through its own investigation that would show no coverage,] that the suit is one for which liability insurance coverage is not afforded and for which the insurer need not provide a defense. To excuse the duty to defend the petition must unambiguously exclude coverage under the policy, and thus, the duty to defend exists if the claim potentially comes within the policy. Where the claim is one of potential coverage, doubt as to liability and insurer’s duty to defend should be resolved in favor of the insured.”

In examining and adjusting claims, there are generally two common situations where an insurer is faced with the possibility of bad faith:  (1) in refusing to settle or compromise a claim made by an injured third-party claimant; and (2) in refusing to provide coverage or a legal defense for an insured when a claim is made or a lawsuit filed by a third-party claimant against the insured.  Each of these will be discussed in greater detail below.

  • The Georgia Supreme Court’s Recent Decision in Hoover v. Maxum Indem. Co.

“Under Georgia law, where an insurer is faced with a decision regarding how to handle a claim of coverage at the same time a lawsuit is pending against its insured, the insurer has three options.  First, the insurer can defend the claim, thereby waiving its policy defenses and claims of non-coverage.  Second, the insurer can deny coverage and refuse to defend, leaving policy defenses open for future litigation.  Or, third, the insurer can defend under a reservation of rights.”  When faced with a questionable issue of coverage, while far from providing a complete defense as to any bad faith claim, often the safest course of action is the third option, to provide a defense to its insured under a reservation of rights, and thereafter file a declaratory judgment action to determine the parties’ rights and responsibilities under the applicable policy.  To this end, the Supreme Court of Georgia recently issued a significant opinion on June 18, 2012, concerning an insurer’s proper use of a reservation of rights and declaratory judgment in determining coverage issues.

In Hoover, the claimant “sustained a serious brain injury on October 20, 2004 when he fell while climbing down from the roof of a residence while working for his employer, [the insured].”  Maxum Indemnity claimed that its first notice of the claimant’s injury was its insured’s letter dated almost two years after the accident which enclosed the lawsuit filed against the insured.  Four days later, “Maxum responded by disclaiming coverage under the policy and informing EWES that it would not be providing a defense or indemnification, citing the policy’s Employer’s Liability Exclusion as the basis for refusing to defend.”  The letter also contained boilerplate language purporting to reserve Maxum’s rights to claim a number of other defenses in the future.  Almost four months later, Maxum filed a declaratory judgment action, again focusing on Employer’s Liability Exclusion in the CGL policy.  The DJ action did not include the failure to comply with the notice provisions of the policy as a reason for denying coverage.

Based upon these facts, the Court ultimately found that a reservation of rights was unavailable to Maxum due to the fact that it had already denied coverage to its insured based upon the Employer’s Liability Exclusion.  The Court made clear that “an insurer cannot both deny a claim outright and attempt to reserve the right to assert a different defense in the future.”  “A reservation of rights does not exist so that an insurer who has denied coverage may continue to investigate to come up with additional reasons on which the denial could be based if challenged.”  Specifically, the Court made clear that the disclaimer language in a letter denying coverage and purporting to reserve an insurer’s rights to assert certain defenses later is not a proper reservation of rights.

The Court went on to find that even if Maxum’s denial letter had been construed to be a valid reservation of rights, the boilerplate notice therein was still inadequate “because it did not unambiguously inform [the insured] that Maxum intended to pursue a defense based on untimely notice of the claim.”  The Court stated that “at a minimum, the reservation of rights must fairly inform the insured that, notwithstanding the insurer’s defense of the action, it disclaims liability and does not waive the defenses available to it against the insured.”  In addition, the reservation of rights must “fairly inform the insured of the insurer’s position.”  “In order to inform an insured of the insurer’s position regarding its defenses, a reservation of rights must be unambiguous.  If it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured.”  Finally, the Court held that “Maxum’s continued failure to fairly inform [its insured] of its intention to raise a defense related to untimely notice means Maxum waived the defense.”

The Hoover decision significantly tightens the requirements upon insurers in handling cases where coverage is questionable and there has been a claim and a demand for a defense made by the insured.  After Hoover, insurers should remember the following in determining its duties in evaluating whether to provide coverage and/or a legal defense in future cases:

  • When presented with a claim and demand for a defense, the safest course of action is to send a clear and unambiguous reservation of rights, enter a defense for your insured, and file a declaratory judgment action on the coverage issues.
  • An insurer cannot both deny coverage and then seek declaratory judgment. If you want to file a declaratory judgment action, you must provide a defense under a valid reservation of rights.
  • A reservation of rights must fairly inform an insured of all policy defenses under which the insured is reserving its rights and must be clear and unambiguous. If it uses ambiguous boilerplate language, such ambiguous language will be construed strongly against the insurer.
  • If the insurer does not fairly and clearly inform its insured of all policy defense(s), the insurer waives those policy defense(s).
  • An insurer’s safest course is to promptly file a declaratory judgment action after sending the reservation of rights.  While not specifically stated in the Hoover opinion, in the alternative, an insurer may consider attempting to get a signed agreement from its insured that the insurer may file an answer and reserve its rights to assert policy defenses without the requirement of filing an immediate declaratory judgment action.

1Southern Fire & Cas. Ins. Co. v. NW Ga. Bank, 209 Ga.App. 867, 867 (1993).

2Tate v. Aetna Cas. & Sur. Co., 149 Ga.App.123, 124 (1979).

3Leonard v. Firemen’s Ins. Co. of Newark, N.J., 100 Ga.App. 434, 437 (1959), See Alexander Underwriters General Agency, Inc. v. Lovett, 182 Ga.App. 769 (1987).

4Alexander Underwriters, 182 Ga.App. at 773.

5United Services Auto Association v. Carroll, 226 Ga.App. 144, 148 (1997).

6Southern Fire, 209 Ga.App. at 867.

7O.C.G.A. § 33-4-7(b).

8O.C.G.A. § 33-4-7(c).

9 Southern General Ins. Co. v. Holt, 262 Ga. 267, 268 (1992).

10 Id.

11Id. at 268-269.

12Fortner v. Grange Mutual Ins. Co., 286 Ga. 189, 190 (2009).

13 Southern General. 262 Ga. at 269.

14Id.

15Id. at 269. (emphasis in original).

16 Cotton States Mutual Ins. Co. v. Brightman, 276 Ga. 683, 686 (2003).

17Id.

18See also Fortner v. Grange Mutual Ins. Co., 286 Ga. 189 (2009).

19 Id., 226 Ga.App. 144, 148 (1997)

20Cotton States Mutual Ins. Co. v. Neese, 254 Ga. 335, 341 (1985).

21Id.

22Driskell v. Empire Fire & Marine Ins. Co., 249 Ga.App, 56, 62 (2001).

23 Id. at 61.

24 Hoover v. Maxum Indem. Co., 2012 WL 3031345, *2 (2012).

25Id. at *3.

26Id. at *1.

27 Id. at *2.

28Id.

29 Id. at *3.

30 Id. at *3.

31Id. at *4.

32Id. at *3.

33Id. at *4.

34 Id. at *4.

35Id. at *5.