• Issues Surrounding an Insurer's Bad Faith Failure to Settle
  • December 1, 2009 | Author: Esther Vayman
  • Law Firm: Swift, Currie, McGhee & Hiers, LLP - Atlanta Office
  • In the context of a third-party claim, when an insurance company is faced with a demand for settlement within policy limits, a heightened good faith duty to give equal consideration to the interests of the insured is triggered. In light of this duty, the insurance company acts in bad faith if it capriciously refuses to entertain the offer or fails to consider the risk to the insured should the case proceed to trial and a judgment in excess of the policy limits be rendered. Cotton States Mutual Insurance Co. v. Fields, 106 Ga. App. 740, 128 S.E.2d 358 (1962); Government Employees Insurance Co. v. Gingold, 249 Ga. 156, 288 S.E.2d 557 (1982). Put another way, the insurer “may not gamble” with the funds of its insured by refusing to settle within the policy limits in the hopes of striking a better deal later, knowing that its liability is capped by policy limits if hard ball tactics fail. McCall v. Allstate Insurance Co., 251 Ga. 869, 310 S.E.2d 513 (1984).

    In failing to abide by this duty, the insurance company faces exposure on two separate, but closely related theories: (1) bad faith failure to settle within policy limits; and (2) negligent failure to settle within policy limits. Both of these causes of action share similar standards and tests. Home Insurance Co. v. North River Insurance Co., 192 Ga. App. 551, 385 S.E.2d 736 (1989).

    The question of bad faith is determined by whether or not the insurer had reasonable and legitimate grounds in law or in fact to refuse to settle the third party’s claim within policy limits. The mere fact that the claim could have been settled within policy limits, that the insurer rejected such a demand by the plaintiff, or that the insured requested such a settlement is not dispositive of the existence of bad faith.

    The Supreme Court of Georgia recently addressed the issue of whether a judgment must be entered against an insured at trial in excess of the policy limits before an action for negligent or bad faith failure to settle can be brought against the insurer. Trinity Outdoor, LLC v. Central Mutual Ins. Co., 285 Ga. 583, 679 S.E.2d 10 (2009). The Court answered in the affirmative.

    In Trinity, the insured’s billboard fell, killing two men. The decedent’s family sued and offered to settle for the policy limit of $2 million. Although the insured requested its insurer, Central Mutual Insurance Co., settle because the insured believed its liability exceeded the policy limits, the insurer declined to settle and filed a motion for summary judgment on the insured’s behalf.

    The federal district court mandated mediation. During the settlement negotiations, the insurer offered to pay $200,000 on behalf of its insured. Ultimately, the insured agreed to pay $954,530.00, without its insurer’s approval, to settle the claim. The settlement was comprised of the $200,000 offered by Central and $754,530 the insured received from the insurance company of the billboard manufacturer in satisfaction of an earlier judgment against the manufacturer. When the insurer refused to pay on the settlement, the insured filed suit claiming the insurer breached the insurance policy, failed to settle in bad faith, and negligently failed to settle.

    The Trinity court found in favor of the insurer, holding that the $754,530 portion of the settlement was a voluntary payment that the insurer was not required to pay based upon policy provisions that expressly gave the insurer the right to defend and settle claims and that prohibited the insured from making voluntary payments without the insurer’s prior consent. In this case, the insurer was actively defending the claim against its insured when the insured entered into a settlement agreement without its consent. Additionally, the Trinity court held that a policy provision limiting the insured’s right to sue its insurer to “an agreed settlement or on a final judgment against an insured obtained after an actual trial,” ...“made it clear”... that “Trinity cannot maintain an action against Central for bad faith failure to settle the ... claim in the absence of a jury verdict.” Id. at 4 and 9-10.

    It is unclear from the case whether this holding will be limited in application to factually similar cases or whether it has a much broader application. The certified question answered by the court is framed very broadly; however, the court’s answer indicates the holding may have a much narrower application with regard to an insured’s claim for negligent or bad faith failure to settle against its insurer.

    For more information on this topic, please contact Esther Vayman at [email protected] or at 404.888.6148.