Is the insurance company fulfilling its legal duty to its customer?
Virtually everyone is familiar with insurance, and most people, adults and children, are covered by some form of insurance, such case health insurance, life insurance, disability insurance, or car insurance. Car/auto insurance is itself made up of a number of different coverage, including liability, collision, comprehensive, uninsured motorist, and medical payments coverage, among others. The purpose of insurance coverage is the protect the customer from financial losses after some sort of loss, whether car accident, health issue, or some other harm. But insurers are also businesses, and their business purpose is to make money for their shareholders or other owners. This creates a problematic situation when the insurer's desire to make money runs up against its contractual and legal duties to protect its customers, and due to the very nature of insurance, virtually every claim creates this potential conflict.
When an insurer fails to properly protect its customer, it can be liable for what is commonly known as "insurance bad faith." In some cases, actual bad faith is not required - an insurer, in certain circumstances, can be liable if it negligently fails to properly protect its customers (known as "insureds"). There are, broadly speaking, two types of "bad faith" case: claims where the insurer fails to pay a claim made by its own insured (often referred to as "first-party bad faith"), and claims where an insurance company fails to pay a third party (such as a car accident victim) who makes a claim against the company's insured (referred to as "third-party bad faith").
First-party bad faith: when insurers don't treat their customers right
Here is a common scenario: a driver backs his car into a tree, causing damage to the vehicle. The driver makes a claim with his auto insurer, but the insurer is not willing to pay for what the driver thinks is required to properly repair the vehicle and compensate the driver for the diminished value of the car. Or, if the vehicle is a total loss, the insurer offers less than the owner believes the case is worth. In these situations, Georgia law provides a remedy to the insured: if a proper demand is made, and the insured is forced to take the case to court, the insurer can be liable for paying the insured's reasonable attorneys' fees, plus a penalty of 50% of the amount that should have been paid. This is established by a Georgia statute, Official Code of Georgia, Annotated (OCGA) 33-4-6.
Proving bad faith can be difficult, however. First, the statute (OCGA 33-4-6) requires strict compliance with the demand requirement to the insurer before the insurer can be found in bad faith. Second, the insured is required to obtain a verdict, which can mean lengthy litigation. Finally, the insurer will generally only be liable if the insured can prove that it actually acted in bad faith in failing to pay the claim. If the insurance company can come up with a reasonable reason for failing to meet the insured's demand, it may be able to escape penalties. All of this requires time, effort and money. And the law is complex, particularly with the evidence required to prove "bad faith." Therefore, successful claims resulting in penalties against insurers for denying claim, or failing to pay the appropriate amount, are relatively rare, even if a court or jury ultimately decides that the claim should be paid.
Other first-party bad faith situations may involve claims against an uninsured/underinsured motorist insurer. Uninsured motorist claims are governed by a separate Georgia statute, OCGA 33-7-11, and the penalty allowable is only 25%, rather than 50% as is the case in many other claims. Uninsured motorist bad faith claims may also require a second lawsuit in order to pursue, adding to the costs involved. For this reason, while uninsured motorist coverage is advisable, it is also important to carefully choose an insurer who will treat its customers correctly.
Many other types of first-party insurance claims, including homeowners' insurance,
Some disability and health insurance plans present special issues with respect to bad faith. Many employer-provided insurance plans are governed by a federal law known as ERISA, or the Employee Retirement Income Security Act of 1974. Despite the name, ERISA is perhaps most notable for significantly limiting the rights of employees to seek compensation from an insurance plan by vesting great discretion with plan administrators who have fiduciary duties to the plan, and severely limiting any penalties against those plans for denial of claims. Although Georgia law (OCGA 33-4-6) can make it difficult to pursue bad faith claims, it is far more forgiving that ERISA. However, ERISA, as a federal law, generally preempts, or supersedes, Georgia law, and therefore the more favorable provisions of Georgia law in many cases simply do not apply. This is a vastly complex area of law, and determining the proper law to apply, and the rights of the insureds, often requires a careful legal analysis of whether state or federal law applies. However, if a health insurance or disability insurance policy is not governed by ERISA, state law would usually apply, and Georgia law provides for better remedies in many cases.
Third-party bad faith: when insurers put their customers' personal assets at risk
Liability insurance is different from other types of insurance, and raises a distinct legal issue with regard to bad faith: can the insurer be liable if it fails to settle a claim or lawsuit that it should have, and as a result, the insured's personal assets are at risk?
Liability insurance protects its insured if he or she is sued by another person for the insured's wrongdoing. For example, a person who causes an automobile accident may be sued by someone injured (or by the family of someone who is killed) due to the insured's negligence. The at-fault negligent driver's liability insurance does two things: it covers damages that the injured party is claiming in the claim or lawsuit, and it provides a legal defense for the insured.
In Georgia, car insurers are required to provide a minimum of $25,000 per injured person in liability coverage, and $50,000 per accident. But many injured in car accidents have significantly higher damages that these minimum limits. In these cases, the injured person may have uninsured motorist coverage, which also provides coverage for a negligent driver who is underinured. An injured victim may send a demand, either him or herself, or through an attorney, to the liability insurer to settle the claim against the at-fault negligent driver for the insurance limits. But because of the insurer's interest in paying as little as possible, the insurer may decline to pay. The injured party may then take the case to trial, and if a jury awards more than the insurance limits, the at-fault driver will be personally liable for any verdict beyond the amount of the limits.
Most liability insurance policies state that the insurance company has the right to settle or not settle the case, leaving the at-fault insured customer with little say in whether the case is settled. Because of this, serious issues arise when an insurance company declines to settle, later leaving its customer open to personal responsibility for the verdict for any amounts that exceed the limits. This may lead to the insured customer having their wages or bank accounts garnished, or their property levied upon. In some cases, it may lead the insured to file bankruptcy. Does the insured customer have any recourse against the insurance company that should have settled the case when it had the chance?
The short answer is yes, in some cases, at least. Georgia law allows an insurance customer to make a claim against a liability insurer that negligently, or in bad faith, failed to settle a claim, leaving the at-fault negligent person and their assets personally exposed. In the 1960s, the federal appeals court in Atlanta established, in a series of cases known as the Smoot v. State Farm cases, that a customer may be able to make a claim under these circumstances. In general, if an insurance company gambles with its client's assets by failing to settle a case, "where the insurer is guilty of negligence, fraud, or bad faith in failing to compromise the claim," and the negligent insured is harmed, the insured customer may be able to pursue a claim against the insurer. Damages in these cases can include both the amount of the excess judgment as well as punitive and other damages.
In 1992, the Georgia Supreme Court issued a decision in Southern General Insurance Company v. Holt that established that an insurance company could be liable to its insured customer, where the insured was negligent in causing an injury, if the injured victim sent a time-limited demand to the liability insurer that was rejected and the victim ultimately was awarded more than the policy limits at trial. Before this decision, there was a question whether the insurance company could be liable if, at some point prior to the verdict, it offered to resolve the case for an amount within the insurance policy limits that would not expose its customer to personal liability.
The Holt decision made clear that a victim claimant could place a time limit on the demand. Subsequent cases, in state and federal court, have reaffirmed the rationale Holt decision. In 2017, for example, a judge in the United States District Court for the Northern District of Georgia entered judgment against Nationwide in a case where it was found that Nationwide failed to properly accept a demand for $100,000 in a case involving a young mother who was killed by a drunk driver. Nationwide had issued a liability insurance policy to the at-fault DUI driver, but did not accept the demand submitted by the family of the woman who was killed. After a judgment in excess of $5 million against the drunk driver, the driver, who faced personal liability for the entire amount of the judgment less the $100,000 in insurance, assigned his claim against Nationwide to the victim's family. The family then recovered the amount of the judgment, plus additional damages, against Nationwide due to its failure to settle the case for $100,000 when it had the chance. Had Nationwide settled the claim for $100,000 when it had the opportunity to do so, the at-fault driver would not have faced any personal liability or exposure to damages. The District Court's judgment was subsequently affirmed by the Eleventh Circuit Court of Appeals in the case of Camacho v. Nationwide Mutual Insurance Co. (John Hadden represented the Georgia Trial Lawyers Association as amicus curiae in the case, and submitted a brief on its behalf).
New statutory requirements for auto accident cases enacted in 2013
In 2013, the Georgia General Assembly enacted OCGA 9-11-67.1, which establishes additional requirements to a demand made under situations like those discussed above. Although the statute did not abrogate the principles of Southern General Insurance Company v. Holt, it established certain rules that must be followed in certain cases. Among other things, the statute requires demands to be sent in writing via certified mail or statutory overnight delivery and requires that the insurer be given at least 30 days to accept the demand. The statute applies only to pre-lawsuit automobile collision claims in which the victim is represented by an attorney. However, it does not apply to other types of cases, such as premises liability (including negligent security, slip-and-fall, and trip-and-fall cases), product liability, and other personal injury claims. As to those cases, the general principles of Holt continue to apply without the statutory limitations set forth in OCGA 9-11-67.1.