An Insurer's Duty to Settle: the Law in Georgia
| Citation | Vol. 22 No. 1 Pg. 0018 |
| Pages | 0018 |
| Publication year | 2016 |
The Legal
An Insurer's Duty to Settle: The Law in Georgia
This article addresses the state of claims for bad faith failure to settle in Georgia, examining the duty that an insurer owes its insured, discussing how a time-limited settlement demand may affect the insurer's duty, discussing two safe harbors that Georgia courts created and analyzes the remedies afforded to policyholders if their insurers are found liable for bad faith when failing to settle a claim.
BY JOHN E. HALL JR. AND W. SCOTT HENWOOD
A cause of action exists in Georgia when an insurance company, in bad faith, refuses to pay amounts demanded under a policy. Under O.C.G.A § 33-4-6, an insured must prove three elements to prevail on a claim of bad faith against an insurer: "(1) that the claim is covered under the policy, (2) that a demand for payment was made against the insurer within 60 days prior to filing the suit, and (3) that the insurer's failure to pay was motivated by bad faith."[1] Although Georgia has traditionally recognized statutory claims of bad faith when an insurance company fails to pay, courts have also established a long line of precedent diagnosing the problem of bad faith when an insurer fails to settle a claim against its insured.[2]
Claims for bad faith failure to settle arise when an insurer rejects or fails to timely respond to an injured third party's reasonable offer to settle a claim against the insured.[3] Assume an automobile accident occurs where the policyholder is likely at fault and the policy limit is $50,000.[4] The insurer agrees to defend its policyholder when a third party, injured in the accident, brings suit against the policyholder. If the third party offers to settle the case for an amount within the $50,000 policy, the insurer has very little choice when deciding whether to accept or reject the offer. If the insurer rejects the offer, deciding instead to take its chances at trial, the court may return a verdict that is higher than the policy limits. In that case, the insurer would likely be liable for bad faith and responsible for tendering the full policy as well as the excess judgment exceeding the policy limit.[5] If the insurer compromises by settling within the policy limit, however, then it loses the possibility of a lower judgment at trial.[6]
An insurer’s duty to settle third-party claims against its insured is an independent duty that arises out of tort, not contract.
An insurer's duty to settle third-party claims against its insured is an "independent duty" that arises out of tort, not contract.[7] When an insurer refuses to settle, it will be liable for any excess judgment "where the insurer is guilty of negligence, fraud, or bad faith in failing to compromise the claim."[8]This type of claim developed to protect policyholders in the battle over competing litigation interests.[9] As the injured party's claim approaches the ceiling of the policy, the insured becomes more interested in protecting himself or herself from excess damages, while the insurer has less incentive to settle and more motivation to gamble on the possibility of a defense verdict or a judgment below the policy limit.[10] Whether an insurer breaches this independent duty by acting in bad faith and failing to settle is almost always a question for the jury and will rarely be resolved as a matter of law.[11]
This article addresses the state of claims for bad faith failure to settle in Georgia. Part I examines the duty that an insurer owes its insured, while Part II discusses how a time-limited settlement demand may affect the insurer's duty. This article also discusses, in Part III, two safe harbors that Georgia courts created to insulate insurers from excess liability when circumstances are outside the insurer's control. Finally, Part IV analyzes the remedies afforded to policyholders if their insurers are found liable for bad faith when failing to settle a claim.
I. An Insurer's Duty of Equal Consideration
The duty an insurer owes to its insured when determining whether to settle a claim is nebulous and difficult to define. The original standard employed by courts and legal scholars was "such care as would have been used by an ordinarily prudent insurer with no policy limit applicable to the claim."[12] Georgia courts will also consider the totality of circumstances surrounding the demand when determining whether an insurer acted negligently or in bad faith.[13]
In practice, courts have established a complementary yet more demanding duty for insurers in failure-to-settle cases.[14] Each insurer owes its insured the duty of equal consideration.[15] In United States Fidelity & Guaranty v. Evans,[16] the Court of Appeals explained that there have long been two extreme views as to an insurer's duty to settle a claim against its insured. The first view is that the insurer "has an absolute right to [trial or to] appeal with no duty to consider the insured's interest in rejecting a settlement."[17] The second view is that "the insurer has an absolute duty to accept any offer to settle for an amount within the policy coverage."[18] The majority rule, however, requires the insurer to "accord the interest of its insured the same faithful consideration it gives its own interest."[19]
The controversy in Evans arose when an insurance company refused to settle a case after the jury returned a verdict against the policyholder that exceeded the policy's limit.[20] The insurance company refused to settle for an amount within the policy limits before the verdict, and then again refused to settle for the amount of the policy after the verdict had been delivered but before disposition of the insurer's motion for a new trial and subsequent appeal.[21] After the insurer lost on appeal, the policyholder sued the insurer, claiming bad faith in refusing to settle.[22] A jury returned a verdict against the insurer.[23] On appeal, the insurer contended that a lack of good faith only existed if the previous appeal was frivolous, but the Court of Appeals disagreed, stating that "any prudent insurer [owes a duty] to refrain from taking an unreasonable risk on behalf of its insured."[24] This is also known as the duty of equal consideration.[25]
When deciding whether to settle a claim within or for the policy limits, "the insurance company must give equal consideration to the interests of the insured."[26] The trier of fact must consider the totality of the existing circumstances when deciding whether an insurer complied with its duty, including factors such as (1) whether a time-limited settlement offer afforded the insurer the opportunity to settle within the policy limits and (2) whether any safe harbor exceptions apply.[27]
II. Time-Limited Settlements and the Opportunity to Settle
Rejecting a time-limited settlement offer is the catalyst for most claims of bad faith failure to settle. Reasonable settlement offers may be limited to a few hours in mediation, to 10 days, or even longer in some cases. An insurance company does not act in bad faith merely because it fails to accept the offer within the prescribed deadline. Instead, the company must reasonably act within the scope of equal consideration.[28]
The seminal case addressing timelimited settlement offers is Southern General Insurance Co. v. Holt.[29] The Supreme Court of Georgia stated that bad faith may be found "when the company has knowledge of clear liability and special damages exceeding the policy limits."[30] The Court also stipulated, however, that an insurer's failure to respond to a time-limited settlement offer does not automatically constitute bad faith per se:
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.[31]
In Holt, Southern General knew of the insured's liability, of the injured party's extensive medical bills and lost wages, and that damages would likely exceed the policy limit, yet it failed to respond to the plaintiff's settlement offer within the 10-day limit.[32] Southern General claimed that it needed medical documentation to support the damages claims, but the company failed to request an extension for the time-limited offer.[33] Thus, the Court concluded that a directed verdict for Southern General was not warranted and that the issue of bad faith in failing to settle was a jury question.[34]
Insurers face a "Hobson's choice" when deciding whether to settle a claim for the policy limits: settle or risk the imposition of excess liability.
The key to whether an insurer acted in bad faith is determining whether the insurer "had the opportunity to make an effective compromise."[35] Georgia courts, however, have failed to specifically define what constitutes an opportunity to compromise.[36] "[A]t a minimum . . . Georgia law mandates that the insured show that settlement was possible—the case could have been settled within the policy limits—and that the insurer knew, or reasonably should have known, of this fact."[37] Although an insurer must act reasonably in responding to a settlement offer, it has no affirmative duty to negotiate with third parties regarding offers exceeding the policy limits.[38] Further, an unreasonably short time limit imposed on a settlement demand will likely excuse an insurer's failure to settle.[39]
The insurer may have the opportunity to make a compromise when "the insured's liability is clear, the damages are great and the insurer is on notice that it has an opportunity to settle the case, usually because a settlement demand in the amount of the policy limits or greater is received from...
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