Bad Faith: Assignemnts, Consent Judgments, & Dowse Settlements

ASSIGNMENTS, CONSENT JUDGMENTS AND DOWSE SETTLEMENTS

Many lawsuits involving an insurer’s bad-faith failure to settle are brought by the claimant and not by the insured. Others are brought by both the claimant and the insured. Because a third-party claimant that lacks privity with the insurance company generally has no cause of action against the insurer for claims handling, a claimant who prosecutes a bad-faith claim generally does so by taking an assignment from the insured. Because liability policies have clauses forbidding the insured from assigning claims or settling claims without the insurer’s consent, such assignments can only be accomplished in certain situations.

Southern Guaranty Ins. Co. v. Dowse

The classic situation was presented in Southern Guaranty Ins. Co. v. Dowse. In that case, the claimant brought a lawsuit against a contractor who was insured under a commercial general liability policy. The insurer denied coverage and refused to defend. The claimant and insured entered into a settlement agreement, under which the insured withdrew its answer and allowed a default judgment to be rendered against it. The settlement agreement also provided that the claimant would not seek to enforce the judgment against the insured’s personal assets, but would limit its recovery to any amounts due under the insurance policy. The matter went to trial on damages.

Damages were awarded against the insured, and the claimant initiated a garnishment action directly against the contractor’s insurance company.The insurer argued that because the insured faced no liability under the settlement agreement, there was no indemnity obligation for the insurer to undertake. The insurer also argued that it was relieved of liability because the insured had breached policy provisions barring settlement without the insurer’s consent. The Supreme Court of Georgia rejected both defenses, holding that an insurer that refuses to defend based upon a belief that a claim against its insured is excluded from a policy’s scope of coverage “[does] so at its peril, and if the insurer guesses wrong, it must bear the consequences, legal or otherwise, of its breach of contract.” The Court continued as follows:

In Georgia, an insurer that denies coverage and refuses to defend an action against its insured, when it could have done so with a reservation of its rights as to coverage, waives the provisions of the policy against a settlement by the insured and becomes bound to pay the amount of any settlement within a policy’s limits made in good faith, plus expenses and attorneys’ fees.

Similarly, an insurer who denies coverage waives the provisions (common in most liability policies) barring coverage when the insured has made “voluntary payment” to the claimant. Furthermore, if an insurer refuses to defend a third-party action against its insured after timely notice, the insurer is bound to the issues adjudicated in the underlying suit against its insured.103 If the insurer is then sued for the refusal to defend or failure to pay a judgment entered against the insured, the insurer may not relitigate issues that form the basis for the judgment entered against its insured.

Trinity Outdoor, LLC. v. Central Mut. Ins. Co.

However, an insurer’s refusal to defend does not waive its right to contest whether the insurance policy provides coverage for the underlying claim. The insured may not unilaterally settle a lawsuit, however, if the insurer is defending the insured in the lawsuit but refuses to settle the lawsuit within policy limits. In Trinity Outdoor, LLC. v. Central Mut. Ins. Co., a billboard fell while it was being installed on Trinity’s property, killing two persons. Investigations ultimately determined that the manufacturer of the billboard was primarily at fault, though liability for Trinity could not be ruled out. A wrongful death action against Trinity and the manufacturer ensued, and Trinity’s insurer provided Trinity a defense. A mediation among all parties provided an opportunity to settle the liability against Trinity for less than its $2 million policy limits. The insurer attended the mediation and refused the opportunity to settle. Trinity, fearing a judgment in excess of policy limits, agreed to and paid the settlement. Trinity then sued its insurer, alleging, inter alia, negligent failure to settle and seeking indemnification for the settlement amount. The insurer defended itself by arguing that Trinity had breached the provision in the insurance policy barring insureds from making a “voluntary payment” without the insurer’s prior consent. The Supreme Court of Georgia agreed, holding that “an action for negligent or bad faith failure to settle a case requires that a judgment be entered against an insured in excess of the policy limits before the action can be asserted.” The court distinguished Dowse, in which the insured was “wholly abandon[ed]”, reasoning that Trinity’s insurer provided a defense and had not breached its duties so as to release Trinity from its duties as an insured. Accordingly, Trinity had no cause of action for bad faith as a matter of law.

Bad Faith: Seeking A Judicial Declaration

Bad Faith And The Jury

Bad faith is for the jury where there is a dispute as to whether the insurer’s offer of payment was unreasonably low.

Where an insured has suffered a loss, efforts by the insurance company to settle the claim that are not bona fide can be a constructive refusal to pay. In Firemen’s Ins. Co. of Newark, N.J. v. Allmond, the insurance company acknowledged coverage, made an offer of settlement of $2,250, and a jury determined the amount of the loss to have been $4,000. In such a case, “it was a question for the jury to say whether the offer had been so small as to amount to an absolute refusal to pay, and if so, whether there was bad faith in such refusal.” Accordingly, the Court of Appeals affirmed the jury’s award of bad-faith damages.

Seeking A Judicial Declaration On A Disputed Coverage Issue

Seeking a judicial declaration on a disputed coverage issue does not defeat bad faith as a matter of law. ” [T]he mere filing of a declaratory judgment action does not in and of itself absolve an insurer from being subject to a bad faith penalty under O.C.G.A. § 33-4-6.” In Great Southwest Exp. Co. Inc. v. Great Am. Ins. Co. of New York, the insured filed a claim that the insurer disputed. The insurance company filed a declaratory judgment action against its insured, seeking direction from a court as to whether coverage existed. The insured counterclaimed for coverage and bad-faith damages. The trial court denied the insurance company’s motion for summary judgment on bad faith, and the Court of Appeals affirmed, holding that the issue of bad faith was for the jury. Likewise, there are circumstances when the insurance company’s failure to seek a declaratory judgment can be evidence of bad faith.

An insurer’s waiver of a coverage defense does not preclude bad faith.

An insurance company that retains a prepaid premium for four and one-half years after learning of fraudulent answers in the insurance application may waive the defense that the policy was void ab initio, but the insurer may still maintain the fraud defense to the bad faith claim. Florida Int’l Indem. Co. v. Osgood, the insured’s house burned. The insurer discovered that the insured had committed fraud in the application by failing to inform the insurer of previous losses by fire. Rather than rescinding the policy, the insurer issued a notice of nonrenewal that specifically stated that the policy remained in effect. The court determined that the notice waived the right to rely on the defense of fraud with regard to coverage. However, because “[t]he waiver did not eliminate the fact that [the insured] had defrauded [the insurer],” a directed verdict for the insurer on bad faith was appropriate.

Bad Faith: Partial Payments

No Bad Faith For A Partial Payment

It is not considered bad faith for a partial payment when amount of the claim is reasonably questioned. In Shaffer v. State Farm Mut. Auto. Ins. Co., the insured was injured in an automobile accident. The insured’s automobile policy provided for payment of reasonable medical expenses incurred as a result of automobile accidents. After the accident, the insured was transported by ambulance and treated. The insurer paid the ambulance and hospital costs. The next day, the insured saw an internist who referred her for physical therapy. The insurer paid the internist’s bill but retained the services of an independent physician to determine if the physical therapy bill was excessive. The physician concluded that certain bills were excessive and that the records did not indicate the necessity of physical therapy. The physician recommended partial payment of $1,185.81, which the insurer tendered. The insured filed suit for the balance, alleging bad faith. The trial court granted partial summary judgment to the insurer on the bad-faith claim, finding the refusal to pay reasonable as a matter of law because of the advice of the independent physician.

The Court of Appeals affirmed, citing Jones v. State Farm Mut. Auto. Ins. Co., which held as follows:

The advice of an independent medical examiner that the treatment furnished a claimant is not in fact necessary treatment for injuries arising from the accident covered by the insurance policy, unless patently wrong based on facts timely brought to the insurer’s attention, provides a reasonable basis for an insurer’s denial of a claim for payment of such treatment.

No Bad Faith And Insurance Paying Less Than Demanded

 No bad faith where insured recovers substantially less than demanded, but insurance company acknowledges coverage. Where the verdict in a suit on an insurance policy is for substantially less than the amount claimed in the proof of loss and less than the amount demanded in the petition, no recovery for bad-faith damages and attorney’s fees is authorized. In Georgia Farm Bur. Mut. Ins. Co. v. Boney, the insured purchased a new car for $2,400 and rolled it five days later. The insured submitted a proof of loss for $2,350, the cost of the car less the $50 deductible. The insurance company acknowledged coverage but refused to pay the amount sought. Rather, the insurance company offered to

(1) have the car repaired by the insured’s choice of dealer

(2) pay $800. The insured rejected the offer, sent a 60-day demand for $1,400 and filed suit. The jury awarded $1,000 for the loss as well as a bad-faith penalty. The Court of Appeals reversed the bad-faith award, ruling that there can be no bad faith as a matter of law where the proof of loss seeks $2,350, the insured seeks $1,400 in its petition, and the jury awards $1,000. The court found it significant that the insurance company had gathered several estimates “from reputable people engaged in the repairing of automobiles.” In addition, the insured refused to produce the damaged car or meaningfully cooperate with the appraisal process called for in the policy.

Bad faith even though insured recovers less than demanded, but insurance company had denied all coverage.

In Hendley v. Am. Nat’l Fire Ins. Co., the insured’s home was damaged by a storm. The insurer denied all coverage, asserting that the insured had failed to give timely notice or make repairs to protect her property from additional damage immediately after the storm. The insured sought approximately $117,000 in damages but recovered much less. The issue on appeal was whether the issue of bad faith should have gone to the jury “where the jury awarded only 59% of the damages which [the insured] requested.”The Eleventh Circuit distinguished between, on the one hand, cases where the insured recovered substantially less than the amount demanded but the insurer had acknowledged coverage with, on the other hand, cases where the insured recovered less than the amount demanded but the insurer had denied coverage. In the former, the insurance company can escape bad faith as a matter of law if it shows good cause for the dispute. In the latter, the issue of bad faith is for the jury.

In addition, the Eleventh Circuit noted that “[t]he fact that the parties have a dispute as to liability will not preclude liability for bad faith penalties.”Although acknowledging that the insurance company’s defenses “provided a genuine dispute,” the Eleventh Circuit refused to find that there could be no bad faith as a matter of law. “Only a very finely-drawn distinction separates the insufficient defense from the one which as a matter of law raises a reasonable question of law or a reasonable issue of fact.

Other cases have found that if the insurer has completely denied any liability, the insured’s failure to recover the full amount sued for will not preclude an insured from recovering a penalty and attorneys’ fees for bad faith.

 

 

Insurance Bad Faith: Damages

DAMAGES

Although an insurer’s failure to defend a covered claim is a breach of the insurance contract, a claim for bad faith refusal to settle within policy limits sounds in tort, not contract. Like any tort, damages are an essential element to a claim for bad  faith. Since the Smoot cases, Georgia law has recognized several categories of available damages:
(1) special damages
(2) general damages
(3) punitive damages
(3) attorneys’ fees

SPECIAL DAMAGES

Special damages consist of the judgment against the insured that the insurer refuses to pay.  In the typical case, where the
insurer has tendered limits but refuses to pay amounts in excess of limits after having allowed a judgment to be entered, the special damages are the difference between policy limits and the amount in excess of policy limits.  In cases where the insurer is refusing to pay anything, perhaps because of a purported coverage defense, special damages would be the entire judgment.  Where an insurance company fails to offer a defense, it may be liable to its insured beyond the policy limits to the full amount of the judgment. An insurer who is liable for bad faith may be liable for the full amount of the judgment, even in excess of the policy limits, where the consequential
damages can be traced directly to the failure to timely defend or settle. The issue of whether the insured is entitled to
judgment in excess of the policy limits is a matter for the jury.

An insurer may be liable to its insured for post-judgment interest that the insured is required to pay.  In addition, if the insured incurred legal fees in its own defense (for example, when the insurer refused to defend its insured), such legal fees are recoverable as special damages.

GENERAL DAMAGES

General damages are of the type typically found in tort cases and caused by the tortfeasor’s negligence or bad faith.  For example, in Smoot III, the judgment in excess of policy limits caused a foreclosure and ruined the insured’s credit, justifying $10,000 in general damages.  Other proof of such damages may, in the proper case and with appropriate proof, include exposure to post-judgment discovery and collection efforts, damage to reputation or business interests caused by a judgment of record, or various types of mental or psychological
injury.

PUNITIVE DAMAGES

When an insurer fails to settle claims against its insured within policy limits when it has a reasonable opportunity to do so, the insurer may be subject to punitive damages. An insurer’s failure to take advantage of a single, time-limited demand for policy limits can create a jury question as to punitive damages. Even without the existence of an express, time-limited demand from the claimant, there may be a jury issue as to punitive damages when there is a fact issue as to whether the insurer should have initiated settlement discussions. Whether an insurer’s bad faith subjects it to punitive damages is governed by the familiar standards applicable to other torts and set forth in O.C.G.A. § 51-12-5.1.71  Under that statute, punitive damages may be awarded only when it is proven by “clear and convincing evidence” that the defendant’s actions showed “willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.” If punitive damages are awarded, they are generally capped at $250,000. The cap does not apply, and a jury may award unlimited punitive damages, upon a finding that the defendant had “specific intent to cause harm.” Because O.C.G.A. § 51-12-5.1 has general applicability, judicial construction of the statute in cases other than those involving an insurer’s bad faith failure to settle is highly relevant.

Entitlement to punitive damages up to $250,000

“Willful misconduct,” as used by the courts in authorizing punitive damages, is generally defined as the conscious or intentional disregard of the rights of another. The term “conscious indifference to the consequences” has been defined as the “[i]ntentional disregard of the rights of another, knowingly or willfully disregarding such rights.” It is not essential to a recovery for punitive damages that the person inflicting the damages was guilty of willful and intentional misconduct, if the act was done under such circumstances as evinces an entire want of care and a conscious indifference to the consequences.

The fact that many victims of an insurance company’s bad faith do not always suffer direct personal injury does not remove the potential for punitive damages.  Nor is it relevant that there might be no personal contact between the insured and the insurance company adjuster that decides not to settle within policy limits.  This is because neither direct personal contact nor specific malice between the defendant and plaintiff is required to support a claim for punitive damages. In Bowen v. Waters, an automobile owner sued a store for property damage to his automobile.  The damage occurred when the automobile was forced off the road by a store employee who was following the automobile because he suspected the driver of shoplifting.  Because there was evidence that the defendant’s acts were done with reckless disregard or with a conscious indifference to the rights of the plaintiff, the court ruled that there was a fact issue as to punitive damages.
Entitlement to punitive damages must be proven by clear and convincing evidence. A jury may award punitive damages even where the clear and convincing evidence only creates an inference of the defendant’s conscious indifference to the consequences of his acts. Specific to bad-faith cases, “conscious indifference to the consequences” may be shown where an adjuster who is in possession of a time-limited demand, knowing the insured is 100 percent liable and knowing that “special” damages already exceeded policy limits, fails to accept the offer within the deadline or ask for an extension. Also, once it has been determined that the insurer tortiously refused to accept an offer within policy limits (and the issue of punitive damages does not come up until that underlying issue is decided), the insurer has “gamble[d] with the funds of its insured” and failed to give its insured’s interests “equal consideration,” violating duties in Georgia law long-known to all liability insurers.  Indeed, an insurer who undertakes the defense of an insured under a liability policy has established a fiduciary relationship. Thus, it is difficult for the insurer to claim that its failure was of the type of “mere negligence” that will not support a claim for punitive damages.

Entitlement to more than $250,000 in punitive damages.

The statutory cap of $250,000 on punitive damages is lifted where the trier of fact finds that the defendant acted, or failed to act, with “specific intent to cause harm.” A party possesses specific intent to cause harm when that party desires to cause the consequences of its act or believes that the consequences are substantially certain to result from it.  Intent is always a question for the jury.  It may be shown by direct or circumstantial evidence.

Whether the defendant acted or failed to act with the specific intent to cause harm is determined by the common law standard of preponderance of the evidence.It is hard to imagine a situation where the issue of whether the insurer acted with specific intent to cause harm would not be a jury question.  As noted, a liability insurer who declines a reasonable opportunity to protect its insured has breached its fiduciary duty to the insured.88  Thus, the insurer specifically knows who will be harmed by any failure to settle.  Moreover, the decision to not settle or defend is rarely made by accident.  Discovery of the claims file will usually show the deliberativeness of the process of making such decisions, highlighting the “intent” of the act.

Attorneys’ Fees

Expenses of litigation under O.C.G.A. § 13-6-11 may be allowed in common law bad faith claims against an insurer.

 

The Time-Limited Holt Demand

The Time-Limited Holt Demand

The most common failure to settle within policy limits involves the insurer’s rejection of a time-limited offer. A notable 1992 decision provides the moniker for the so-called “Holt demand,” in which an attorney for a claimant sends a letter to the insurer demanding a settlement at or below policy limits and threatening the specter of a judgment in excess of policy limits if the demand is not accepted within a specified time period. In Holt, the Supreme Court of Georgia addressed whether a demand letter providing the insurer 10 days to make a decision was sufficient.

Two Ways Where The Supreme Court Limited Its Holdings

In upholding the rulings and verdict against the insurer, the Supreme Court limited its holding in two distinct ways:

1. An insurance company does not act in bad faith solely because it fails to accept a settlement offer within the deadline set by the injured person’s attorney. Each claim is different, so the factors the insurer must consider in deciding whether to accept a settlement offer vary. The Holt court specifically mentioned three factors – the strength of the liability case against the insured, the risk to the insured of a judgment in excess of policy limits, and damages to which the claimant may be entitled under applicable tort law – that must also be considered when deciding on any opportunity to settle.

2. The Supreme Court stated that “[n]othing in this decision is intended to lay down a rule of law that would mean that a plaintiff’s attorney under similar circumstances could ‘set up’ an insurer for an excess judgment merely by offering to settle within the policy limits and by imposing an unreasonably short time within which the offer would remain open.”

Thus, although the Holt court accepted a 10-day deadline for an insurer to accept an offer, Holt does not stand for the proposition that 10 days is appropriate in all situations. The length of the deadline depends on the facts and circumstances of the case at hand. For example, consider a simple car-wreck case where liability against the insured is reasonably clear, where the claimant has finished treating and sufficient medical expenses and lost wages can be documented and presented with the demand, and policy limits are at the statutory minimum. In such a case, 10 days should be sufficient for the insurer to analyze the documentation, make a decision as to the value of the case and prepare and deliver payment. In a case where the permanency of the claimant’s injuries are still in doubt, and the available policy limits are substantially high in relation to the known damages, an insurer may reasonably require additional time or additional information to determine the reasonable likelihood that policy limits might be pierced.

Consistent with Holt, obvious “policy limits” claims justify a 10-day demand period. In claims that are not so obvious, or in which the insurer has not had a reasonable opportunity to investigate liability and damages, a time-limited demand might still be appropriate, but more time might be reasonably necessary for the insurer to digest the new information, conclude its independent investigation and respond to the offer to settle.

Other factual scenarios might create a situation where a reasonable insurer must respond to a demand to settle within policy limits in rather short order. For example, if the insurer is providing a defense, the parties go to mediation, and sufficient discovery has taken place to establish that there is a significant risk to the insured of a judgment in excess of policy limits, an insurer may have a matter of hours during the mediation to respond to a policy-limits demand. An even shorter deadline might reasonably occur during trial if a key witness fails to perform, performs better than expected, or other vagaries of trial create a significant risk to the insured of a judgment in excess of policy limits. In these situations, it is interesting to note that both parties are subject to the constraints of time. In the mediation scenario, the parties have the mediator and their respective clients’ focused attention for an afternoon. In the trial scenario, the jury may be out deliberating with both parties evaluating the risk of an adverse decision.

Insurers sometimes ask for extensions to respond to time-limited demands. Any insurer requesting an extension should provide, and any claimant considering whether to grant an extension should request, a reasonably articulated explanation as to why an extension is needed, If the explanation is reasonably necessary, Holt would seem to suggest that failing to provide the extension would run afoul of the cautionary language in Holt warning against a claimant’s attorney “set[ting] up an insurer for an excess judgment merely by offering to settle within the policy limits and by imposing an unreasonably short time within which the offer would remain open.”

In summary, because the test of the insurer’s response to a time-limited demand is measured by the standard of the reasonably prudent insurer, the reasonableness of the terms of the demand is a central factor. Because the facts going to liability, damages and whether the insurer had a reasonable opportunity to settle vary widely from case to case, whether the insurer was negligent or acted in bad faith is usually to be decided by a jury.

Bad Faith And Genuine Conflict

Bad faith And Factual Position

An insurer’s defense “going far enough to show reasonable and probable cause for making it” vindicates the good faith of the  insurer and precludes a finding of bad faith. The facts must,  however, be “in genuine conflict” for the insurance company to be released from bad faith as a matter of law.  Indeed, when faced with conflicting facts, the court’s duty is to “carefully scrutinize” those facts to preclude the insurance company from relying on “fanciful allegations of factual conflict to delay or avoid legitimate claims payment.”

Cincinnati Ins. Co. v. Kastner

In Cincinnati Ins. Co. v. Kastner, the insureds filed suit to recover benefits under their homeowner’s policy following a burglary.  The insurer’s refusal to pay was based, in part, on the fact that there had been no forced entry and that the insureds’ accounts of the missing items and of the location of the keys to the deadbolt doors were somewhat inconsistent.  However, the inconsistencies in the insured’s stories were minor, and there was ample evidence tending to point to a burglary (access from the townhouse next door was relatively easy, the insureds’ neighbor had seen a stranger in the

courtyard of the townhouse on the afternoon of the burglary, the townhouse was for sale and various people, including the movers, had recently been allowed access to the house).

There was no evidence that the insureds had facilitated or staged the burglary nor evidence that the insureds were in possession of the items they claimed had been stolen.  Thus, the insurer’s rationale for its denial supported a claim for bad faith in the trial court, and the Court of Appeals affirmed the award of bad-faith damages.

Where the insurance company’s investigation reasonably indicates that the insured’s loss may have lead to no monetary damages whatsoever, there is no bad faith as a matter of law.

Lawyers Title Ins. Corp. v. Griffin

Lawyers Title Ins. Corp. v. Griffin involved a title insurance policy.  The insured made a claim for a loss of an easement insured under the policy and the insurer denied coverage, arguing that the easement had no monetary value.  Although the insurance company’s factual position was rejected by the trier of fact, the court ruled that there was sufficient evidence of the insurer’s factual position (though ultimately rejected) to defeat bad faith as a matter of law.  A factual dispute, however, “must be reasonable under the circumstances presented in the case.”
No bad faith where insurer has a reasonable ground to contest the claim, even though the insurer may have been wrong. Penalties for bad faith are not authorized under O.C.G.A. § 33-4-6 if the insurance company has a sufficiently reasonable ground to contest the claim.

Guideone Life Ins. v. Ward

In Guideone Life Ins. v. Ward, a widow sued to collect benefits under her husband’s life insurance policy.  The husband had failed to pay his premium on its due date and died outside the grace period.  Other evidence revealed, however, that the husband had overpaid his premium during the life of the policy.  Thus, there was a fact issue as to whether the overpayments kept the policy in force beyond the grace period to include the time of death.  Although the Court of Appeals remanded for determination of the coverage issue, the court ruled that the husband’s failure to pay the premium constituted a reasonable ground to contest coverage, precluding bad faith as a matter of law.

Bad Faith And Ambiguous Policy Provisions

Most bad-faith cases involve disagreements over the meaning of a particular provision of the insurance policy, the resolution of which resolves the issue of coverage.  Where the insured prevails on the coverage issue in such cases, it will sometimes be because the court found the provision ambiguous and construed it in favor of coverage.  Notwithstanding a ruling in favor of coverage in a particular case, the issue of whether the insurance company relied on the ambiguous provision in “bad faith” would still remain.  The cases are mixed as to whether an insurer can face liability for bad faith when the insurer denies coverage in reliance on an ambiguous policy provision.  As shown below, however, the modern trend appears to be that an insurance company’s reliance on an ambiguous provision does not shield the insurer from bad faith as a matter of law.

The Northwestern Mut. Life Ins. Co. v. Ross

One of the earliest bad-faith cases involved ambiguity in an insurance policy.  In The Northwestern Mut. Life Ins. Co. v. Ross, the Supreme Court of Georgia found that the insurance company had relied on an ambiguous policy in denying coverage.  Construing the ambiguity in favor of the insured, the Court found that coverage existed and affirmed the verdict in favor of the insured.  In discussing its conclusion as to the meaning of the operative clause, the Court referred to the fact that other jurisdictions had reached an opposite conclusion as to the meaning of the operative clause.

Turning to the issue of bad faith, the Court ruled that there could be no bad faith as a matter of law.  “Where the highest courts of the country have differed in respect to the construction of a contract, and, in this state, the principle, though hinted at, had never been settled, it cannot be that to test the question here is in bad faith.”  Thus, the court reasoned that the insurer could not be penalized for litigating its interpretation of the policy in that particular case, even though the insurer did not prevail.

Georgia Farm Bureau v. Jackson

A more recent case reached a different result.  In Georgia Farm Bureau v. Jackson, the named insured owned a Geo and a Taurus that were insured under two separate policies.  The policy on the Geo had an accidental death benefit, which stated as follows: The Company will pay insured’s injury coverage benefits for: … “accidental death benefit” incurred with respect to “bodily injury” sustained by an “eligible injured person” caused by an accident…. When used in reference to this coverage “accidental death benefit” means death resulting directly and independently of all other causes from “bodily injury” caused by accident while “occupying” or being struck by a “motor vehicle.”

The 16-year-old daughter of the named insured was killed in an accident while driving the Taurus.  The named insured made a claim under the Geo policy for the accidental death benefit, and the insurer denied the claim.  The trial court granted summary judgment and bad faith penalties against the insurer. With regard to coverage, the insurer argued on appeal that to qualify for the accidental death benefit an insured must be “struck by a motor vehicle” while a pedestrian.  In rejecting the argument, the Court of Appeals relied on the general rule that policies are to be read according to the reasonable expectations of the insured and found that the language of the endorsement was not specifically tailored to apply only to pedestrians.  Accordingly, the court found the language ambiguous and construed it in favor of coverage.

With regard to bad faith, the court acknowledged that an insurer is not liable for bad faith penalties where there is a doubtful question of law, but ruled that the policy was ambiguous without a doubt.  The assertion that there was a “doubtful question” was based on an “implication” gathered from the policy, the court reasoned, not on specific language or doubtful facts.  Accordingly, the court affirmed the trial court’s finding of bad faith as a matter of law.

Transportation Ins. Co. v. Piedmont Construction Group, LLC

In another case, the court ruled that although the insurer’s reliance on an ambiguous provision was “plausible,” bad faith should still go to the jury.  Bad faith and the reasonableness of the insurer’s In Transportation Ins. Co. v. Piedmont Construction Group, LLC, the court determined that the insurance company’s denial of coverage was based on a frivolous and unsubstantiated interpretation of policy language and the law, supporting bad faith as a matter of law.  In Transportation Ins. Co. v. Piedmont Construction Group, LLC, the insured was a contractor renovating part of a building.  A subcontractor started a fire that caused substantial damage to the entire building.  The building owner sued the contractor, and the contractor sought coverage and a defense from its liability insurer.  The insurer denied, relying on the so-called “business risks” exclusions, one of which bars coverage for damage to “[t]hat particular part of real property on which you or any contractors or subcontractors . . . are performing operations.”

The insurer relied solely on one decision of the Georgia Court of Appeals that had applied the exclusion when the insured sought liability coverage solely for its own work.  In the case at interpretation of policy language. bar, however, the fire had damaged parts of the owner’s property that were clearly not the insured’s work and not the “particular part” of the property on which the insured was working.  The insurer ignored case law making the distinction clear, supporting the appellate court’s decision to affirm the trial court’s finding of bad faith as a matter of law.

Selective Way Ins. Co. v. Litigation Technology Inc.

An “unfounded” interpretation of policy language may also create a jury issue as to bad faith.  In Selective Way Ins. Co. v. Litigation Technology Inc., the court affirmed a trial court’s denial of an insurance company’s motion for summary judgment on bad faith.  “[The unfounded interpretation] coupled with the fact that [the insurance company] initially agreed to pay and did not assert its exclusionary defense for over a year and a half creates a jury issue as to whether it exercised bad faith in refusing to pay [the insured’s] claim.”

Insurance Coverage: Timely Demand

What Is Considered Timely Demand?

A proper “demand” for payment that complies with O.C.G.A. §
33-4-6 is essential to recovery.  In evaluating the sufficiency of
a demand, a court should consider its purpose.  The purpose
of the demand requirement “is to adequately notify an insurer
that it is facing a bad faith claim so that it may make a decision
about whether to pay, deny or further investigate the claim
within the 60-day deadline.”

On its face, the demand requirement is straightforward.  The
statute’s plain language would appear to require only that the
insurer refuse to pay within 60 days of a demand.    This
straightforward language notwithstanding, courts have added
additional requirements to the demand through case law.

Because of the case law, no element of statutory bad faith
provides more opportunity for the insured to forfeit an otherwise
valid cause of action for bad faith than a failure to meet the
deceptively simple demand requirement.  In summary, Georgia
courts and courts applying Georgia law have interpreted the
statute to require that a demand:

• Be sent to the insurer 60 days prior to filing a lawsuit
• Be sent at a time the loss is due and payable.
• Include (in some cases) a threat of litigation
• Reference a specific loss.

 Demand must be prior to lawsuit

The literal language of the statute states that there must be a
“refusal of the insurer to pay the [loss] within 60 days after a demand has been made.”  This language would not appear to foreclose the filing of a bad-faith lawsuit prior to 60 days after the demand has been made if the insurer were to issue a
written, unequivocal refusal to pay following its receipt of the
demand but prior to 60 days having run.  Such a reading would
be consistent with the notion that the demand be sent such that
the insurer has at least 60 days to decide whether to pay the
claim or refuse to pay the claim before the lawsuit is filed.

Nonetheless, other courts have expressed the requirement
more strictly, writing that “a failure to wait at least 60 days
between making demand and filing suit constitutes an absolute
bar to recovery of a bad-faith penalty and attorney fees under
this statute.”  Until there is more clarity on this issue, the
conservative approach would counsel waiting 60 days after the demand to file the suit, an intervening refusal to pay
notwithstanding.

 Immediate payment Due

To be timely, a demand for payment may not be made before immediate payment is in order.  In Cagle v. State Farm Fire & Cas Co., the policy stated that a loss was not payable until 60 days after the insured submitted a proof of loss. The insured had submitted a proof of loss approximately 55 days before filing the lawsuit.  The court stated that the demand did not appear to be proper, because the insured was not entitled to immediate payment until 60 days after it had submitted a proof of loss.

An insured is not in a position to demand immediate payment,
and a demand is premature, if the insurer has additional time
left under the terms of the insurance policy in which to
investigate or adjust the loss. In Dixie Construction Products
Inc. v. WMH Inc., the insured claimed it had made sufficient
demand by May 4. The insured’s agent testified that he had
submitted the final figures for adjustment of the claim on May
10.  The agent further stated that he figured the adjuster would
need a reasonable amount of time to process the final figures
and other claim information following its submission.  The trial
court found the demand to be premature as a matter of law.
The Court of Appeals affirmed, holding that there was no
evidence that the insured was legally in a position to demand
immediate payment more than 60 days before it filed the
lawsuit.

Similarly, if the policyholder submits additional information after
having sent a demand, and the insurer needed the information
to determine whether the claim was payable, bad faith may be
defeated as a matter of law. In Balboa Life and Cas., LLC v.
Home Builders Finance, Inc., a mortgagee was a loss payee
under a property policy.  The mortgagee sent a demand letter
to the insurer.  The insurer responded with a request for
“information relevant to determine the mortgagee’s interest in
the insurance proceeds.” The mortgagee filed a bad-faith
lawsuit less than 60 days later, defeating the bad-faith claim as
a matter of law.

If an insurance policy states that the insurer does not have to
pay until 30 days after receipt of a proof of loss, a demand is
untimely if made before 30 days after the proof of loss is
submitted.  An insurer may waive the requirement to file a
proof of loss form.

Specter or threat of litigation

O.C.G.A. § 33-4-6 requires no specific content of the demand, and the plain language includes no requirement that the
insured threaten litigation or a bad-faith lawsuit.  Despite the lack of such a requirement, some courts have required that “the language used must be sufficient to alert the insurer that it is facing a bad faith claim for a specific refusal to pay so that it may decide whether to pay the claim.”  As explained below, the case law reflects a subtle distinction in regard to the level of threat necessary.

On one end of the spectrum, some courts have required that
the demand reflect only “the mere specter of a lawsuit.”  In Southern Realty Mgmt., Inc. v. Aspen Specialty Ins. Co., the insured’s attorney sent a letter to the insurer demanding payment of the amounts included in the proofs of loss submitted four months earlier and stating, “This letter is a formal demand for payment under the referenced policies and applicable law, and should be considered a demand for payment under the provisions of the Georgia Code pertaining to a refusal by an insurer to pay an insured’s loss after
demand.”  Although the letter did not specifically threaten litigation or cite to the statute, it was a sufficient demand.

Because the statute addresses solely litigation between insurers and insureds, it is logical to assume that including a citation to the statute (though not required by the plain terms of the statute) puts an insurer on notice of possible litigation.

A more recent case examined two letters from the insured and determined that in combination the “transactions constituted a demand” under the statute. In Byce v. Pruco Life Ins. Co., the insured’s first letter stated that “I respectfully request immediate payment.”  The court ruled that “respectful language does not overcome the clear intent of the letter which was to demand payment.”  The court further ruled, however, that because the letter did not use the phrase “bad faith” or cite to the statute “as a shorthand,” the first letter did not “on its own” constitute a proper demand.  The second letter did not “actually state that [the insured] will sue,” but it did state that the insured did not “waive her right to sue [the insurer] at any time for its bad faith refusal to pay.”  The court ruled that “[t]hese letters taken together clearly indicate that, at a minimum, ‘a mere specter’ of a bad faith lawsuit existed.”  Thus, the two letters constituted a “transaction” that in turn constituted proper demand. On the other end of the spectrum, several courts have dismissed bad-faith claims for the failure of the demand to sufficiently threaten bad-faith litigation.

For example, a letter to the insurer from the insured’s attorney that complains of “stonewalling,” refers to “unacceptable” and “negligent” adjusting practices and promises to “hold [the insurer] fully responsible” for any failure to pay was held to be insufficient as a matter of law.  In Arrow Exterminators, Inc. v. Zurich American Ins. Co., the court faulted the letter for failing to reference a claim for “bad faith,” failing to cite to the statute as a “shorthand” reference or failing to state that the insured was contemplating litigation. Because of these failures, the insurer was not on sufficient notice that it had 60 days to make a decision or face possible penalties, and the bad-faith claim was dismissed.

The above requirements notwithstanding, a demand may be
oral.  In Clark, the insured stated to an adjuster “[w]ell, if you won’t pay me I will have to take you in [sic] court,” and the adjuster responded, “I’ll see you in court.”  Significantly, the demand was oral and did not reference the penalty available under the statute.  Nonetheless, this exchange constituted a sufficient demand under O.C.G.A. § 33-4-6(a). Although such an oral demand presents a flare for the dramatic, written demands continue to be the safer practice and provide the clearer proof that the demand was properly made. Mere submission of a proof of loss is not a “demand” for payment, nor is the mere submission of bills.

Specific loss

A notice that fails to demand payment for a specific loss is insufficient.  Arrow Exterminators, Inc. v. Zurich American Ins. Co. is again instructive, because the letter merely expressed general dissatisfaction with the manner in which the insurer adjusted a series of claims rather than demanding payment for a specific claim.  The failure to demand payment in a particular sum, however, does not necessarily render the demand insufficient.  Indeed, the mere fact that a jury awards only 59 percent of the damages sought in a demand does not defeat bad faith as a matter of law.

Where an insurer files a declaratory judgment to determine its contractual duty to the insured, the insurer waives the 60-day notice requirement of O.C.G.A. § 33-4-6.50

PRACTICE POINTER:  Ideally, a demand should be sent after the insurance company has formally denied coverage, removing most potential objections as to whether the demand prematurely interrupted the claims-adjusting process.  When possible, a practitioner should attempt to review the entire insurance policy and make sure conditions precedent and other duties of the insured have been satisfied before sending a formal demand.  A formal, written demand is preferred over an oral demand for reasons of proof.  Some practitioners put something like the following legend across the top of the

Bad-Faith Demand For Immediate

Payment under O.C.G.A. § 33-4-6.  Some also include in the letter a sentence like the following:  “In the event that [insurance company] fails to pay all amounts due within the time provided for in O.C.G.A. § 33-4-6, [insured] will file a lawsuit against [insurance company] seeking all amounts due under the policy as well as the penalty and attorney’s fees provided for in O.C.G.A. § 33-4-6.”

Statuatory Bad Faith: Failure To Pay A Loss

The statute opens with the requirement that there be a “loss” covered by a policy.  Thus, the insured must prove that the loss for which payment sought is covered under the insurance policy at issue.  Where the claim is not covered, the insurer has
no obligation to pay and there can be no bad faith.

The vast majority of cases applying O.C.G.A. § 33-4-6 involve the insurance company’s failure to pay a loss under “first-party”
coverage.  First-party coverage includes claims involving only the insured and the insurer, such as payment for property damage to a home following a fire or the payment of benefits under a life or disability policy.

Leader Nat. Ins. Co. v. Kemp & Son

An increasing number of statutory bad faith cases, however, involve the insurance company’s failure to provide coverage or a defense under a “third-party” liability policy.  An instructive example is Leader Nat. Ins. Co. v. Kemp & Son, Inc.13  In that case, the insurer failed to defend an insured under a liability policy, leading to judgments against the insured in excess of policy limits.  The insured sued the insurer.

At trial, the jury awarded the amount of the excess judgments,post-judgment interest and the statutory penalty, which at the time was twenty-five percent.  Both the Court of Appeals and the Supreme Court of Georgia affirmed.  The authors predict Georgia law to further develop in the coming years with respect to the relevance of O.C.G.A. § 33-4-6 in claims involving the alleged breach of a third-party liability policy.  Any such development must focus on the meaning of “loss” in the statute.

Transportation Ins. Co. v. Piedmont Construction Group, LLC

At present, there is a “loss” within the meaning of O.C.G.A. § 33-4-6 and bad faith damages are possible in cases involving a breach of the duty to defend under a liability policy.14  In Transportation Ins. Co. v. Piedmont Construction Group, LLC, the insured was a contractor whose subcontractor caused a fire to the owner’s building.  The owner sued the contractor, who tendered the case to its liability insurer.  The insurer refused to defend the contractor.  The insured provided its own defense and filed an action against its insurer.  The court held that the insurer breached the duty to defend in bad faith, and that the attorneys’ fees incurred by the insured in its own defense was a “loss” within the meaning of O.C.G.A. § 33-4-6(a).  The court did not specifically address whether any amounts the insurer failed to pay in indemnification of a judgment constituted a “loss” under the statute.

Statutory Bad Faith

Generally, a mere breach of a valid contract amounting to no more than a failure to perform creates a cause of action in contract, but not in tort. Thus, under the common law, an insurer’s failure to pay amounts due under an insurance policy allowed an insured to recover only the amounts that would have been due under the insurance contract. An insured had no cause of action against an insurer for simple negligence in handling a first-party claim. This common law created an incentive for insurance companies to delay payment and deny coverage in close cases, as the worst-case scenario for an insurer later deemed to have unnecessarily delayed payment or to have denied coverage incorrectly was to be forced to pay the amount the insurer should have paid to begin with. The expense, risk and duration of litigation further incentivize nonpayment.

How The Law Protects The Insured

Many insureds will abandon or compromise their claims because they do not want to pay or cannot afford to pay an attorney, cannot be guaranteed success, or likely need some funds quickly to restore damaged property. To partly alleviate these situations, O.C.G.A. § 33-4-6 provides for additional damages when an insurance company, following a demand from the insured, persists in its refusal to pay amounts due under a policy in “bad faith.”

Early on, Georgia courts recognized that the purpose of the statute was to remove the incentive for unnecessary delay and to create a situation allowing an insured to be made whole in the event the insured is forced to go to court to enforce the insurance contract. For this reason, the statute can be particularly ineffective as applied to low-value losses. For example, the statutory penalty for failure to pay a $20,000 loss is only $10,000 (50% of limits, see, O.C.G.A. § 33-4-6(a), set forth below). A large, for-profit carrier might not be fearful of such a penalty, knowing that the insured must hire an attorney and pay for expert witnesses and other litigation expenses with little upside for the risk undertaken. O.C.G.A. § 33-4-6(a) states as follows:

In the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liable to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees for the prosecution of the action against the insurer. The action for bad faith shall not be abated by payment after the 60 day period nor shall the testimony or opinion of an expert witness be the sole basis for a summary judgment or directed verdict on the issue of bad faith.

The amount of any reasonable attorney’s fees shall be determined by the trial jury and shall be included in any judgment which is rendered in the action; provided, however, the attorney’s fees shall be fixed on the basis of competent expert evidence as to the reasonable value of the services based on the time spent and legal and factual issues involved in accordance with prevailing fees in the locality where the action is pending; provided, further, the trial court shall have the discretion, if it finds the jury verdict fixing attorney’s fees to be greatly excessive or inadequate, to review and amend the portion of the verdict fixing attorney’s fees without the necessity of disapproving the entire verdict. The limitations contained in this Code section in reference to the amount of attorney’s fees are not controlling as to the fees which may be agreed upon by the plaintiff and the plaintiff’s attorney for the services of the attorney in the action against the insurer.

What The Insured Must Show

Many courts have held that because the statute imposes a penalty, its requirements are strictly construed. To prevail on a claim for an insurer’s bad faith under O.C.G.A. § 33-4-6, the insured must show that:

• The claim is covered under the policy.
• A demand for payment was made against the insurer 60 days prior to filing suit.
• The insurer’s refusal to pay was in bad faith.

The statute also requires that the insured plaintiff “mail to the Commissioner of Insurance and the consumers’ insurance advocate a copy of the demand and complaint by first-class mail.” Ironically, Georgia has no official with the title of “consumers’ insurance advocate.” The office of the Commissioner of Insurance is aware of the statutory requirement and the impossibility of literal compliance.

Practitioners may mail the complaint and demand to the office of the commissioner, who, in the authors’ experience, promptly sends written confirmation of receipt, helpfully reciting compliance with the statute.

Best Tips On How To Read An Insurance Policy

Although the law can guide a practitioner in interpreting the
various component parts of an insurance policy, the ability to
analyze a policy and render a competent coverage analysis
requires certain practical considerations.  An opinion regarding
coverage cannot be confidently given without consideration of
all of the following:

Accurate Copy Of The Policy

Few insureds ever obtain, much less maintain, a complete and accurate copy of their policies.  Although a commercial broker will often maintain or be able to reconstruct a complete and accurate copy, many retail agents will, in response to a request for a copy of the policy, provide a declarations page and state-specific endorsements without all policy forms.

The only way to  be sure to have a complete and accurate copy is to obtain a certified copy of the policy from the insurer.  A certified copy is one assembled by the insurer and attested to, under oath, as to being complete and accurate.

The Declarations Page

The declarations page provides individualized details about the insured, the insurer and the coverage provided.  It lists the precise entity insured and sometimes additional insureds. It specifies the name of the insurer, which is the proper entity to name in any suit on the policy.  A declarations page also provides the limits potentially available for each type of coverage. Entering a limit is often the method of indicating what coverages are available. The declarations page sets the
amount of the deductible.

The Deductions Page

Finally, a declarations page should list the forms and endorsements that make up the complete and accurate policy.  Any analysis of the policy should begin with a comparison of the list of forms and endorsements with those actually attached to ensure that all forms referenced are present and that no form present is not referenced.

The Coverage Clause

The coverage clause (or insuring clause or coverage grant) is the meat of the policy and the first substantive element for analysis.  Many policies have multiple coverages and multiple coverage clauses.  For example, most automobile policies provide property coverage for damage to the insured’s vehicle and liability coverage for bodily injury or property damage the insured may cause to third parties.  In the commercial context, a business might have a single “policy” providing coverage for property damage, loss of business income, general liability, employment liability, or even kidnap and ransom insurance for traveling executives.  Each must be read separately, though they sometimes reference each other.

What a coverage clause giveth, an exclusion may taketh away.  Each exclusion should be separately considered with respect to the attendant circumstances of each loss, bearing in mind the rule of narrow construction described supra.

Conditions

Conditions describe the tasks and procedures the parties must follow both before and after a loss.  Conditions include the familiar notice and cooperation provisions that often constitute conditions precedent to coverage.  The conditions section will also contain procedures and time limits applicable to the insurer in adjusting and paying the loss.  Many policies include condition sections that apply only to a particular coverage as well as a section of “general” conditions that apply to all coverages.  Thus, not all conditions necessarily apply to each loss.

Definitions Section

Most policies contain a definitions section.  Definitions must be read simultaneously with the other policy components.  Although purporting to merely define certain words and phrases, many definitions severely restrict or enlarge coverage.

Endorsements

Endorsements must be considered with a view as to how they alter the provisions previously considered.  Endorsements may go so far as to add entirely new coverage sections, delete a previous endorsement, or merely define a word or phrase.

When reading an endorsement that purports to alter previous language, it is helpful to actually note such deletions on the portion of the policy referenced by the endorsement.

Grants of coverage, conditions, exclusions, definitions, endorsements and even declarations pages are read in accordance with the rules of contract construction described supra.

Bad Faith Insurance: Construction Upholding Whole Contract

The rules of construction require the court to consider the policy as a whole, to give effect to each provision, and to interpret each provision to harmonize with each other. Additionally, a court should avoid an interpretation of a contract that renders portions of the language of the contract meaningless.

“[I]t is a cardinal rule of contract construction that a court should, if possible, construe a contract so as not to render any of its provisions meaningless and in a manner that gives effect to all of the contractual terms.” Pomerance, 288 Ga. App. at 494, 654 S.E.2d at 641.

A court may not construe an insurance policy in a way that renders a provision superfluous. York Ins. Co. v. Williams Seafood of Albany, Inc., 273 Ga. 710, 712, 544 S.E.2d 156, 157 (2001). This Court “must consider [the policy] as a whole, give effect to each provision, and interpret each provision to harmonize with each other.” S. Trust Ins. Co. v. Dr. T’s Nature Products Co., 261 Ga. App. 806, 807, 584 S.E.2d 34, 35-36 (2003).

As a corollary of this rule, when a contract uses two different terms in short sequence, the terms cannot have the same meaning. Ins. Co. of Pennsylvania v. APAC-Se., Inc., 297 Ga. App. 553, 558-59, 677 S.E.2d 734, 739 (2009), citing, Pomerance v. Berkshire Life Ins. Co. of Am., 288 Ga. App. 491, 494-95, 654 S.E.2d 638 (2007) (rejecting interpretation of the word “substantial” that would render it interchangeable with the word “material”), and Tyson v. McPhail Properties, 223 Ga. App. 683, 689, 478 S.E.2d 467 (1996) (concluding that contract “would not have used two different terms in two sequential paragraphs to describe the same thing”).

 Endorsements

An endorsement is “[a] provision added to an insurance contract whereby the scope of its coverage is restricted or enlarged.”  The terms of an endorsement take precedence over printed portions of the policy.  Multiple endorsements can combine with the policy form to create ambiguities.

Burdens

The burden of proof is on the insured to show that there is a loss covered by the policy.  The insurer has the burden of showing that any exclusion applies.  The insurer may not fulfill that burden by showing an absence of evidence, but must show that the exclusion applies “without dispute.”