Bad Faith Procedural Aspects: Declatory Judgments

The Georgia Declaratory Judgment Act

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.

When Is A Declatory Judgment Used?

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:

• a demand for payment has been made
• the insurance company has not yet acted to deny
• legitimate questions exist about the validity
• Georgia law does not provide a clear answer

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.

Drawdy v. Direct General Ins. Co.

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.

Bad Faith Cases: Procedural Aspects

Parties

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.

Venue

O.C.G.A. § 33-4-1 sets out the venue provisions for actions against insurers. Such actions may be brought:

• in the county where the insurer’s principal office is
• in any county where the insurer has an agent
• in any county where an agent or place of doing
• in any county in which the property covered by the located; place of doing business; business was located when the cause of action accrued; policy is located or where a person entitled to the proceeds of an insurance policy maintains his legal residence.O.C.G.A. § 33-5-34 provides for venue in actions against unauthorized or surplus lines insurers “in the superior court of the county in which the cause of action arose.”

Choice Of Law

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

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.

Insurance Bad Faith: The “Set-Up” Myth

The Holt court observed that “[a]n 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.” Quoting a federal district court applying Oregon law, the Holt court went on to state as follows:

Nothing 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.

What Is The “Set-Up” Myth?

Using this language as a spring board, insurers typically defend claims of bad faith by arguing that they were “set up” by the claimant’s attorney. In order to “set up” the insurer, or so the argument goes, the claimant’s attorney has a subjective desire that the insurer not accept a time-limited demand so that a later bad-faith action will allow the claimant to recover more than policy limits. One court has rejected that interpretation of the Holt set up language, ruling that the language “simply indicates that the imposition of an unreasonably short time within which an offer to settle would remain open is a relevant factor in evaluating whether the insurance company acted unreasonably in failing to accept such an offer.”

Griffin arose in the context of a discovery dispute in a bad faith case in which the insurer sought communications between attorneys representing the claimant and the insured tortfeasor. The court quashed the subpoenas, ruling that any such communications shedding light on the parties’ motivation is irrelevant in a bad-faith case. Thus, although the length of the deadline in a time-limited demand is clearly relevant to bad faith, the claimant’s motivation for choosing a particular deadline is not. “Even if the attorneys for [the claimant and the insured] did have the subjective intent to ‘set up’ [the insurer] for a bad faith claim, their intent simply is not relevant to whether [the insurer’s] response was in bad faith.’

Insurance Bad Faith: Safe Harbor

“Safe Harbor”: Liens Involved

The Georgia Court of Appeals has recently created a “safe harbor” for an insurer presented with an opportunity to settle a claim that involves certain healthcare liens. S. Gen. Ins. Co. v. Wellstar Health Sys., Inc., provides a typical example of the manner in which a hospital lien could complicate efforts between the claimant and the insurer to settle claims against the insured. In Wellstar, the insured injured a bicyclist. The insured’s liability limits were insufficient to compensate the bicyclist for his damages. A healthcare provider (Wellstar) asserted a lien. The bicyclist accepted policy limits to settle the tort claim against the insured but would not agree to indemnify the insurer. The insurer paid the claimant anyway. The healthcare provider succeeded in enforcing the lien against the insurer in the trial court. The insurer appealed, arguing that the familiar law of offers and counteroffers as applied in Frickey v. Jones conflicted with the potential liability to settling parties arising out of hospital lien law. Although declining to find any such conflict, the court in Wellstar created a “safe harbor” for insurers in the situation in which Southern General found itself.

What Is “Safe Harbor”?

[I]t is possible for an insurance company to create a ‘safe harbor’ from liability under Holt and its progeny when:

• The insurer promptly acts to settle a case involving clear liability and special damages in excess of the applicable policy limits
• The sole reason for the parties’ inability to reach a settlement is the plaintiff’s unreasonable refusal to assure the satisfaction of any outstanding hospital liens.

Hypothetical Example Used

Consider the following hypothetical:

An insurance company – faced with a situation of clear liability and special damages in excess of the policy limits – offers in a timely fashion to tender its policy limits to the plaintiff, subject to a reasonably and narrowly tailored provision assuring that the plaintiff will satisfy any hospital liens from the proceeds of such settlement payment. For example, the insurance company could request that plaintiff’s counsel or a third party hold a portion of the settlement proceeds (in an amount equal to that of the hospital lien) in escrow to allow the plaintiff an opportunity to investigate the validity of the liens and to negotiate with the hospital. And once the relevant lien-resolving documents have been executed by the parties, the held-back settlement funds could then be disbursed to the plaintiff. But if the insurer made such an offer or counteroffer (in a timely and reasonable fashion) and the plaintiff unreasonably refused to give the requested assurance, the insurer is (at that point) under no obligation to tender policy limits directly to the plaintiff. Indeed, a plaintiff who unreasonably refuses to give such an assurance does so at his or her own peril because the insurance company would thereafter have no obligation to negotiate with the hospital or otherwise advocate on the plaintiff’s behalf. Instead, the insurer would be free (at that point) to simply verify the validity of any liens, make payment directly to the hospital, and then disburse any remaining funds to the plaintiff. Most fundamentally, there was no bad faith in Wellstar and no allegations of bad faith. Indeed, there could be no bad faith because the insurer effectively settled the claims against its insured. Thus, the insured’s interests and perspectives were not represented in the briefing and argument leading to the Wellstar decision. The only two interests represented, insurance companies and hospitals, can derive benefits from a “safe harbor” that allows the insurance company to pay the hospital without protecting the insured from legal liability. For that reason, any application of the safe harbor in a situation where there has actually been an excess judgment against the insured remains uncertain.

The Court tempered its suggestion by noting as follows: “The hypothetical posited supra should in no way be read as condoning or encouraging an insurance company to make payment directly to a hospital before engaging in good-faith settlement negotiations with a plaintiff. And while we leave the answer to this question for another day, it is possible that an insurer would be liable under Holt and its progeny if the company made payment directly to the hospital before even attempting to negotiate with the plaintiff.” Wellstar is perhaps better viewed (and more easily reconciled) in relation to the reasonableness of the opportunity to settle and the actions of the reasonably prudent insurer in responding to such an opportunity. It would seem unreasonable to fault an insurer for considering the effect of known and perfected liens when evaluating an opportunity to settle. However, a reasonably prudent insurer, giving equal consideration to the interests of its insured, should weigh the risk to the insured created by the lien as against the risk to the insured created by the legal liability to the claimant. Wellstar does not recognize or address those concerns, arguably making it contrary to existing authority.

Bad Faith Litigation: Expert Witnesses

EXPERT WITNESSES IN COMMON-LAW BAD-FAITH ACTIONS

The crux of the typical common-law bad-faith lawsuit turns on the reasonableness of the insurer’s decision to decline an opportunity to settle within policy limits. In some cases expert testimony regarding the insurance company’s actions could be helpful for the trier of fact in determining whether the insurer behaved as an “ordinarily prudent insurer” in determining whether to settle a lawsuit. Although questions as to the appropriateness of a particular expert would be a fact-intensive analysis tailored to a specific case, a few reported cases offer some guidance.

The Daubert Standard

Under the familiar Daubert standard, the Northern District of Georgia has ruled that an esteemed attorney with 30 years of experience litigating personal injury cases involving automobiles and who has authored an authoritative treatise on the subject was not qualified to provide expert testimony on whether an insurance company properly responded to a time-limited demand to settle within policy limits. The court reasoned that the attorney had never worked in the insurance industry as an adjuster of automobile liability claims. Thus, he was unqualified to testify as to the standard of care for a claims adjuster in receipt of a time-limited demand. A practicing attorney who is an adjunct professor of insurance law, who had counseled insurers on claims handling and underwriting in a manner “similar to those of a claims manager” and who had authored a treatise on insurance issues was qualified to testify in the Middle District of Georgia. The same expert could not, however, “merely describe what the law is or tell the jury what result to reach.” An adjuster who had handled thousands of time-limited demand letters in a 30-plus year career with State Farm was unqualified to testify as to industry standards. The court reasoned that the adjuster had worked solely for State Farm during those decades, so he had not shown that he had sufficiently broad knowledge of the industry so as to form opinions regarding industry-wide standards. The court noted that the proffered expert had also been out of the insurance industry for many years, and there was little evidence that the former adjuster had taken steps to keep his knowledge of industry practices current.

Dickerson v. Am. Nat’l Property and Ca. Co.

Expert testimony on the standard applicable to a “reasonably prudent insurer” is not necessary in all cases. Dickerson v. Am. Nat’l Property and Ca. Co. involved the failure of an adjuster to accept a time-limited demand for policy limits. Testimony from the adjuster revealed that the adjuster had no doubt as to the insured’s liability or that the claimant’s damages exceeded policy limits of $25,000. The court ruled that the lack of expert testimony was not fatal to the plaintiff’s bad-faith claim against the insurance company, because a reasonable fact finder could conclude, based on testimony from the insurance company’s own employees, that a reasonably prudent insurer would have accepted the time-limited demand.

The Time-Limited Demand: Acceptance and Rejection

Acceptance and Rejection of The Time-Limited Demand

The law of contract formation with respect to offers, counteroffers and rejections informs whether an insurer fails to take advantage of an offer to settle within policy limits. Accordingly, when negotiating a possible settlement within policy limits, the following rules apply:

• The offeror is master of his offer and may condition the terms under which an offer may be accepted.
• Failure to accept the offer in strict compliance with its terms or an “acceptance” that purports to vary a single term is deemed a rejection.
• A counteroffer is a rejection of the initial offer.
• Oral agreements to settle are binding.In accordance with these rules of contract formation, a claimant may send a Holt demand to an insurer stating, for example, that the claimant will accept a certain amount so long as the insurer accepts the offer in writing by a certain date.  If the insurer fails to respond within the stated time limit, the insurer has rejected the offer as a matter of law.  If the insurer makes a counteroffer prior to the deadline, the insurer has rejected the offer as a matter of law.  If the claimant rejects the insurer’s counteroffer, the insurer may not then accept the original offer, even if within the originally stated time, unless the claimant revives the offer.  Finally, such dealings may be consummated in writing, orally, or in any combination, though problems of proof may occur with regards to negotiations and agreements not confirmed in writing.

Frickey v. Jones

Whether or not an insurer has made a counteroffer to a time-limited demand has been hotly litigated in recent years.  The Supreme Court of Georgia has consistently applied the age-old common-law rules of contract formation stated above to hold that a response by the insurance company that does “not purport to accept [the claimant’s] offer unequivocally and without variance of any sort” is a rejection.  Frickey v. Jones is typical of these disputes in that it arises in the context of a motion to enforce settlement agreement.  In Frickey v. Jones, the claimant sent a demand letter providing the insurer a five-day period to accept an offer to settle for policy limits. The insurer responded within the five-day period, stating its willingness to tender policy limits and as follows:  “Obviously, payment is complicated by what appears to be a Grady Hospital lien as well as potential liens by your client’s health carrier.  Please advise me of the status of these liens.”

The claimant viewed this language as a rejection of the demand under the theory that it added the condition of resolving liens prior to payment.  The insurer agreed, later writing that it would “tender the policy limits . . . if you were able to resolve the Grady Hospital lien as well as potential liens by your client’s health carriers.” The insurer, on behalf of its insured, filed a motion to enforce the alleged settlement agreement.  The Supreme Court of Georgia ruled that no settlement agreement had been made, as the insurer purported to “accept” the offer on the condition that liens be resolved, making the attempted acceptance a counteroffer.

McReynolds v. Krebs

The Supreme Court of Georgia again addressed a nearly identical exchange in McReynolds v. Krebs. In McReynolds v. Krebs, the claimant made a time-limited demand for policy limits that did not mention how a known lien by Grady Hospital would be resolved.  The insurer made a timely response as follows:
Our limits are $25,000/$50,000 and we agree to settle this matter for the $25,000 per person limit. Please call me in order to discuss how the lien(s) (Specifically, but not limited to the $273,435.35 lien from Grady Memorial Hospital) will be resolved as part of this settlement.
In the motion to enforce settlement that followed, the insurer argued that its reference to the lien merely made an inquiry and did not add conditions to the demand.  The Supreme Court disagreed, noting that the language used did not inquire as to the existence of liens but indicated that counsel needed to discuss how the known liens would be resolved as part of the settlement.  Accordingly, a counteroffer was made.

The issue of whether a counteroffer was made arises in many bad-faith cases, as insurers sometimes defend such cases on the theory that it had accepted an offer to settle within policy limits that the claimant refused to consummate.

Insurance Bad Faith: Opportunity To Settle

The common occurrence of a written Holt demand notwithstanding, there is no requirement under Georgia law that the insurer’s failure to settle within policy limits be proven by the insurer’s failure to accept a formal, written demand within a stated time. Rather, the law requires an inquiry into “whether the insurer had an opportunity to make an effective compromise.” Although refusing to place an “affirmative duty on the company to engage in negotiations concerning a settlement demand that is in excess of the insurance policy’s limits,” the Georgia Supreme Court has not required that the “opportunity to make an effective compromise” be in any particular form.

Settling Within Policy Limits

The “argument that an insurer may not be held liable for tortious refusal to settle in the absence of a settlement demand from the plaintiff is not supported by Georgia law.” Indeed, the Georgia Court of Appeals has held that in the appropriate situation an insurer may have a duty to make an offer: “The failure either to settle within policy limits or to make an offer of settlement creates an issue of bad faith of the insurer, because the issue arises whether the insurer places its financial interest superior to the interests of its insured who is placed at great risk for an excess judgment.”

At the present time, no Georgia court has specifically ruled on whether an insurance company has a duty to initiate a settlement offer when the claimant has not first provided an opportunity to the insurer to settle the claims against the insured for an amount within policy limits. The Northern District of Georgia, applying its understanding of Georgia law, has ruled that there is no bad faith as a matter of law unless “the case could have been settled within the policy limits-and that the insurer knew, or reasonably should have known, of this fact.” In Kingsely v. State Farm, “[p]rior to filing suit, neither [claimant] nor her attorneys made a settlement demand or requested to discuss settlement with State Farm.” State Farm tendered policy limits within a month of suit being filed. The claimant rejected the tender and proceeded to obtain a verdict in excess of policy limits. In the subsequent bad-faith lawsuit, the claimant acknowledged that she had made no demand and testified that she had decided to obtain an excess judgment if State Farm did not offer its limits prior to her deadline for filing a lawsuit. The deadline for filing a lawsuit was not communicated to State Farm. The court ruled that there was no bad faith as a matter of law, as State Farm had no knowledge of the claimant’s “secret deadline” and that there was no evidence that State Farm knew of any “triggering event” alerting State Farm to an opportunity to settle.Thus, although the formal demand is highly useful as documentary proof of the insurer’s failure to fulfill its duty, the demand is not itself may not be a necessary element of the tort. Rather, the necessary element is failure to take advantage of an opportunity to settle within policy limits. Although in the vast majority of bad-faith cases the opportunity is delivered to the insurer in the form of a written demand, in the appropriate case, an insurance company may have to create a reasonable opportunity to effect settlement and protect its insured from legal liability before any demand is sent. the opportunity itself. This opportunity could arise while the insurer fulfills its duties of investigating the claims against its insured.

Practice Pointer

Whether a necessary element of the tort of bad faith or not, a formal, time-limited demand is a useful and sometimes necessary tool in getting a claim paid promptly. A for-profit entity like an insurance company is likely to avoid or delay payment unless prodded. A demand should be in writing and give the insurer sufficient information (in the form of medical invoices, statements of lost income, etc.) justifying the amount of the demand. The demand should clearly state the deadline and means of acceptance, with the amount of time being reasonably sufficient in the circumstances of the particular case. Send the demand via certified mail, return receipt requested, to insure that you have a record of when the insurer received the letter. Insurers routinely ask for more time to consider. Failing to provide additional time to consider in the appropriate case could provide a defense to the insurer if it can show that it did not have enough time to properly consider. Respond to such requests in writing. If the rejection of a reasonable offer is at mediation and possibly subject to confidentiality, consider following up with a formal letter making a demand that follows the suggestions above.

The Equal Consideration Rule

The Equal Consideration Rule

The “Equal Consideration Rule” provides the standard by which an insurance company’s decision to not settle a claim against its insured is measured. The standard was pronounced five years after Smoot I, when the Georgia Court of Appeals in United States Fidelity & Guar. Co. v. Evans expressly recognized that a cause of action against a liability insurer for failing in its duties to properly protect its insured arises “in tort and naturally involves a duty and an alleged breach of that duty.” Deciding that a duty exists begs the question, however, which the court itself asked: “What then is the duty?” The answer to that question, which is the holding in Evans, is best understood in its factual context. The underlying lawsuit in Evans was a typical car-wreck case resulting in a verdict against the insured in excess of policy limits. Following the verdict, the claimant offered to settle for policy limits, apparently preferring quick and certain payment over waiting for an appeal to run its course. The insurer refused, lost the appeal for a new trial and tendered policy limits, leaving the insured “holding the bag” for the amount in excess of policy limits. The insured filed suit against the insurer, and a jury found bad faith, entitling the insured to the difference between the judgment and policy limits. The insurer appealed, arguing that it should not be penalized for exercising its right to appeal a judgment.

The issue of law for the Evans court was whether there could be bad faith if the insurer’s decision to appeal the underlying lawsuit was not frivolous. The insurer had argued that it could not be liable as a matter of law for failure to settle so long as its decision not to settle was supported by a non-frivolous defense pursued on behalf of the insured. The court rejected the standard, suggesting that such an analysis would turn on whether the insurer had sufficiently “consult[ed] its own self interest” in rejecting the settlement offer and deciding to assert the defense on appeal. Such a standard was inadequate, the court reasoned, because it would require no analysis as to whether the insurer had consulted the insured’s interests. Noting that the insurer must do more than merely refrain from making frivolous decisions while handling litigation against its insured, the court held as follows:
As a professional in the defense of suits, [the insurer handling the defense] must use a degree of skill commensurate with such professional standards. As the champion of the insured, [the insurer] must consider as paramount his interests, rather than its own, and may not gamble with his funds.

What The Court Wrote

Stated differently, the court wrote as follows:
[T]he insurer must accord the interest of its insured the same faithful consideration it gives its own interest. While this rule will not be as simple to apply in differing circumstances . . . we think it states the duty owed by any prudent insurer to refrain from taking an unreasonable risk on behalf of its insured, e.g., where the chances of unfavorable results on appeal are out of proportion to the chances of favorable results.
Applied to the facts at issue in Evans, the Court of Appeals held that it could not, as a matter of law, reverse the jury’s determination that the insurer had failed to accord its insured’s interests equal consideration to its own. Indeed, the court reasoned that the insurer was the only party who could possibly benefit from the appeal, as a successful appeal would only subject the insured to another trial and another opportunity to be subject to a judgment in excess of policy limits. A reasonable jury could find that the insurer had failed to consider its insured’s interests in refusing to settle within policy limits, cap everyone’s damages, and remove the insured’s risk of future liability exposure.

The Georgia Supreme Court affirmed Evans with little discussion. Almost 20 years later, Georgia’s highest court approved Evans and expressly held as follows:
An automobile liability insurance company may be liable for damages to its insured for failing to adjust or compromise the claim of a person injured by the insured and covered by its liability policy, 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. Hence, where a person injured by the insured offers to settle for a sum within the policy limits, and the insurer refuses the offer of settlement, the insurer may be liable to the insured to pay the verdict rendered against the insured even though the verdict exceeds the policy limits of liability. The reason for this rule is that the insurer may not gamble with the funds of its insured by refusing to settle within the policy limits.
In determining whether to settle a claim, an insurance company must give its insured’s interests “equal consideration.” The Georgia Supreme Court described the “equal consideration rule” as follows:
In deciding whether to settle a claim within the policy limits, the insurance company must give equal consideration to the interests of the insured. The jury generally must decide whether the insurer, in view of the existing circumstances, has accorded the insured “the same faithful consideration it gives its own interest.”
The “equal consideration” rule has been stated in many different ways over the years. Its significance, however, is not in the terminology used, but in the definition of the care to be exercised by the insurer. An insured may recover for the insurer’s failure to settle within policy limits if the insurer (1) failed to give equal consideration to the interests of the insured; (2) failed to accord its insured the same faithful consideration it accords its own interests; (3) refused to settle because of an arbitrary or capricious belief that the insured was not liable; or (4) capriciously refused to entertain a settlement offer with no regard given to the position of the insured. The insurer is negligent in failing to settle if the ordinarily prudent insurer would consider that a decision to try the case created an unreasonable risk. The insurer’s liability for the entire judgment, including amounts in excess of policy limits, arises from the failure of the insurer to exercise the proper standard of care in refusing to settle.

Bad Faith Claims: Issue Of Fact

Bad faith is found if disputed issue of fact concerns a collateral issue and the insurer failed to investigate.When a disputed question of fact regards a collateral issue, however, the insurer does not have a reasonable ground for contesting liability for damages from a covered claim.

Georgia Farm Bureau Mut. Ins. Co. v. Murphy

In Georgia Farm Bureau Mut. Ins. Co. v. Murphy, the insured was driving while intoxicated, lost control of her car and hit a tree. Although a front tire was flat, she drove another 11 miles. Her right rear assembly fell off, but she continued driving another 20 miles until her car caught fire. The insured sought coverage for a total loss to her vehicle. The insurer denied, arguing that the damages stemmed from the fire rather than the impact with the tree. The insured’s expert examined the car and testified that the frame was so warped by the impact with the tree that the car was totaled before it ever caught fire. The jury found in favor of the insured on coverage and awarded bad-faith damages.

The Court of Appeals affirmed, reasoning that the insurer had failed to investigate whether the car was totaled by the impact with the tree.

“[A] failure upon the part of [an insurer] to investigate [an] alleged loss or damage, and a denial upon the part of the company of any liability whatsoever upon the ground that such loss or damage was not recoverable under the policy, but arose from some cause not covered by the policy, may be considered as evidence of bad faith on the part of the insurance company in refusing to pay for such loss or damage.”¹ The court noted that the insurer “knew at the time the claim was investigated that the car was damaged by its collision with the tree before it was damaged by the fire, and that there was no question that [the insurer] was liable under the policy for the damage stemming from that original collision.” Therefore, there was no reasonable basis for the insurer’s failure to investigate the extent of damage caused by the covered collision. Questions of fact regarding a collateral issue – the post-collision fire – were not a “reasonable ground” for the insurer to contest its liability for damages stemming from a covered claim.

No Bad Faith Where There Is A Doubtful Question Of Law

Federal Ins. Co. v. National Distributing Co., Inc.

In Federal Ins. Co. v. National Distributing Co., Inc., an alcohol distributor based in Georgia employed a Florida resident as a salesperson. The employee caused an auto accident in Florida while traveling on company business. The claimant sought punitive damages. The insurance policy provided coverage for punitive damages. Coverage for punitive damages is allowed in Georgia, but Florida courts have ruled that insurance coverage for punitive damages is contrary to public policy. The insured settled the case, and the insurer refused to indemnify the insured for the settlement amount that reflected punitive damages, arguing that Florida law applied to the issue of insurance coverage. The appellate court concluded that Georgia law applied to insurance coverage, meaning there was coverage for punitive damages. Nonetheless, the insurer was not liable for bad-faith damages as a matter of law, because the choice-of-law issue was reasonably disputed.