Insurance

• Publication year: 2015

Insurance

Bradley S. Wolff

Stephen Schatz

Maren R. Cave

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Insurance

by Bradley S. Wolff^* Stephen Schatz^** and Maren R. Cave^***
I. Introduction

Courts continue to address the unique issues that arise with respect to uninsured motorist (UM) coverage, often finding that coverage exists.¹ In a case of first impression, the Georgia Supreme Court held that an insured may recover UM benefits from a policy, despite the partial sovereign immunity of the tortfeasor. An insured may be entitled to UM benefits after settling with the tortfeasor's liability carrier for the full policy limits, even though a limited liability release allocates the majority of the settlement amount to punitive damages. Further, courts continue to strictly adhere to the "case or controversy" requirement in order for a party to have standing to bring a declaratory judgment action on a coverage issue. An insured is precluded from bringing a bad faith action against its insurer where the insured breached the policy condition that requires obtaining the insurer's consent before settling a

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claim. Courts found no waiver of, and therefore enforced, the policy conditions, including the requirements for the insured to file suit within one year of the date of loss and provide notice of a claim within a certain time period. In a case of first impression, paint was found not to constitute a pollutant as defined by a liability policy; therefore, the pollution exclusion did not apply to a claim arising out of the ingestion of lead paint.

II. Uninsured Motorist Coverage

A. Partial Sovereign Immunity May Render a Vehicle "Uninsured"

In a case presenting a matter of first impression, the Georgia Supreme Court held in First Choice in Commercial Insurance Co. v. McLendon Enterprises, Inc.² that an insured may recover UM benefits for damages sustained in a collision with a school bus where the owner and operator of the bus had insurance and was entitled to sovereign immunity for any damages above the liability policy limits.³ The case came to the supreme court as a certified question from the United States Court of Appeals for the Eleventh Circuit.⁴ The case arose from a declaratory judgment action filed after a collision involving a truck owned by McClendon Enterprises and a school bus owned by Evans County. The driver and two passengers in the McClendon truck claimed injuries resulting from the accident. The Evans County Board of Education had an insurance policy with the Georgia School Board Association (GSBA) Risk Management Services with a $1 million limit for bodily injury liability. GSBA settled with the two passengers for $350,000 and paid the truck driver, Bobby Brooks Mitchell, the remaining $650,000. Alleging injuries exceeding the available GSBA policy limits, Mitchell filed suit against the school bus driver and the Board of Education. He also served First Choice Commerical Insurance (FCCI) as McClendon's UM carrier for UM benefits.⁵

FCCI then filed a complaint for declaratory judgment in district court. FCCI denied any liability under the UM policy, arguing that the tortfeasors' sovereign immunity⁶ prevented Mitchell from being "legally entitled to recover" damages from the tortfeasors above the available

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policy limits and that benefits under the policy required a legal entitlement to recovery.⁷ The district court, relying on Tinsley v. Worldwide Insurance Co.,⁸ found that an insured may recover UM benefits for injuries caused by a tortfeasor who was completely protected by sovereign immunity. The district court found Tinsley persuasive and applied its holding to this case involving partial sovereign immunity.⁹

FCCI appealed and the Eleventh Circuit, determining that neither the Georgia Court of Appeals nor the Georgia Supreme Court had addressed the issue, certified the question of whether an insured may recover UM benefits from a policy that requires the insured be "legally entitled to recover" damages despite the partial sovereign immunity of the tortfeasor.¹⁰ The supreme court agreed with the district court that Tinsley provides the applicable rule.¹¹ The court reiterated that the purpose behind section 33-7-11 of the Official Code of Georgia Annotated (O.C.G.A.),¹² also known as the Uninsured Motorist Act, is to provide a means of recovery for injured parties who are unable to recover from their tortfeasors.¹³ The court determined there was no reason why a UM carrier should be obligated to pay for damages where sovereign immunity completely protects the tortfeasor who caused the accident, but then allow the UM carrier to escape liability where only partial immunity applies.¹⁴ Therefore, the court held that an insured may recover UM benefits from a policy that requires they be "legally entitled to recover" damages despite the partial sovereign immunity of the tortfeasor.¹⁵

B. Allocation of Settlement Funds to Punitive Damages Does Not Bar Recovery of UM Benefits

Reversing the Georgia Court of Appeals, the Georgia Supreme Court held in Carter v. Progressive Mountain Insurance¹⁶ that an insured may be entitled to recover UM benefits after settling with the tortfeasor's liability carrier for the full policy limits; although, a limited liability release given by the insured allocates the majority of the settlement

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amount to punitive damages.¹⁷ In the underlying tort action, Velicia Carter sued Claudino Oliviera for injuries sustained in a collision. Oliviera was allegedly driving under the influence of alcohol. Carter served her UM carrier, Progressive. Oliviera's liability insurer, GEICO, settled with Carter, paying its policy limit of $30,000; $1000 of that amount was designated as compensatory damages while $29,000 was designated as punitive damages.¹⁸

Progressive moved for summary judgment on Carter's UM claim, arguing that by allocating $29,000 for punitive damages, Carter failed to exhaust Oliviera's policy limits.¹⁹ The trial court and court of appeals agreed, both holding that Carter forfeited the opportunity to recover UM benefits by allocating the majority of the liability limits to punitive damages because the limited liability release statute, O.C.G.A. § 33-24-41.1,²⁰ allows an insured to settle with a liability carrier and still recover UM benefits only for "actual injuries or losses and not [for] punitive damages."²¹

While the supreme court agreed with the court of appeals that an insured must exhaust the tortfeasor's liability insurance coverage before being entitled to recover UM benefits and, also, that UM carriers are not obligated to pay awarded punitive damages because of the tortfeasor's conduct, the supreme court held that the court of appeals erred in holding that O.C.G.A. § 33-24-41.1 only requires paying compensatory damages to exhaust the tortfeasor's liability limits.²²

In rejecting both Progressive's argument and the court of appeals' concern—that Carter's allocation of the settlement amount to punitive damages actually shifted the payment of punitive damages indirectly to the carrier—the court held that under O.C.G.A. § 33-24-41.1(d)(2),²³ the entire amount, not merely the amount attributed to compensatory damages, paid with the limited release is evidence of the UM carrier's entitlement to an offset.²⁴ This amount effectively keeps the UM carrier in the same position it would have been in had the full settlement amount been designated as compensatory damages.

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C. Does the Insured or the Insurer Bear the Burden of Proving Whether a Liability Insurer's Denial of Coverage Was "Legally Sustainable"?

Where a liability insurer denies coverage based on the tortfeasor's failure to cooperate by attending the trial and the injured party then brings a claim for UM benefits under a policy that provides a motorist may become "uninsured" if the liability carrier's denial is legally sustainable, which party must prove whether the tortfeasor is uninsured? In Castellanos v. Travelers Home & Marine Insurance Co.,²⁵ the court of appeals held that where known facts and law support the liability carrier's denial the UM insurer bears the burden of proving the necessary facts to justify its denial of coverage once the insured meets a threshold burden of showing entitlement to benefits.²⁶

The underlying facts of the case arose from a collision between vehicles driven by Luis Castellanos and Jose Santiago. At the time, Castellanos was a named insured under a Travelers policy held by Lucrecia Arias, and Santiago held liability insurance through United Automobile Insurance. Castellanos sued Santiago, and United provided his defense. Castellanos also served the complaint and summons with Travelers. Santiago, however, failed to participate in, or attend, the trial. A jury awarded Castellanos compensatory damages, punitive damages, and costs.²⁷

United refused to pay the awarded amount, alleging that Santiago violated the terms of his policy by failing to cooperate in his own defense.²⁸ Georgia law permits such "cooperation clauses" where an insured's failure to participate in their defense forms the basis of a legal denial of coverage.²⁹ This denial of coverage, in turn, renders the tortfeasor an uninsured motorist and allows the injured party to seek compensation from their UM carrier.³⁰ Thus, Castellanos demanded that Travelers pay the judgment.³¹

Travelers failed to pay the judgment within sixty days, and Castellanos then filed a bad faith action against Travelers for its failure to pay. Both parties moved for summary judgment, arguing on whether United's refusal to pay the judgment was legally sustainable. The trial court

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granted Travelers' motion for summary judgment, finding that Castellanos failed to produce evidence that established Santiago's failure to participate was unreasonable or willful. By this reasoning, Travelers did not have to pay Castellanos because Santiago was not an uninsured motorist.³²

The court of appeals reversed, holding that the trial court improperly...