Bad Faith in Insurance Claim Handling in Georgia, an Overview and Update

• Citation: Vol. 9 No. 2 Pg. 0001
• Pages: 0001
• Publication year: 2003

Georgia Bar Journal Volume 9.

GSB Vol. 9, No. 2, Pg. 1. Bad Faith in Insurance Claim Handling in Georgia, An Overview and Update

Georgia State Bar Journal
Vol. 9, No. 2, October 2003

"Bad Faith in Insurance Claim Handling in Georgia, An Overview and Update"

By Dale C. Ray Jr.

Whether one is regularly involved in handling personal injury claims or providing advice to insurance companies, it is inevitable that at some point, every attorney will be presented with the issue of insurance company bad faith. This article will provide an overview of Georgia law in this area dealing first with statutory remedies for bad faith handling of first party and uninsured motorist insurance claims, and then discussing bad faith issues involving the evaluation and settlement of liability insurance claims. As to the first the law has been fairly consistent and predictable for several years; however, in the area of liability insurance claim bad faith, recent legislation has expanded the remedies available to victims, and recent case law signals an expansion of the risks liability insurers can face when dealing with settlement demands and limited coverage

THE FIRST PARTY PENALTY STATUTE

The Georgia Code has provided for statutory penalties for bad faith failure to timely pay first party insurance claims since at least 1872. The current version, codified at O.C.G.A. 33-4-6, establishes a cause of action for penalties and attorney fees when an insurer refuses, "in bad faith," to pay a claim brought by its own insured.1 Outside of the employee benefits arena, most first party insurance claims would be subject to this statute, including claims under homeowners policies, fire loss policies, title insurance, automobile med-pay, collision and comprehensive coverage, and personally held health, life and disability insurance. Life, health and disability coverage provided through most employee benefit plans, however, would be beyond the reach of Georgia's penalty provisions given the state law preemption provisions of the federal Employees Retirement Income Security Act (ERISA).2

If it is proven that an insurer has refused to pay a first party claim "in bad faith," section 33-4-6 allows a judge or jury to award a penalty of not more than 50 percent of the insurer's liability for the loss or $5,000 whichever is greater, as well as reasonable attorney's fees for prosecution of the action against the insurer. Prior to 2001, the penalty could be no more than 25 percent of the loss. The award of attorney's fees is not limited to those incurred in the lawsuit against the insurer, but can also include fees incurred in litigating subsequent appeals. "All of the work done on a case of this type, including work done on appeal, may be considered in awarding attorney fees."3

The statute also includes, as a condition precedent to a recovery of penalties, a requirement that a demand must first be made upon the insurer and a 60 day window of opportunity allowed to pay the claim without exposure to penalties. Because penalties and forfeitures are not favored, the right to bad faith penalties must be clearly shown.4 Code section 33-4-6 must also be strictly construed.5

Therefore, a proper demand for payment is essential, and compliance with the statute's demand requirements must be proven.6 At least one Court of Appeals decision has indicated that the demand should specifically notify the insurer that the plaintiff asserts a claim for bad faith, but one judge concurred specially and argued that Georgia law has never required this.7 Even if it is not required, providing such notice in the demand would seem to be the better practice and would likely give the document greater evidentiary value to the claimant in any future bad faith lawsuit. Merely filing a lawsuit will not serve as a proper demand,8 nor will a proof of loss or the insurer's written denial of a claim suffice.9

Timing of the demand in relation to filing suit is also critically important. A failure to wait at least 60 days between making a demand and filing suit constitutes an absolute bar to recovery of penalties and attorney fees under the statute.10 This time frame is inflexible and has barred bad faith liability even though suit had to be filed during the 60 day period in order to comply with the statute of limitations.11 Nor may the demand be made unless the insured's right to payment from the insurer has vested. "Demand must be made at a time when the insured is legally in a position to demand immediate payment, and it is not in order if the insurer has additional time left under the terms of the insurance policy in which to investigate or adjust the loss and therefore has no duty to pay at the time the demand is made."12 Thus, a proper demand cannot be made too soon, nor can the lawsuit be filed too soon after the demand has been made.

Once a timely demand has been shown, the insured must then prove that the insurer's refusal to pay the claim was "in bad faith."13 Code section 33-4-6 does not define what this term means, but the appellate courts have held that under this Code section, "'bad faith' of the insurer means a frivolous and unfounded refusal to pay a claim."14 "Penalties for bad faith are not authorized where the insurance company has any reasonable ground to contest the claim and where there is a disputed question of fact."15 The issue is thus whether the insurance company had "reasonable and probable cause for refusing to pay a claim."16

The existence of a factual dispute regarding the merits of the claim will generally provide a complete defense to a first party bad faith claim.17 Bona fide disputes concerning liability or damages should also preclude the imposition of bad faith penalties.18 First party bad faith claims will also fail in cases involving "doubtful" questions of law.19

Although the defenses available to insurers in these cases are substantial and often lead to summary judgments or directed verdicts for the insurer, there are still multiple cases in which juries rejected the insurer's claims of reasonable cause to deny payment and imposed bad faith sanctions. In one case, denial of a burglary loss claim led to bad faith penalties despite evidence of lack of forced entry and inconsistencies in the claimants' stories.20 The trial court had concluded that the insurer's intransigence and its tainted investigation, which overshadowed the lack of evidence of a staged burglary, warranted bad faith penalties. The Court of Appeals affirmed because the inconsistencies in the claimants' stories were minor, and the evidence did not show a staged burglary. In another case, a bad faith verdict was affirmed because there was evidence that the insurer had failed to properly investigate the claimant's theory of loss in a collision coverage claim.21 Inadequate investigation also played a prominent role in an award of bad faith sanctions in a case involving denial of payment for medical expense reimbursement under the former No-fault Act.22 In that case, the insurer refused to pay for treatment based on the adjuster's subjective opinions about the relation of treatment to the accident and the alleged billing excessiveness and the competency of a treating physician, without making a real attempt to properly investigate the validity of the medical expenses.

Independent professional reviews that support the denial of a claim will generally, but not always, defeat bad faith liability. Independent medical evaluations (IME) often produce expert opinions which will prompt denial or termination of insurance benefits and at the same time, insulate an insurer from bad faith exposure. Indeed, in one case, an insurer denied a claim based on the opinion of a doctor who had been hired by a consultant for the insurance company, yet despite the issue of potential bias, the insurance company was still insulated from bad faith penalties.23 Notwithstanding reliance upon an IME opinion, however, bad faith liability can still result in these cases where the insurer timely learns that the doctor's opinion was "patently wrong" or where the IME was a "mere pretext for an insurer's unwarranted prior decision to terminate benefits."24

The remedies of O.C.G.A. 33-4-6 are considered exclusive.25 Consequential damages due to delay in responding to claims are thus not recoverable.26 Likewise, litigation expenses under O.C.G.A. 13-6-11, and punitive damages under O.C.G.A. 51-12-5.1 are not recoverable in a first party bad faith action.27

THE UNINSURED MOTORIST PENALTY STATUTE

O.C.G.A. 33-7-11(j) provides for similar penalties and attorney's fees upon proof that an insurance carrier has refused to pay an uninsured motorist (UM) coverage claim "in bad faith." Although there are far fewer appellate decisions addressing bad faith in the UM context UM bad faith has been described by the Court of Appeals in the same terms as bad faith under the first party penalty act. One such UM bad faith opinion quoted directly from a decision involving the first party bad faith statute stated that, "Refusal to pay in bad faith means a frivolous and unfounded denial of liability. If there is any...