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.