Bad Faith Insurance: Exclusions, Exceptions And Limitations

Exclusions, Exceptions And Limitations

In contrast to the grant of coverage in an insurance policy, exceptions and exclusions to coverage must be narrowly and strictly construed against the insurer and liberally construed in favor of the insured to afford coverage.  A contract of insurance is construed most strongly against the insurer and liberally in favor of the insured, particularly where the insurer seeks to deny coverage based upon a policy exclusion. Exceptions, limitations and exclusions to insuring agreements require a narrow construction on the theory that the insurer, having affirmatively expressed coverage through broad promises, assumes a duty to define any limitations on that coverage in clear and explicit terms. Where an insurer grants coverage to an insured, any exclusions from coverage must be defined clearly and distinctly. Exclusions are strictly construed.

Ambiguities

Under the rule of contra proferentem, ambiguities in an insurance policy are strictly construed against the insurer and in favor of coverage, under the theory that the insurer drafted the contract. Ambiguity exists when a term, phrase, or section “may be fairly construed in more than one way.” An ambiguity involves a choice between two or more constructions of the contract.

 

In Georgia Farm Bureau Mut. Ins. Co. v. Meyers, the Court of Appeals explained:

Ambiguity in an insurance contract is duplicity, indistinctiveness, uncertainty of meaning of expression, and words or phrases which cause uncertainty of meaning and may be fairly construed in more than one way. Where a term of a policy of insurance is susceptible to two or more constructions, even when such multiple constructions are all logical and reasonable, such term is ambiguous and will be strictly construed against the insurer as the drafter and in favor of the insured. Where the phrasing of the policy is so confusing that an average policyholder cannot make out the boundaries of coverage, the policy is genuinely ambiguous. Whether or not an ambiguity exists in an insurance policy is a matter of law for the court to decide. In determining whether the terms of the policy are subject to more than one reasonable interpretation, the policy should be read as a layman would read it and not as an insurance expert or an attorney might analyze it.  A clause in an insurance policy deemed unambiguous in one situation may be deemed ambiguous when applied to a different situation. “Multiple logical interpretations make a clause ambiguous as a matter of law.”  “[I]f a provision of an insurance contract is susceptible of two or more constructions, even when the multiple constructions are all logical and reasonable, it is ambiguous.”  “Pursuant to the rule of construction set forth at O.C.G.A. § 13-2-2(5), the contract will be construed strictly against the insurer/drafter and in favor of the insured.”  If two clauses in an insurance contract are contradictory, an ambiguity is created, and the clause more favorable to the insured will be enforced.

Bad Faith Insurance: The Reasonable Expectations Doctrine

The Reasonable Expectations Doctrine

The plain meaning of an insurance policy is informed by the reasonable expectations of the insured.  “A contract of insurance should be strictly construed against the insurer and read in favor of coverage in accordance with the reasonable expectations of the insured.”   Insurance policies are contracts of adhesion, drawn by insurers, and should be construed as reasonably understood by an insured.  The test is not what the insurer intended its words to mean, but rather what a reasonable person in the insured’s position would understand them to mean.  “The policy should be read as a layman would read it and not as it might be analyzed by an insurance expert or an attorney.”

Richards v. Hanover Ins. Co.

The Supreme Court of Georgia, in Richards v. Hanover Ins. Co., expressly approved application of the reasonable expectations rule and explained its function in conjunction with other rules of policy construction.  In Richards, a couple’s insured home was destroyed by fire.  The husband was arrested for arson.  The insurance company denied coverage to the wife, relying on an exclusion barring coverage in the event of “neglect of the insured to use all reasonable means to save and preserve property.”  In essence, the insurer argued that the “neglect provision” created a joint obligation by both insureds to preserve the property, and that if one insured breached the obligation the exclusion was triggered for both. The wife argued that her duty under the “neglect provision” was several from that of her husband’s.  The Georgia Supreme Court agreed, not by relying on public policy or concepts of fairness, but by reference to the plain terms of the policy construed in light of the insured’s reasonable expectations.  The court looked to the definition of “insured,” and found that the term referred to an individual.  Furthermore, reading the definition in light of the reasonable expectations of the insured, nothing in the language of the policy would indicate to a reasonable insured that the “neglect provision” created a joint – as opposed to several – obligation.

Common-Law Bad Faith: An Introduction

Insurance Bad Faith And Common Law

In addition to the cause of action for bad-faith failure to pay that is grounded in statute, Georgia recognizes a cause of action for insurance bad faith that is grounded in the common law. As explained below, common-law bad faith is associated with a liability insurer’s fiduciary duty to protect its insured from the risks associated with litigation against the insured. In most cases, these risks include legal liability to the insured for damages the insured has allegedly caused to a third-party claimant. Succinctly stated, “[a]n 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.” The most common example of an insurance company’s liability for bad faith arises when the insurance company fails to take advantage of a reasonable opportunity to settle claims against its insured within policy limits.

Origins and the Smoot Trilogy

The Georgia Court of Appeals summarized the common-law duty of good faith in dicta more than 60 years ago, noting that a liability insurer “may be held liable for damages to its insured for failing to adjust or compromise a claim covered by its policy of insurance, where the insurer is guilty of negligence or of fraud or bad faith in failing to adjust or compromise the claim to the injury of the insured.”  While this statement of the law endures today, it was the former Fifth Circuit Court of Appeals, applying Georgia law, that gave firm shape to the concept.  From 1962 to 1967, the Fifth Circuit issued three decisions in the matter of Smoot v. State Farm Mutual Automobile Insurance Company. These cases set forth the “the good faith doctrine,” which describes the duties of the liability insurer to investigate, adjust, and, in the proper case, settle claims against the insured. A detailed examination of the Smoot trilogy is a highly instructive primer to the law of common-law bad faith.

Bad Faith Insurance: An Introduction

Because an insurance policy is a contract, any dispute implicating an insurer’s bad faith will involve the meaning of the words in the insurance policy.  This is true no matter the type of bad faith at issue.  Construction and interpretation of an insurance policy come into play in statutory bad-faith cases brought under O.C.G.A. § 33-4-6  as well as in bad-faith cases under the common law.

 

Types Of Bad Faith Insurance

1. Withholding Payment

With respect to statutory bad faith, for example, an insurer may eventually be deemed to have withheld payment of policy proceeds in bad faith because the claim was clearly covered under the plain terms of the insurance policy.

 2. Incorrect Policy

On the other hand, an insurer may be deemed to have not acted in bad faith under the statute even though its interpretation of the policy was later determined to be incorrect, but only if the question of interpretation is objectively a “close question.”

3. Refusal To Settle A Claim

With respect to the common law, a bad-faith claim may have its genesis in the insurer’s refusal to settle a claim or defend a lawsuit it believes not to be covered, leading to a default judgment in excess of policy limits.  Thus, an insured who brings a bad-faith, failure-to-settle claim may, in some instances, be required to show that there is coverage under the insurance contract. Knowledge of the rules of contract construction as applied to insurance policies is obviously necessary, therefore, to correctly analyze and effectively litigate situations involving the potential bad faith of an insurer under O.C.G.A. § 33-4-6 as well as under the common law.