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.