The following blog post Commercial Drivers: The Background Check was first seen on Slappey & Sadd Blog
The Background Investigation The regulations mandate that a detailed background check be conducted on any prospective driver. The requirements are quite rigorous, but also quite often not followed properly. A breakdown at this step is often an indicator that a motor carrier has a poorly-functioning safety department. In reviewing documentation of this step in the [...]
CMV Drivers: The Driver Application See more on: http://ift.tt/1GbQA7k
The Driver Application The first real step in the qualification process is the completion of an employment application that complies with the regulations. The application must be signed by the applicant and contain specific information. A motor carrier is free to require more information on its application than that called for under the regulations, but [...]
The blog post The Commercial Motor Vehicle Driver: Overview was first published to http://bit.ly/1Lv83gO
CMV Overview While a great deal of the FMCSRs concern the motor carrier itself, the rules governing driver qualification, monitoring, and testing are also extensive. These regulations come into play before the driver candidate ever takes the wheel. At the employment application stage, a driver candidate must assist his prospective motor carrier employer with the [...]
The following post Approaching Compliance in a Trucking Case is republished from Slappey & Sadd, LLC
Trucking Case: Regulatory Compliance Issues Knowing how to approach the pre-suit investigation and pre-trial discovery of regulatory compliance issues is an essential part of obtaining a successful result in a trucking case. Often the initial step is to understand the size and scope of the defendant motor carrier. While not always true, small “mom and [...]
Insurance Law: Limitation on Damages & Statute of Limitation was first published to Slappey & Sadd - Personal Injury Attorneys
Limitation on Damages An insurance agent’s bad faith may be imputed to the insurance company and thus become the company’s bad faith. However, under Georgia law, the potential liability of an insurance broker or agent (separate from the potential liability of the insurer itself) is limited to the terms of the insurance policy it negligently [...]
The article Insurance Law: Dual Agency & Liability of Agents is available on Slappey & Sadd - Personal Injury Attorneys
Dual Agency Independent agents or brokers are often considered the agent of the insured. However, Georgia law recognizes the concept of dual agency, where an agent acts on behalf of both the insured and the insurer. Dual agency is not considered void per se as against public policy in Georgia. Dual agency is proper where [...]
The following blog post Insurance Law: Negligent Procurement Read more on: http://bit.ly/1Lv83gO
Insurance Agents and Brokers An insurance agent is an individual appointed or employed by an insurer who sells, solicits, or negotiates insurance, or an individual insurance producer. Agents are licensed by and subject to regulation by the state. An agent may be an independent agent, representing at least two insurance companies and serving clients by [...]
A trend toward the use of in-house counsel to defend insureds has emerged. Insurers benefit because in-house attorneys become specialists not only in general insurance law, but also in the particular workings of their employer. Additionally, the insurer recognizes savings through not paying outside counsel bills.
When an in-house attorney represents an insured, unique ethical issues may arise, including whether the attorney is assisting the insurer in the unauthorized practice of law. The North Carolina Supreme Court held that “a licensed attorney who is a full-time employee of an insurance company [may not] ethically represent one of the company’s insureds as counsel of record” as doing so would constitute aiding the insurer in the unauthorized practice of law. There is little doubt that the use of in-house attorneys should intensify attention on the tripartite relationship. However, the majority of jurisdictions – including Georgia – hold that an in-house attorney may defend an insured without engaging the insurer in the unauthorized practice of law.
The ABA has also endorsed this view, holding that the ethics rules do not prevent insurance staff counsel from defending policyholders. Staff counsel for the insurer may provide legal representation to both the insured and insurer in an insurance defense claim, so long as he or she:
Unique ethical situations arise when an in-house attorney represents an insured. A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. The in-house attorney must ensure that he or she does not develop an attorney-client relationship with an employee of the company who is not a “duly authorized constituent.”
An in-house attorney for an insurer must also beware of ethical duties in attorney-client relationships with the insurer’s agents as the actions of an agent may have an important (and possibly determinative) impact on an insurer’s liability. For example, an in-house attorney may interview an insurance agent in order to defend a case. If, during that interview, the agent reveals confidential information to the attorney, the attorney may be obligated to maintain the confidentiality of that information. Additionally, if the attorney provides legal advice to the agent, an attorney-client relationship may develop.
Insurers sometimes audit defense counsel’s fee bills as a cost control measure. A billing audit “encompasses a range of services, from an examination of the face of the legal bill for improper charges or errors to a detailed analysis of original time records, attorney work product, expenses and hourly rate benchmarks, and more.” Audits examine hourly rates, background information about the legal matter and lawyer work product to gauge quality, tactics, strategy and performance in context. Ethical problems arise when bills contain confidential or privileged information. Billing records and underlying documentation may reveal the motive of the client in seeking representation, litigation strategy, or the specific nature of the services provided to the insured – information that is generally protected by confidentiality rules, attorney-client privilege, or both. Disclosure of the information required to perform an audit may be particularly problematic when coverage issues exist, as work product by defense counsel could harm the insured’s interests with regard to the coverage issue.
Formal Opinion 01-421, addresses ethical obligations when an insurer instigates a third-party audit. The opinion states: “A lawyer may not…disclose the insured’s confidential information to a third-party auditor hired by the insurer without the informed consent of the insured.” In general, defense counsel may inform the insurer about the litigation through periodic status reports, detailed billing statements and the submission of other information, which usually advances the interests of both the insured and the insurer in the representation. These disclosures are impliedly authorized to carry out the representation. However, a lawyer may not disclose the insured’s confidential information to a third-party auditor designated by the insurer without the insured’s informed consent. The attorney should advise the insured in writing as to:
Many insurers issue to defense counsel “litigation guidelines,” which state under what circumstances defense counsel may decide to take certain actions in the defense and under what circumstances prior authorization from the insurer is necessary. Georgia Rule of Professional Conduct 1.7(a) provides as follows: “A lawyer shall not represent or continue to represent a client if there is a significant risk that the lawyer’s own interests or the lawyer’s duties to another client, a former client, or a third person will materially and adversely affect the representation of the client, except as permitted [by client consent].” Where an insurer uses litigation guidelines to control defense costs by limiting defense counsel’s actions in defending the case, Rule 1.7 comes into play. For example, guidelines may limit the discovery to be propounded on adverse parties. Such restrictions create potential conflicts of interest if they inhibit an attorney’s ability to adequately defend a case or interfere with the attorney’s independent professional judgment. For instance, the Montana Supreme Court has held that Montana attorneys may not follow an insurer’s billing and practice rules which limit or direct the scope and extent of the attorney’s representation of the insured.
The American Bar Association addressed the issue of litigation guidelines in Formal Opinion 01-421.3 The ABA stated:
Pursuant to the liability insurance contract, the insured delegates to the insurance company the right to defend the case and is required to cooperate in the insured’s defense. However, the rules of professional conduct – and not the liability insurance contract – govern the lawyer’s ethical obligations to his client, whether the client is the insured, the insurer, or both.
As soon as the matter is assigned, the defense attorney should inform the insured of any limitations on the representation. ABA Formal Opinion 01-421 states:
If the lawyer is hired to defend an insured pursuant to an insurance policy that authorizes the insurer to control the defense, and in its sole discretion, to settle within policy limits, the lawyer must communicate these limitations on his representation of the insured to the insured, preferably early in the representation. The lawyer should “make appropriate disclosures sufficient to apprise the insured of the limited nature of his representation as well as the insurer’s right to control the defense in accordance with the terms of the insurance contract … No formal acceptance or written consent is necessary. The insured manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation being offered.”
The attorney should provide written notice to the insured at the time of retention that:
The insured can agree at the outset that his appointed attorney should follow the insurer’s direction and does not have to specifically consent to each act or decision that his attorney makes. If the insured disagrees, however, the attorney must follow the wishes of his insured client, to whom he owes his primary duty.
Ethical issues may arise when an insurer refuses an offer to settle within policy limits, and the plaintiff’s counsel writes a letter to the insured defendant regarding the matter. In Formal Advisory Opinion No. 86-4, the Supreme Court of Georgia first stated the general rules that an insurer is normally only liable for:
If an insured engages in fraud (for example, arson) and the defense attorney becomes aware of the fraud, several ethical rules come in to play. Obviously, defense counsel cannot assist or advise an insured that is engaging in such conduct. If an attorney knows that the client is engaging in fraud, the attorney must withdraw from the representation. If an attorney withdraws due to an insured’s fraud, the attorney cannot disclose the fraud to the insurer. However, the attorney can give notice of the withdrawal and “may also withdraw or disaffirm any opinion, document, affirmation, or the like.
In some cases, defense counsel may become aware that the insured has a potential counterclaim against another party in the lawsuit or a third-party claim that may be barred if not asserted in the pending action. Insurance policies do not necessarily provide coverage for these additional claims, and the insurer will not pay the defense attorney to prosecute them. The proper course of action for the defense attorney is to advise the insured of:
Some insurance policies exclude punitive damages. If the complaint otherwise triggers the duty to defend, a conflict arises between the insurer and insured. The insurer may have little interest in defending the punitive damages claim, as the insurer might have no duty to indemnify the insured for that aspect of damages. If an insurer is not obligated to indemnify its insured for punitive damages, it may attempt to limit defense counsel’s activities with regard to defending that aspect of the claim. At the outset of the representation of a punitive damages case, defense counsel must determine whether the policy provides coverage for punitive damages and advise both the insured and the insurer of punitive damages claims so that they may protect their respective interests. In any event, the defense attorney must continue to defend the punitive damage claims.
Defense counsel has a duty to keep the insured client fully informed of all settlement negotiations. In Formal Advisory Opinion 86-4, the Georgia Supreme Court cited Rogers v. Robson, Masters, Ryan, Brumund & Belom, an Illinois case involving an insurer’s settlement over the express objection of the insured. Dr. James Rogers was sued for negligence by a patient. Dr. Rogers’ malpractice insurer provided a defense. During discovery, deposition testimony established that Dr. Rogers was not negligent. The malpractice policy provided that written consent of the insured was not required before the insurer settled any claim or suit. Despite Dr. Rogers’ express instructions not to settle, defense counsel negotiated a settlement. Dr. Rogers then brought suit against the attorneys. In opposition to the law firm’s motion for summary judgment, Dr. Rogers filed an affidavit in which he stated that he repeatedly informed one of the partners that he would not consent to a settlement, that he was assured the action would be defended, and that the attorneys never advised him that they intended to settle the suit.
In affirming denial of summary judgment for the law firm, the Supreme Court of Illinois noted that when the attorneys became aware that settlement was imminent and that Dr. Rogers did not want to settle the case, a conflict of interest arose that prevented the attorneys from continuing to represent both Dr. Rogers and the insurer without full disclosure. The attorneys breached their duty to Dr. Rogers and were liable for any damages stemming from the breach. The Supreme Court of Illinois then stated:
Although [the attorneys] were employed by the insurer, [Dr. Rogers], as well as the insurer, was their client and was entitled to a full disclosure of the intent to settle the litigation without his consent and contrary to his express instructions. [The attorneys’] duty to make such disclosure stemmed from their attorney-client relationship with [Dr. Rogers] and was not affected by the extent of the insurer’s authority to settle without [Dr. Rogers’] consent. We need not and therefore do not consider the question whether [Dr. Rogers’] insurance carrier was authorized to settle the malpractice action without his consent. Further, since no disclosure was made and [Dr. Rogers] was not given the opportunity to elect what course to pursue, we need not speculate on what recourse, if any, [Dr. Rogers] had under the terms of the insurance policy.
When faced with a situation where the insured and the insurer disagree on a settlement strategy, defense counsel can require the parties to work out disagreements on their own. Defense counsel can provide an objective assessment of the likely outcome at trial and estimate future defense costs. Defense counsel can also encourage the clients to obtain separate counsel or a mediator. However, defense counsel should refrain from making an “all things considered” settlement recommendation without obtaining informed waivers from the insured and the insurer.
Where multiple insureds are entitled to a defense under the same policy for the same claim, the insurer often assigns the same defense counsel to defend the insureds, creating potential conflicts. For example, a passenger in a car may sue both the driver and the owner of the car after a wreck. An owner and a driver are typically entitled to a defense under the same policy. However, the driver and the owner may have conflicting interests if, for example, the owner asserts that the driver was operating the car without permission.
If hired to represent multiple insureds under the same policy, defense counsel should, at the inception of the representation
obtain valid conflict waivers from all parties.Even after these initial disclosures, defense counsel should continue to monitor potential conflicts, as they may ultimately require defense counsel to withdraw.
Georgia Rule of Professional Conduct 1.6(a) states:
A lawyer shall maintain in confidence all information gained in the professional relationship with a client, including information which the client has requested to be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client, unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, or are required by these rules or other law, or by order of the Court.
In the course of a representation of an insured, defense counsel may learn of information supporting a coverage defense. Regardless of whether the attorney learns of the information through independent investigation and activities, or whether the insured informs the attorney of the information, defense counsel is generally barred from disclosing the information to the insurer.
A famous case illustrating this conflict is Parsons v. Continental National American Group. The Parsons were violently assaulted by Michael Smithey, the 14-year-old son of CNA’s insureds. CNA appointed counsel to defend the Smitheys in the resulting lawsuit. During the lawsuit, the attorney informed CNA of a confidential file on Michael Smithey from a psychiatric institution that treated him. Counsel reported that the confidential file showed that the boy knew what he was doing was wrong. Counsel further reported to the insurer that “the assault [Michael] committed on claimants can only be a deliberate act on his part.” After receiving this letter, CNA sent a reservation of rights to the Smitheys warning that Michael’s act might have been an intentional act excluded from coverage. In preparation for trial, defense counsel interviewed Michael and wrote to CNA: “[Michael’s] own story makes it obvious that his acts were willful and criminal.” At trial, the court granted the Parson’s motion for a directed verdict on the issue of Michael’s liability, and a judgment was entered against him for $50,000.
The Parsons then garnished the CNA policy and offered to settle for the limits of $25,000. CNA rejected the offer. Instead, CNA defended the garnishment action by claiming that the intentional acts exclusion applied. The same law firm and attorney that had represented Michael represented CNA in the garnishment action. The Parsons contended that CNA was estopped to deny coverage and had waived the intentional acts exclusion because the company exploited the relationship between its appointed defense counsel and the Smithey’s son. The Arizona Supreme Court agreed. After noting that defense counsel obtained confidential and privileged information by virtue of the attorney-client relationship:
[W]e hold that such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under any exclusionary clause in the policy.
Accordingly, CNA was liable for the entire $50,000 judgment.
Three years before Parsons, the Texas Supreme Court held that an insurer was estopped from denying coverage due to the insured’s late notice where the defense counsel hired by the insurance company to represent the insured “actively work[ed] against [the insured] in developing evidence for [the insurer] on the coverage question.” The Texas Supreme Court stated that “[a]n attorney employed by an insurer to represent the insured simply cannot take up the cudgels of the insurer against the insured…”. An attorney’s actions against his client in this manner violates the rules of professional conduct. An attorney should not act as both defense counsel for the insured and coverage counsel for the insurer.
Eroding Limits and Exhaustion of LimitsAlthough policy limits generally constitute the boundaries of the insurer’s indemnity obligations, most liability policies do not limit the amount an insurer must pay in defense of claims. One way an insurer may limit defense costs and its overall exposure is through the use of “eroding” or “burning limits” policies. In these policies, defense costs erode indemnity limits. In other words, every dollar spent on defense reduces by one dollar the amount available to settle or otherwise resolve the claim. Increasing numbers of professional liability policies and employment practices liability policies include eroding limits. Although the idea is gaining popularity among automobile, homeowners’ and commercial general liability policies, competitive markets in some industries and state regulations are likely to curtail expansive use of eroding coverage.
A similar situation arises when there are several claims, and the payment of one or more exhausts policy limits. Whether an insurer has a duty to continue to defend its insured after policy limits have been exhausted is a contractual matter spelled out in the policy. Depending on the policy and the use of the limits, an insurer’s duty to defend some claims may be satisfied by defending and accomplishing a good-faith settlement of other claims in a manner that provides a real benefit to the insured.
In either situation, defense counsel must advise the insured of the benefits of a suggested litigation activity (for example, hiring an expensive expert) and its potential effect on both the defense of the case and the available indemnity limits. In doing so, however, the defense attorney must be careful not to give coverage advice. In his or her initial letter to the insured regarding undertaking the defense assignment, the defense attorney should specifically state that he or she will not be rendering any coverage advice.
It is good practice for an attorney handling a defense pursuant to a declining limits policy is for the attorney to create a liability analysis report and a litigation budget as soon as possible. These tools should be updated regularly, with copies sent to the insurer and the insured. An attorney who determines that potential defense costs may impair the insurer’s ability to indemnify the insured for exposure should bring that issue to both the insurer and the insured’s attention as early as possible.
In dealing with plaintiff’s counsel, the best course of action is to be candid about the fact that the policy limits may be reduced by defense costs. In a 2003 case in California, the Court of Appeal found that an insured’s judgment creditor could sue the attorney who had been retained by the insurer to provide a coverage analysis when that attorney misrepresented the scope of coverage available for the claim.
When policy limits are exhausted, insurers generally advise their insured and defense counsel that the insurer will no longer be funding the defense. However, an insurer’s decision to cease payment does not end the defense attorney’s duty to the client. Counsel must follow the prescribed rules for withdrawing from cases. It is not clear whether exhaustion of policy limits in and of itself allows a defense attorney to seek an order of withdrawal. A court may hold that an attorney who undertakes the defense of an insured under a burning limits policy does so at his own peril and with knowledge that there is a maximum amount available for defense costs. Some courts have refused to allow an attorney to withdraw from representation when the insurer ceased to pay for the defense.
Ethical issues arise for the plaintiff’s attorney as well. A plaintiff’s attorney, in gathering policy information at the outset of litigation, should attempt to determine whether the policy is an eroding limits policy. Obviously, in a declining limits policy, amounts spent on aggressive litigation decrease the plaintiff’s potential recovery. As part of initial litigation strategy, a plaintiff’s attorney should weigh the pros and cons of conducting certain activities (such as extensive discovery) and consider how those activities may bear on the ultimate recovery. The plaintiff’s attorney should also disclose these issues to the client and explain how certain litigation tactics may impact recovery.
The most common problem that arises in the “tripartite relationship” occurs when the carrier undertakes the defense of the insured pursuant to a reservation of rights. In such cases, it is possible for an insurer to take less interest in paying for a vigorous defense, because the insurer may ultimately prevail on the coverage issue and withdraw its defense. Additionally, if defense counsel is aware of the coverage issues, defense counsel may gather discovery or steer the case toward a coverage result that is favorable to the insurer (for example, by eliciting deposition testimony that supports a particular coverage defense). In these cases, conflicts can generally be avoided where:
When defending under a reservation of rights, the insurer should not hire attorneys who provided the coverage opinion as defense counsel for the insured. Instead, independent defense counsel with no involvement in the coverage issue should be appointed to avoid the conflict.
In a case where an insured has a solid liability defense but the claimed damages exceed policy limits, conflicts arise for defense counsel. An insurer may want to aggressively litigate a case in hopes of receiving a defense verdict or a judgment below policy limits. Such a course of action puts at risk the insured’s personal assets, because a plaintiff’s verdict may result in a judgment in excess of policy limits. The defense attorney may find herself in a conflicting situation, where settling is in the best interest of the insured client, but the insurer may think twice about continuing a business relationship with a defense attorney who is unwilling to try hard cases.3 In addition, defense counsel may be personally liable for failing to settle within the policy limits. This conundrum can create the need to hire separate, independent defense counsel to represent the interests of the insured. Similar conflicts may arise where the insured has a self-insured retention (SIR) that requires the insured to bear the first dollars of loss (insurance is excess over the SIR). The SIR may apply to defense costs as well as judgments or settlements.
In claims where the damages may exceed the policy limits, defense counsel should be on the lookout for “conflict clues” – signs that clients have unusual interests that must be protected. One of these signs is the existence of the excess exposure itself, as the insured may have uninsured assets at risk and have an unusually strong interest in the outcome. Another “conflict clue” is a request from one client to persuade another client of the merits of a particular course of action, such as when an insured requests that the defense lawyer pressure the carrier to accept a demand within the policy limits. Defense counsel should conspicuously inform the insured of the risk of a judgment in excess of policy limits and advise the insured of the right to retain independent coverage counsel.Of course, merely informing the insured of the right to retain independent counsel does not relieve the insurer of the duty to act in good faith.
When a liability insurer retains defense counsel to represent an insured, the resulting relationship among the three parties is often called a “tripartite relationship.” This relationship is unique in the insurance context. Georgia, like a majority of states, generally holds that the defense attorney has two clients: the insurance company and the insured. In most situations, the objectives of the insurer and the insured align and the tripartite relationship is beneficial to all parties. Insurers have an interest in controlling the costs of litigation, which can be done through billing arrangements with appointed counsel. In turn, defense attorneys receive regular business from their insurance company clients and are generally well compensated for their services. Meanwhile, the insured is to be provided a defense from competent counsel with expertise in defending against claims brought against the insured.
Nonetheless, any time multiple parties are involved in such a relationship, ethical issues arise. One court stated that the ethical dilemma created by the tripartite relationship would “tax Socrates, and no decision or authority … furnishes a completely satisfactory answer.” Lawyers appointed by the insurance company may be in-house attorneys, staff counsel, “captive” law firms, or panel counsel. Regardless of the label, the attorney appointed by the insurance company to represent the insured typically has a business or employment relationship (often a long-standing one) with the insurer. The laws of human nature attendant to this relationship are difficult to ignore.
Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client – the one who is paying his fee and from whom he hopes to receive future business – the insurance company.
The close relationship between defense counsel and the insurance company is often a concern of both insureds and the courts. As made clear below, the best practice for avoiding conflict issues in the “tripartite relationship” is prediction of such conflicts and communication when they appear on the horizon. Counsel could and should evaluate possible ethical issues at the inception of each representation. As issues arise, the Georgia Rules of Professional Conduct and Formal Advisory Opinions issued by the Georgia Supreme Court address aspects of the tripartite relationship. Where the Georgia Rules do not address the issues, attorneys should look to the Model Rules of Professional Conduct and the Formal and Informal Advisory Opinions of the American Bar Association (ABA). With such guidance in mind, the following addresses some common concerns presented by the tripartite relationship.
An attorney owes a duty of loyalty to his or her client. This duty is expressed in the obligations to exercise independent professional judgment on behalf of the client, and to decline representation or withdraw if the ability to do so is adversely affected by the representation of another client. An attorney who does not know to whom his highest loyalty should be given – who his client is – is bound to drift into ethical trouble.
In a typical insurance case where coverage is not contested, a policyholder is involved in a potentially covered incident. The insured tenders the claim to its insurer and requests a defense. The insurer retains defense counsel to defend the insured. However, in a case where the interests of the insured and the insurer diverge, to whom does the attorney’s duty of loyalty extend? Courts take several different views of whether defense counsel represents the insurer, the insured, or both. These views are called the “two-client”, “one-client”, and “third-party payor” (or “one-and-a-half client”) theories.
A majority of courts hold that the lawyer has two clients: the insurance company and the insured. Courts that adopt this theory reason that both the insured and the insurer are beneficiaries of the insurance company’s exclusive control over the litigation. These courts also recognize that, in general, “companies and insureds usually enjoy a substantial commonality of interests, even when their interests do not perfectly align.”
In Georgia, whether a lawyer represents a party is a question of fact, not appearances, unless the party knowingly caused the attorney to appear as his agent in that matter. Georgia has not officially adopted the two-client rule in case law, although the Georgia Supreme Court’s Formal Advisory Opinion notes “the attorney for the insured is also the attorney for the insurer”. There may be some circumstances where defense counsel’s duty to the insured makes the insured the “primary” client. The Opinion addresses the “ethical propriety of the plaintiff’s attorney in a personal injury case writing a letter to the insured defendant which may contain legal advice.” The Supreme Court stated that the appropriate attorney to provide advice regarding the insured’s legal rights is the insured’s attorney. A potential conflict arises because both the insured and the insurer are the defense counsel’s clients. Interestingly, the Supreme Court appears to switch from a “two-client” theory to a “one-client” theory, stating: “the dilemma is only apparent. [Defense counsel] represents the insured as a client and has a duty to keep the insured fully informed by virtue of the rules of ethics…[Defense counsel] has a duty to inform the insured not only of any offer of settlement…but also of the potential tial liability of the insurer for a bad faith refusal to accept any reasonable offer within the policy limits.”
Although still the minority view, there is an increasing judicial trend toward holding that defense counsel’s only client is the insured.
In Atlanta International Ins. Co. v. Bell, the Michigan Supreme Court held that no attorney-client relationship existed between an insurance company and defense counsel. Atlanta filed a malpractice suit against the attorneys that it retained to represent Atlanta’s insured in a premises liability case, claiming that the attorneys failed to raise a particular defense. Whether Atlanta had the standing to sue the attorneys depended upon the existence of an attorney-client relationship between the insurer and the attorneys it hired to represent the insured. Stating that “courts have consistently held that the defense attorney’s primary duty of loyalty lies with the insured, and not the insurer,” the court allowed the insurer to proceed pursuant to the doctrine of equitable subrogation. The court noted that
To hold that an attorney-client relationship exists between insurer and defense counsel would indeed work mischief, yet to hold that a mere commercial relationship exists would work obfuscation and injustice. The gap is best bridge by resort to the doctrine of equitable subrogation to allow recovery by the insurer. Equitable subrogation best vindicates the attorney-client relationship and the interests of the insured, properly imposing the social costs of malpractice where they belong. Allowing the insurer to stand in the shoes of the insured under the doctrine of equitable subrogation best serves the public policy underlying the attorney-client relationship.
The third-party payor or “one-and-a-half client” theory “advocates that ‘the lawyer be deemed to represent both the insurer and the insured until something goes wrong, at which point the insurer would no longer be a client, at least in the usual sense.” The theory considers that the insurer is often in the best position to manage and control the litigation, but relies on the attorney to protect its economic interests. If the attorney can do so without compromising the loyalty the attorney owes to the insured, then the insurer also owes a duty of care to the insurer. Since the insurer relies upon the attorney’s representation of the insured, the insurer is permitted to insure the attorney who acts negligently. It is important to note, though, that although this theory allows insurers control over the costs of litigation, the control is limited and insurers are not necessarily able to enjoy the full range of benefits or rights of control that they desire.
Georgia’s Unfair Claims Settlement Practices Act is designed “to set forth standards for the investigation and disposition of claims arising under policies or certificates of insurance issued to residents of Georgia.” The UCSPA does not cover claims involving workers’ compensation, fidelity, or surety insurance. The Act sets out fourteen acts that constitute unfair claims settlement practices when committed.
(1) flagrantly and in conscious disregard of the insurance laws of the State of Georgia
(2) with such frequency so as to indicate a general business practice to engage in such conduct. An insurer commits an unfair claims settlement practice by:
(3) Failing to adopt and implement procedures for the prompt investigation and settlement of claims arising under its policies.
(4) Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear.
(5) Compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them.
(6) Refusing to pay claims without conducting a reasonable investigation.
(7) When requested by the insured in writing, failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation related to such claim or claims.
(8) When requested by the insured in writing, making claims payments to an insured or beneficiary without indicating the coverage under which each payment is being made.
(9) Unreasonably delaying the investigation or payment of claims by requiring both a formal proof of loss and subsequent verification that would result in duplication of information and verification appearing in the formal proof of loss form; provided, however, this paragraph shall not preclude an insurer from obtaining sworn statements if permitted under the policy.
(10) When requested by the insured in writing, failing in the case of claims denial or offers of compromise settlement to provide promptly a reasonable and accurate explanation of the basis for such actions. In the case of claims denials, such denials shall be in writing.
(11) Failing to provide forms necessary to file claims within 15 calendar days of a request with reasonable explanations regarding their use.
(12) Failing to adopt and implement reasonable standards to assure that the repairs of a repairer owned by the insurer are performed in a workmanlike manner.
(13) Indicating to a first-party claimant on a payment, draft check, or accompanying letter that said payment is final or a release of any claim unless the policy limit has been paid or there has been a compromise settlement agreed to by the first-party claimant and the insurer as to coverage and amount payable under the contract.
(14) Issuing checks or drafts in partial settlement of a loss or claim under a specific coverage which contain language which releases the insurer or its insured from its total liability.
There is no private right of action under the Georgia UCSPA. Rather, the Georgia Insurance Commissioner enforces the UCSPA. Despite the fact that an insured cannot raise a cause of action under the UCSPA, an insured may attempt to use evidence of a violation of the Act as evidence of an insurer’s bad faith. Courts routinely admit evidence of a state’s unfair claim practices act and regulations in insurance bad faith actions.
Many policies contain a provision limiting the amount of time in which an insured can bring suit against its insurer, effectively reducing the statute of limitations by way of contractual agreement. Such a contractual limitation or “no-action” clause provides that any suit against the insurer arising out of the policy must be brought within a specific time following “inception of the loss” or some other trigger. Such provisions are generally enforceable. The Supreme Court of Georgia has expressly rejected arguments that such clauses are “unfair,” ambiguous when, for example, they are read with other requirements allowing an insurer 60 days to decide on payment after submission of a proof of loss.
An insurer may waive the contractual limitation “where the insurer leads the insured by its actions to rely on its promise to pay, express or implied” or where conduct on the part of the insurer reasonably leads the insured to believe that strict compliance with the limitation provision would not be insisted upon. For example, where settlement negotiations lead the policyholder to believe that payment will be forthcoming without a lawsuit, the insurer cannot require the action to be brought within a certain time. Also, if an insurer does not deny liability and takes actions indicating an intent to pay the claim without suit, an issue of fact is presented as to whether the insured was lulled into a belief that the limitation for filing suit was waived. However, “mere negotiation for settlement, unsuccessfully accomplished, is not that type of conduct designed to lull the claimant into a false sense of security so as to constitute a waiver of the limitation defense.”Where suit has been delayed beyond the stipulated time on account of direct promises to pay the claim, the action is not barred by delay. It is not necessary that there be an actual promise to pay in order for the acts of the insurer to effect a waiver of the time limitation if facts show that negotiations for a settlement have led the insured to believe that the insurer will pay the claim. In most cases, whether a waiver occurred is a jury issue.
The Georgia Insurance Commissioner has adopted regulations requiring that no-action clauses in certain policies be no less than two years. The Supreme Court of Georgia has ruled that the regulation violated the Commissioner’s authority by contradicting O.C.G.A. § 33-32-1(a), providing for a no-action clause of no less than two years for fire insurance policies.
O.C.G.A. § 33-3-28(a)(1) states that:
Every insurer providing liability or casualty insurance coverage in this state and which is or may be liable to pay all or a part of any claim shall provide, within 60 days of receiving a written request from the claimant, a statement, under oath, of a corporate officer or the insurer’s claims manager stating with regard to each known policy of insurance issued by it, including excess or umbrella insurance, the name of the insurer, the name of each insured, and the limits of coverage. Such insurer may provide a copy of the declaration page of each such policy in lieu of providing such information.
In order to trigger the insurer’s duty, the claimant’s request must set forth under oath the specific nature of the claim asserted and must be mailed by certified mail or statutory overnight delivery. The insurer must amend the information provided upon discovery of facts inconsistent with or in addition to the information provided.
Providing information as required by this Code section does not waive the insurer’s coverage defenses and is not admissible in evidence unless otherwise admissible under Georgia law. The statute is directive only; it does not create a cause of action and right of a claimant to seek damages if an insurer fails to comply with the statute. However, an insurer’s failure to disclose limits can give rise to claims for misrepresentation, false swearing, fraud, and RICO violations, and courts have upheld damages for fraud where the insurer failed to disclose limits in response to a valid request. An insurer may not charge the requesting claimant for the expense involved in complying with a request for information pursuant to O.C.G.A. § 33-3-28.
Most policies contain a “cooperation clause” that requires an insured to cooperate with the insurer in the investigation and defense of a claim. More specifically, the insured must cooperate in the insurer’s investigation, attend trial and make “full, fair, complete and truthful disclosures of the facts known to him relative to the [incident] when called upon to do so.”If an insurer’s investigation includes an examination under oath of the insured, and the insured completely fails to appear at the examination under oath, that failure could preclude recovery under the policy.
If the insured willfully and intentionally fails to cooperate, and this failure is prejudicial to the insurer in the defense or settlement of a claim, the insurer is relieved of the duty to defend or indemnify the insured for any judgment the insurer would be required to pay under the policy.
The insurer must show:
(a) that it reasonably requested its insured’s cooperation in defending against the plaintiff’s claim
(b) that its insured willfully and intentionally failed to cooperate
(c) that the insured’s failure to cooperate prejudiced the insurer’s defense of the claim…Once the insurer presents presents evidence that it was entitled to withdraw coverage, the burden shifts to the plaintiff to establish that the insured’s failure to cooperate was justified.
However, if the insured’s non-cooperation is merely technical or inconsequential, the insurer is generally not relieved of its duties. The insurer has the burden of proving that it diligently sought to obtain the insured’s cooperation and that the insured willfully and intentionally failed to cooperate. If the insurer makes a showing of diligence and good faith, the burden shifts to the insured to show that his failure to cooperate was excused or justified.
If an insured voluntarily fails to attend trial after receiving a request to do so, the insured’s actions are generally considered per se prejudicial to the insurer. The insured’s total failure to cooperate may preclude recovery under the policy as a matter of law. However, if the insured cooperates to some
degree or provides an explanation for non-compliance, the insured’s failure to cooperate becomes a jury issue. The insured has a duty to keep up with his case and has a duty to reply to communications addressed to him by or on behalf of the company regarding his claim. At the same time, the insurer has a duty to keep its insured informed once it has taken over the handling of the claim or lawsuit against its insured.
Finally, an insured violates the cooperation clause by collusively assisting maintenance of the claimant’s suit rather than assisting the insurer.
Where there are multiple insureds under a single policy, each insured is entitled to a separate defense. An insurer owes a duty of good faith and fair dealing to each insured. An additional insured, however, may have to elect coverage under the policy by notifying the insurer of his election and demanding a defense.
A reservation of rights “is designed to allow an insurer to provide a defense to its insured while still preserving the option of litigating and ultimately denying coverage.” The seminal case on the issue is Richmond v. Georgia Farm Bureau Mut. Ins. Co. In that case, the insured’s minor son was driving his father’s car when he hit a pedestrian. Immediately after the accident, the pedestrian was taken to the hospital and the insured volunteered to pay medical expenses. Eight months after the accident, the insured received a letter from the pedestrian’s attorney indicating that suit would be filed. The insured gave notice to his insurer, who sent the insured a non-waiver agreement. The insured refused to sign the non-waiver, instead demanding an unqualified defense. The insurer sent a letter to its insured unilaterally reserving its rights, retained counsel to defend its insured and sought declaratory relief as to coverage. The Georgia Court of Appeals looked favorably upon the approach used by the insurer, approving of a “reservation of rights letter” that “fairly informs the insured of the insurer’s position.”
The Georgia Supreme Court has ruled “where…an insurer assumes and conducts an initial defense without effectively notifying the insured that it is doing so with a reservation of rights, the insurer is deemed estopped from asserting the defense of noncoverage regardless of whether the insured can show prejudice.” This opinion impliedly overrules a long line of cases previously holding that the doctrines of waiver and estoppel are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded.
An insurer that denies coverage and a defense for a specific reason waives the right to deny coverage for other reasons at a later time. In Hoover v. Maxum Indem. Co., a claimant was injured while working for his employer. The claimant filed a lawsuit, and the insurer denied coverage and refused to defend. In the letter denying coverage, the insurer relied on an Employers Liability Exclusion as the basis for the refusal to defend. The denial letter stated that it reserved the right to deny coverage for other reasons at a later date. The claimant received a $16.4 million judgment, took an assignment from the insured and filed suit against the insurer. The insurer defended based on the Employers Liability Exclusion as well as late notice. The trial court granted summary judgment for the insurer on the late notice issue, and the Court of Appeals affirmed. The Supreme Court of Georgia reversed, ruling that the insurer had denied all coverage defenses not set forth in the denial of coverage.
An insurer who defends under a proper reservation of rights may withdraw its defense if the investigation reveals non-coverage, but the insurer must do so seasonably and not delay its decision. If an insurer learns of information indicating that no coverage exists under the policy, the insurer is required to inform the insured immediately. In addition, an insurer who pays the excess of a property damage claim without a reservation of rights has not waived the defense of noncoverage where no action had been filed and the insurer had not undertaken the defense of the insured. An insurer may also be estopped to deny coverage if the insurer undertakes the defense of the insured and is negligent in its handling of the defense.
Where an insurer seeks rescission of an insurance contract, a reservation of rights is not authorized to reserve its rights and file a declaratory judgment action. In Minnesota Lawyers Mut. Ins. Co. v. Gordon, Minnesota Lawyers Mutual (“MLM”) issued a liability policy to an attorney who was sued after a property closing. MLM initially provided a defense to the insured but reserved its rights under the policies. MLM then filed a declaratory judgment and amended its complaint several times. On the final amendment, MLM asserted that the insured’s policies should be void due to the insured’s alleged misrepresentations in applying for the policies. The Court of Appeals held that:
While a declaratory judgment is authorized when circumstances show a necessity for a determination of the dispute to guide and protect the plaintiff from uncertainty and insecurity with regard to the propriety of some future act or conduct, rescission is not characterized by uncertainty. To the contrary, if a party to a contract seeks to avoid it on the ground of fraud or mistake, he must, upon discovery of the facts, at once announce his purpose and adhere to it.
Since MLM took a firm position as to its rights in requesting rescission of the policies, a declaratory judgment was inappropriate.
Generally, an insurer does not have a continued duty to defend its insured after the insurer has exhausted policy limits by settling multiple claims with the insured’s consent, even though there might be additional claims arising from the same accident. In Liberty Mutual Ins. Co. v. Mead Corp., the Supreme Court of Georgia held that the insurer had no further duty to defend remaining claims after settling other claims and exhausting policy limits. The insurer had the insured’s consent to settle the claims, and the applicable insurance policy was construed to mean that “the duty to defend is limited by the amount of liability coverage afforded by the policy.”Similarly, if the insurer exhausts policy limits in good faith settlements of several claims, the insurer need not defend its insured on later-filed claims arising from the same accident. The rule is true even if the insurer mistakenly enters a defense on the later-filed claim, so long as the insurer did not prejudice the insured.
Based on a recent ruling by the Georgia Supreme Court, it remains to be seen whether this rule will hold true if the insurer commences to defend several claims arising out of a single accident without clearly reserving its rights to withdraw its defense at such time as policy limits are exhausted by payment to one or more of the claimants. “An insurer’s duty to defend its insured is not satisfied when the insurer settles by paying its policy limits to the wrong party.” The insurance policy in Atkinson v. Atkinson (like the one in Liberty Mutual Ins. Co. v. Mead), provided that the duty to defend would end upon payment of policy limits. The insurer entered a defense and paid policy limits, but to the wrong party. Because the payment did not resolve the case against the insured, the insurer could not withdraw.
These cases do not mean, however, that if an insured faces many lawsuits arising from a single accident, and it is clear that the liability will exceed policy limits, the insurer may tender the policy limits into court and withdraw from the defense of the lawsuits. The insurance policy at issue in Anderson v. U.S. Fid. & Guar. Co. (like most liability policies) provided that the insurer must defend as well as indemnify. The court ruled that allowing the insurer to tender policy limits into court addresses only the duty to indemnify and constituted a breach of the duty to defend while actions were pending. When an insurer is faced with a matter involving multiple claimants where the damages may exceed the policy limits, the insurer might take the following steps to reduce its potential bad faith exposure:
(1) reasonably and expediently investigate the matter and “attempt to ascertain the insured’s potential liability, identify the claimants, and assess the nature and extent of the claimants’ injuries or damages”
(2) “communicate with the insured concerning her potential liability as soon as possible” – inform the insured that the insurer will retain defense counsel and that the insured has the right to retain her own counsel and “diligently attempt to document all communications with its insured”
(3) “communicate with all claimants to inform them of [the insurer’s] policy limits – both per person and per occurrence – and its willingness to exhaust its limits to achieve a global resolution.” This may include convening a mediation or settlement conference. “The insurer should set a reasonable time limit for the claimants to accomplish their voluntary allocation. The insurer should also explain that if the claimants cannot reach agreement on the allocation of policy proceeds by the deadline, [the insurer] will either
(1) file an interpleader action
(2) begin settling individual claims as it deems reasonable.”
An insurer “should carefully document all communications with the various claimants and their counsel. If claimants or their lawyers misstate facts in communications, the insurer should attempt to correct their misimpressions.”
(4) “keep the insured apprised of the settlement process and its strategy.”
(5) if the claimants cannot reach a resolution amongst themselves, “the insurer should settle with individual claimants in a reasonable manner,” attempting to “prioritize the claims that pose the greatest threat of personal liability to the insured.”
An important value provided by a liability policy is the insurer’s promise to retain attorneys to handle the defense of a lawsuit on behalf of an insured. An insurer’s failure to defend sometimes accompanies the insurer’s failure to take advantage of a reasonable opportunity to settle within policy limits, making the failure to defend relevant to bad faith. A typical commercial general liability policy includes the following:
We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.
An insurer’s duty to defend turns on the language of the insurance contract and the allegations of the complaint asserted against the insured. The duty to defend is broad, and “it is only where the complaint sets forth true factual allegations showing 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.” The insurer is obligated to defend where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage. The duty to defend is triggered if the complaint shows only “potential” or “arguable” coverage.
The insurer must liberally construe coverage and defend even if there is only a possibility of coverage. Any doubt as to liability and the insurer’s duty to defend should be resolved in favor of the insured. A carrier is relieved of the duty to defend only if it is clear that the plaintiff can prove no set of facts entitling him to relief. When a plaintiff alleges alternative theories of liability, there is a duty to defend even if a single alternative implicates coverage. The Georgia Court of Appeals has restated these rules as follows:
[A]n insurer is obligated to defend even where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage. 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.
A recent example of the application of these rules is Landmark Am. Ins. Co. v. Khan. In that case, a claimant was shot while leaving a nightclub. The claimant filed a premises liability lawsuit against the insured nightclub, alleging, inter alia, assault and battery by employees of the club. The insurer denied coverage and refused to defend, relying on an assault and battery exclusion in the policy. The exclusion had an exception stating that it did not apply if the assault and battery was committed by an employee of the insured while reasonably protecting persons or property. A default judgment in the amount of $2.3 million was entered against the insured. The claimant took an assignment and sued the insurer. The insurer argued that the claim was excluded because
The general rule is that, in making a determination of whether to provide a defense, an insurer is entitled to base its decision on the complaint and the policy. The insurer is under no obligation to independently investigate the claims against its insured. A different rule applies, however, when the complaint on its face shows no coverage, and the insured notifies the insurer of factual contentions that would place the claim within coverage. In such a situation, the insurer has an obligation to give due consideration to its insured’s factual contentions and to base its decision on “true facts.” In order to base its decision on “true facts,” the insurer must necessarily conduct a reasonable investigation into the insured’s contentions. Requiring such an investigation does not place an unreasonable burden on insurers, especially in light of the availability of the “procedurally safe course” of providing a defense under a reservation of rights and filing a declaratory judgment action to determine its obligations. An insurer who fails to investigate its insured’s contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.
“UM” coverage is an optional coverage that an insured may purchase to cover the insured who is injured by the negligence of another person who has no liability coverage or insufficient liability coverage to compensate the insured for his or her injuries. Like any insurance policy, an automobile policy providing UM coverage will have its own provisions regarding notice of a claim to the insurer. Care must be taken in reading the policy to determine whether the General Conditions section of the policy contains a notice provision applicable to all coverages or whether the UM coverage section contains its own notice provision.
Some general notice provisions that require notice to the insurer within a specified time period have been construed to begin to run following the date of the accident and not the date the insured learns that the tortfeasor may be uninsured or underinsured. In Manzi v. Cotton States Mut. Ins. Co., the insured was injured in an auto accident. More than six months after the accident she learned that the tortfeasor who had injured her was underinsured, so she provided notice to her insurer that she would seek proceeds from her UM coverage. The policy contained a general notice provision requiring that the insurer be “notified promptly, but in no event later than 60 days, of how when and where the accident or loss happened.” The policy did not specifically mention when the 60-day period began to run or what event triggered the notice requirement. The Court of Appeals ruled that the provision was not ambiguously silent, as the surrounding policy language made it clear that the 60-day period began to run at the time of the accident. The court concluded that the insured had breached the notice provision as a matter of law. Because the provision further stated that it “shall be a condition precedent to the existence of any coverage,” the insured was unable to recover her UM benefits. A different outcome results, and fact issues are raised with regard to timely notice, when the provision requires notice “as soon as practicable.”
In the event that the uninsured or underinsured driver is unknown, the insured “shall immediately” report the accident to law enforcement. The requirement is a condition precedent to recovery of UM benefits, and a delay of only “four or five days” following the accident bars UM coverage.
Whether reasonableness of late notice can be decided as a matter of law, or whether it should remain in the province of the jury depends on two factors:
OneBeacon Am. Ins. Co. v. Catholic Diocese of Savannah involved a delay in notice months after the insured was served with the lawsuit. The insured argued that the delay was justified because the claim triggered policies that were many years old and that could not be quickly located. The insured submitted an affidavit from its counsel attesting to the justification. The Eleventh Circuit affirmed a ruling that the delay was unreasonable as a matter of law. Although the court recognized that a 21-month is not always unreasonable as a matter of law, the affidavit was conclusory, bereft of critical dates and failed to raise a fact issue as how the delay was excused or justified.
Where the insured has no knowledge of a claim, courts have generally found that the issue of whether notice is timely is for the jury. For example, in United Services Automobile Association v. Middleton, the defendant was involved in an accident with another car. At the time of the accident, there were no visible injuries, and the driver and passengers stated that they were not injured. The first notice of injuries came in a letter from the other driver’s attorney nine months after the loss, at which time the insured reported the loss. The court denied the insurer’s motion for summary judgment. Similarly, in Norfolk & Dedham Mut. Fire Ins. Co. v. Cumbaa, the Court of Appeals held that a jury issue existed as to whether a 19-month delay in providing notice was timely because substantial evidence of the claim did not come to the insured until that time.
Justification for failure to give notice as soon as practicable may not include the insured’s unfounded conclusion that there was no liability to the other party. It is the insurer’s job to reasonably investigate the issues of liability and damages. An insured is not required, however, to foresee every possible claim that could arise from an incident. In Newberry v. Cotton States Mut. Ins. Co., the insured attended a work-related social function and fought with another guest. The insured did not notify its insurer until 14 days after being served with a complaint. The insured testified that he believed any claims arising from the incident would be handled through worker’s compensation. The Court of Appeals held that an insured is not required to foresee every possible claim but is required only to act reasonably under the circumstances, creating an issue for the jury’s determination.
Forshee v. Employers Mut. Cas. Co., the Court of Appeals explained:
Sometimes an event is so trivial or inconsequential that a court properly may conclude as a matter of law that no reasonable person would think that a claim could arise from the event and, therefore, that no notice of the event is required…it is the nature and circumstances of the accident or the incident and the immediate conclusions an ordinarily prudent and reasonable person would draw therefrom that determine whether an insured has reasonably justified his decision not to notify the insurer. Relevant circumstances include the nature of the event, the extent to which it would appear to a reasonable person in the circumstances of the insured that injuries or property damage resulted from the event, and the apparent severity of any such injuries or damages…A court also properly may consider whether anyone gave an indication that he intended to hold the insured responsible for the event and resulting injuries and the extent to which the insured acknowledged the likelihood that a claim could arise from the event, either by offering compensation to the injured person or asking him to sign a release…And a trial court must make every effort to eliminate the distorting effects of hindsight and to evaluate the conduct of the insured from the perspective of a reasonable person in the same circumstances as those in which the insured found himself.
In cases where the policy requires notice “as soon as practicable,” an insured’s failure to give notice due to a lack of knowledge that coverage existed may be a jury question. In Georgia Mutual Ins. Co. v. Criterion Ins. Co., the insureds failed to give notice to the insurer for four months because they did not know their policy provided coverage for a new car. The Court of Appeals held that the issue of late notice was a jury issue.
In State Farm Mut. Automobile Ins. Co. v. Sloan, the insureds believed there would be no insurance coverage for an accident and did not give notice to their insurer for six months because their son was driving the car, the son was not named as an insured, and the son was driving a car not covered by the insurance policy. Again, the Court of Appeals held that whether the insureds notified their insurance company “as soon as practicable” was an issue to be determined by a jury.
In contrast, where a policy provides that notice be given “immediately,” failure to give notice may be subject to determination as a matter of law. In Hill v. Safeco Insurance Company of America, the Middle District of Georgia granted the insurer’s motion for summary judgment as to the insured’s failure to comply with the notice provision of his policy. The insured was required to give “immediate notice” to Safeco of the loss. The insured failed to give notice for six months because he did not believe his policy provided coverage for the loss.
If an insured fails to give notice of a complaint and summons as required by a policy and later provides notice of an amended complaint, each notice is subject to separate analysis. In other words, there is no “blanket rule” that if notice is untimely of an initial complaint, notice of an amended complaint is not necessarily untimely if it alleges new claims.
All litigation regarding an insurer’s bad faith necessarily involves other issues associated with the law of insurance contracts and insurance coverage. For example, an insurer’s bad-faith failure to settle under the common law may have its genesis in the insurance company’s decision not to provide a defense to an insured, the lack of defense resulting in a large judgment in excess of policy limits. With respect to statutory bad faith, issues may arise as to whether the insurer’s decision not to pay a property damage claim is caused by the insurer’s failure to conduct an adequate investigation. Finally, any time there is litigation involving any type of insurance policy, certain issues – like timely notice – might come into play.
An insured’s failure to provide notice of a claim or of a lawsuit to its liability carrier can defeat coverage. The standard commercial general liability policy provides that “[i]f a claim is made or suit is brought against any insured,” the insured must notify the insurer “as soon as practicable.” Other policies might provide for “immediate” notice upon knowledge of a suit or claim. The Georgia Legislature has decreed that automobile liability policies shall require notice of a suit as well as delivery to the insurer of a copy of the summons and process. As suggested below, and as made more clear by a reading of the cases, different language in an insurance policy’s notice provision can lead to different results. Accordingly, despite what courts before have decided, the insured’s duty of notice must be analyzed in relation to the specific policy language and the applicable facts.
The purpose of notice is to inform the insurer of potential liability so that it may promptly investigate the circumstances, prepare a defense, or consider the prudence of payment, settlement or other resolution. Under certain circumstances, therefore, delay may prejudice the insurer’s ability to control the defense of the case. If notice is a condition precedent to coverage under the policy, however, an insurer does not need to demonstrate that late notice caused prejudice in order to deny coverage. The lack of prejudice can, however, be a factor for consideration in determining whether notice is untimely under the circumstances. Also, “an insured is not required to foresee every possible claim, no matter how remote, that might arise from an event and give notice of it to his insurer. Instead, the law only requires an insured to act reasonably under the circumstances.”
Where an insured has not demonstrated justification for failure to give notice according to the terms of the policy, and where the insurer has not waived compliance, the insurer is not obligated to provide a defense and coverage is void. In most cases involving an automobile liability policy, on the other hand, Georgia law requires the insurer to prove that late notice caused prejudice.
Although most policies require notice from the actual insured, a third party, including an attorney for the injured party, can give notice to the insurer of the action in order to prevent the insurer from raising a late-notice defense. “It makes no difference who gives the notice, so long as a reasonable and timely notice is given the company and it has actual knowledge of the pendency of a claim or suit.” In Hathaway Dev. Co., Inc. v. Am. Empire Surplus Lines Ins. Co., the liability insurer received notice of the lawsuit from the claimant in accordance with O.C.G.A. § 33-7-15. Although the court noted that the statute applied only to automobile liability policies, the court nonetheless relied on older cases to rule that “[n]otice from [the claimant] was sufficient under [the insured’s] CGL policy to fulfill the contractual condition of notice.”
Notice to an insurance broker may not suffice as notice to the insurance company if the broker is an independent agent (or an agent of the insured) and the policy’s notice provision does not extend such apparent authority to the independent agent. Georgia courts generally construe the policy requirements that notice be “prompt” or “as soon as practicable” as requiring that notice be given in a reasonable time under the circumstances. An insured cannot always wait to provide notice until after the repercussions of an accident become fully known and fully appreciated. Instead, it is the nature and the circumstances of “the incident and the immediate conclusions an ordinarily prudent and reasonable person would draw there from that determine whether an insured has reasonably justified his decision not to notify the insurer.” Whether
an insured gives notice under a policy “promptly” or “as soon as practicable” is generally a question of fact for the jury and not an issue for summary judgment. If the undisputed facts and circumstances indicate that an insured’s delay in giving notice was unjustified and unreasonable, the court may rule on the question as a matter of law.”
Under the facts and circumstances of the following cases, notice was late as a matter of law:
However, lapse of time alone is not sufficient to establish non-compliance with the notice provision. “In most cases, however, the reasonableness of a failure to give notice is a question for the finder of fact.”
Many lawsuits involving insurance coverage or an insurer’s bad faith unfold in the context of a declaratory judgment. This addresses those issues specific to a declaratory judgment action involving insurers and insureds. The Georgia Declaratory Judgment Act, O.C.G.A. § 9-4-1 et seq. provides a mechanism to settle and afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations.
In Georgia, “a declaratory judgment is permitted to determine a controversy before obligations are repudiated or rights are violated.” The petitioner is not entitled to a declaratory judgment where the rights of the parties have already accrued and there are no circumstances showing any necessity for a determination of the dispute to guide and protect the petitioner from uncertainty and insecurity with regard to the propriety of some future act or conduct. A declaratory judgment action makes no provision for a judgment which is advisory.
With respect to disputes involving insurance coverage, the Supreme Court of Georgia provided four factors to be considered in determining whether a declaratory judgment is proper under a given set of facts:
Where circumstances cast doubt on whether a liability policy provides coverage for a claim, there is such an immediacy of choice imposed upon an insurer that an insurer is entitled to seek a declaratory judgment. If an insurer is uncertain how to handle a claim made on a policy, the insurer may enter a defense for the insured under a reservation of rights and then seek a declaratory judgment. For example, if a liability insurer indicates there will be no coverage for a particular claim prior to suit being filed against the insured, and the insurer assumes the defense once the lawsuit is filed, the insurer may pursue a declaratory judgment.
However, an insurer may not file a declaratory judgment action after judgment has been taken against the insured, because there is no uncertainty and insecurity as to future conduct between the parties. A declaratory judgment is also not available merely to test the viability of a party’s defenses. An insurer may not refuse to pay under its policy and then use the declaratory judgment procedure to avoid bad-faith penalties. To allow an insurance company to file a declaratory judgment when it has already taken a definitive position as to coverage would frustrate the purpose of the Declaratory Judgment Act. Even where the insurer did not expressly determine prior to the entry of the judgment that the policy did not provide coverage for the insured, the failure to provide a defense to the insured is equivalent to a denial of coverage and prevents an insurer from later seeking a declaratory judgment.
In Drawdy v. Direct General Ins. Co., the Supreme Court of Georgia held that an insurer was precluded from bringing a declaratory judgment action after an unqualified denial of coverage to the insured. The claims in this case arose from a fatal auto accident caused by the insured’s nephew who was driving the insured’s vehicle. A month after the accident, the insurer unconditionally denied coverage because its investigation revealed that the insured’s nephew was driving the vehicle without the insured’s knowledge or permission. Later, the insurer filed a declaratory judgment action. No tort action had been filed against the insured or his nephew at that point and the insurer expressly stated in its complaint that it had denied coverage. The insured moved to dismiss the declaratory judgment. One week after the motion to dismiss was filed, the estate of the passenger in the car filed suit against the insured. The insurer apparently defended the suit under a reservation of rights. In reversing the Court of Appeals, the Supreme Court stated that a declaratory judgment was not authorized in this case because Direct General had denied the claim and was not uncertain or insecure in regard to its rights, status, or legal relations. The Supreme Court distinguished Colonial Ins. Co. of Calif. v. Progressive Casualty Ins. Co., noting that in that case the insurer had sent a “qualified denial” and undertook the insured’s defense under a reservation of rights before filing a declaratory judgment action. Finally, the Supreme Court noted that the purpose of the Declaratory Judgment Act is to protect parties from uncertainty as to future conduct, not from the adverse consequences of actions already taken.
Provided that coverage has not been denied, an insurer may file a post-judgment declaratory judgment action to determine whether the policy provides coverage to the insured. The insured may pursue action for breach of contract. An insured has the same right to seek a declaratory judgment as the insurer. Allowing insureds to file declaratory judgment actions “levels the playing field” between insurers and insureds.
When an insurer or insured files a declaratory judgment action seeking guidance on whether the insurer must defend an “underlying lawsuit” against the insured, the question sometimes arises whether the underlying lawsuit or the declaratory judgment should be first decided. Whether a stay of the underlying lawsuit will be granted is in the discretion of the court.
As in any litigation, an insured filing suit against its insurer must name the proper party. Litigation involving insurance companies can present challenges in this regard, as many insurers operate myriad companies under similar names. For example, the Georgia Secretary of State website lists no fewer than eight entities beginning with the words “State Farm,” six of which would appear to be underwriters of insurance policies. Accordingly, special care must be taken to avoid dismissal for failure to name the proper party. The declarations page of the insured’s policy should state the correct name of the insuring company. Further research is advisable, as insurers frequently merge, are acquired or simply change names. Most insurers maintain detailed websites with information about their companies, and a simple Google search will turn up such information. Information found during such searches should be confirmed by reference to records of the appropriate secretary of state. The Georgia Safety Fire & Insurance Commissioner’s website provides a “company search” form. The search form will provide detailed information about the company, including the type of company, the date it was licensed to do business in Georgia, the status of the company’s license, the insurer’s agents (if any), contact information, and lines of authority (what types of insurance the insurer is licensed to write). In addition, the Georgia Secretary of State’s website should reveal current agents for service of process for most companies.
O.C.G.A. § 33-4-1 sets out the venue provisions for actions against insurers. Such actions may be brought:
Georgia adheres to the traditional rule of lex loci contractus. Under the rule, the validity, nature, construction, and interpretation of a contract are governed by the substantive law of the state where the contract was made. In Georgia, an insurance contract is “made” at the place where the contract is delivered. For example, if a Georgia company obtains an insurance policy from a Minnesota insurer and the policy is delivered to the company in Georgia, a Georgia court will apply Georgia law to the interpretation of the contract. Care should be taken when the insured has corporate officers or uses insurance brokers in places other than Georgia, as the policy may be delivered to a risk manager in an office in Miami or to a broker headquartered in New York. In 1984, the Georgia Supreme Court expressly rejected the “center of gravity” test outlined in the Restatement (Second) of Conflicts § 188. Nonetheless, litigants should not ignore attempts to apply the concept in the proper case. Federal courts sitting in diversity apply the forum state’s choice-of-law principles. Thus, if the bad-faith case is removed to federal court or initiated by the insurer in federal court, the district court should apply Georgia’s rule of lex loci contractus.
Service of process may be effected differently depending on the type of insurer.
For most “domestic insurers” service of process may be accomplished “in the manner provided by laws applying to corporations generally.” Reciprocal insurers and Lloyd’s associations may be served in the same manner or upon their attorney in fact. Alien or foreign insurers must file with the Georgia Insurance Commissioner a power of attorney appointing a resident of Georgia to receive service of process. The power of attorney is irrevocable and may only be terminated by the filing of a new appointment by the insurer. Alien or foreign insurers must also appoint the Georgia Insurance Commissioner as its attorney to receive service of process. A party attempting to serve an alien or foreign insurer can only serve the Commissioner if service upon the attorney-in-fact cannot be effected.
Service upon nonresident religious or mutual aid societies and certain other cooperative insurers may be made by personal service upon certain officers or certain officers of local lodges. Unauthorized or surplus lines insurers are deemed to have appointed the Georgia Insurance Commissioner as their attorney for acceptance of service of process issued in Georgia for any action or proceeding arising out of the policy. Surplus lines policies must contain a provision stating the substance of O.C.G.A. § 33-5-34 and designating a person to whom the Commissioner will mail process according to O.C.G.A. § 33-5-34.
