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Common-Law Bad Faith: Origins And The Smoot Trilogy

August 7, 2015 | by Slappey & Sadd, LLC

The Georgia Court of Appeals summarized the common-law duty of good faith in dicta more than 60 years ago, noting that a liability insurer may be held liable for damages to its insured for failing to adjust or compromise a claim covered by its policy of insurance, where the insurer is guilty of negligence or of fraud or bad faith in failing to adjust or compromise the claim to the injury of the insured. While this statement of the law endures today, it was the former Fifth Circuit Court of Appeals, applying Georgia law, that gave firm shape to the concept. From 1962 to 1967, the Fifth Circuit issued three decisions in the matter of which describes the duties of the liability insurer to investigate, adjust, and, in the proper case, settle claims against the insured. A detailed examination of the trilogy is a highly instructive primer to the law of common-law bad faith.

The Smoot Cases

The Smoot cases arose from a 1955 automobile accident. Sergeant Smoot was insured by State Farm on an automobile liability policy with limits of $10,000 per person and $20,000 per accident. In November 1955, Smoot was driving, not paying attention and rear-ended Katie Mae Donaldson. The accident involved five cars and was severe enough to knock one of Donaldson’s passengers to the floor of the car. Smoot notified State Farm of the accident and State Farm took a statement from him. Three months after the accident he was assigned to military duty in Guam.

The Equal Consideration Rule

August 6, 2015 | by Slappey & Sadd, LLC

The Equal Consideration Rule

The “Equal Consideration Rule” provides the standard by which an insurance company’s decision to not settle a claim against its insured is measured. The standard was pronounced five years after Smoot I, when the Georgia Court of Appeals in United States Fidelity & Guar. Co. v. Evans expressly recognized that a cause of action against a liability insurer for failing in its duties to properly protect its insured arises “in tort and naturally involves a duty and an alleged breach of that duty.” Deciding that a duty exists begs the question, however, which the court itself asked: “What then is the duty?” The answer to that question, which is the holding in Evans, is best understood in its factual context. The underlying lawsuit in Evans was a typical car-wreck case resulting in a verdict against the insured in excess of policy limits. Following the verdict, the claimant offered to settle for policy limits, apparently preferring quick and certain payment over waiting for an appeal to run its course. The insurer refused, lost the appeal for a new trial and tendered policy limits, leaving the insured “holding the bag” for the amount in excess of policy limits. The insured filed suit against the insurer, and a jury found bad faith, entitling the insured to the difference between the judgment and policy limits. The insurer appealed, arguing that it should not be penalized for exercising its right to appeal a judgment.

The issue of law for the Evans court was whether there could be bad faith if the insurer’s decision to appeal the underlying lawsuit was not frivolous. The insurer had argued that it could not be liable as a matter of law for failure to settle so long as its decision not to settle was supported by a non-frivolous defense pursued on behalf of the insured. The court rejected the standard, suggesting that such an analysis would turn on whether the insurer had sufficiently “consult[ed] its own self interest” in rejecting the settlement offer and deciding to assert the defense on appeal. Such a standard was inadequate, the court reasoned, because it would require no analysis as to whether the insurer had consulted the insured’s interests. Noting that the insurer must do more than merely refrain from making frivolous decisions while handling litigation against its insured, the court held as follows:

Bad Faith Claims: Issue Of Fact

August 3, 2015 | by Slappey & Sadd, LLC

Bad faith is found if disputed issue of fact concerns a collateral issue and the insurer failed to investigate.When a disputed question of fact regards a collateral issue, however, the insurer does not have a reasonable ground for contesting liability for damages from a covered claim.

Georgia Farm Bureau Mut. Ins. Co. v. Murphy

In Georgia Farm Bureau Mut. Ins. Co. v. Murphy, the insured was driving while intoxicated, lost control of her car and hit a tree. Although a front tire was flat, she drove another 11 miles. Her right rear assembly fell off, but she continued driving another 20 miles until her car caught fire. The insured sought coverage for a total loss to her vehicle. The insurer denied, arguing that the damages stemmed from the fire rather than the impact with the tree. The insured’s expert examined the car and testified that the frame was so warped by the impact with the tree that the car was totaled before it ever caught fire. The jury found in favor of the insured on coverage and awarded bad-faith damages.

Bad Faith: Assignemnts, Consent Judgments, & Dowse Settlements

July 31, 2015 | by Slappey & Sadd, LLC

ASSIGNMENTS, CONSENT JUDGMENTS AND DOWSE SETTLEMENTS

Many lawsuits involving an insurer’s bad-faith failure to settle are brought by the claimant and not by the insured. Others are brought by both the claimant and the insured. Because a third-party claimant that lacks privity with the insurance company generally has no cause of action against the insurer for claims handling, a claimant who prosecutes a bad-faith claim generally does so by taking an assignment from the insured. Because liability policies have clauses forbidding the insured from assigning claims or settling claims without the insurer’s consent, such assignments can only be accomplished in certain situations.

Southern Guaranty Ins. Co. v. Dowse

Bad Faith: Seeking A Judicial Declaration

July 29, 2015 | by Slappey & Sadd, LLC

Bad Faith And The Jury

Bad faith is for the jury where there is a dispute as to whether the insurer’s offer of payment was unreasonably low.

Where an insured has suffered a loss, efforts by the insurance company to settle the claim that are not bona fide can be a constructive refusal to pay. In Firemen’s Ins. Co. of Newark, N.J. v. Allmond, the insurance company acknowledged coverage, made an offer of settlement of $2,250, and a jury determined the amount of the loss to have been $4,000. In such a case, “it was a question for the jury to say whether the offer had been so small as to amount to an absolute refusal to pay, and if so, whether there was bad faith in such refusal.” Accordingly, the Court of Appeals affirmed the jury’s award of bad-faith damages.

Bad Faith: Partial Payments

July 28, 2015 | by Slappey & Sadd, LLC

No Bad Faith For A Partial Payment

It is not considered bad faith for a partial payment when amount of the claim is reasonably questioned. In Shaffer v. State Farm Mut. Auto. Ins. Co., the insured was injured in an automobile accident. The insured’s automobile policy provided for payment of reasonable medical expenses incurred as a result of automobile accidents. After the accident, the insured was transported by ambulance and treated. The insurer paid the ambulance and hospital costs. The next day, the insured saw an internist who referred her for physical therapy. The insurer paid the internist’s bill but retained the services of an independent physician to determine if the physical therapy bill was excessive. The physician concluded that certain bills were excessive and that the records did not indicate the necessity of physical therapy. The physician recommended partial payment of $1,185.81, which the insurer tendered. The insured filed suit for the balance, alleging bad faith. The trial court granted partial summary judgment to the insurer on the bad-faith claim, finding the refusal to pay reasonable as a matter of law because of the advice of the independent physician.

The Court of Appeals affirmed, citing Jones v. State Farm Mut. Auto. Ins. Co., which held as follows:

Insurance Bad Faith: Damages

July 24, 2015 | by Slappey & Sadd, LLC

DAMAGES

Although an insurer’s failure to defend a covered claim is a breach of the insurance contract, a claim for bad faith refusal to settle within policy limits sounds in tort, not contract. Like any tort, damages are an essential element to a claim for bad faith. Since the Smoot cases, Georgia law has recognized several categories of available damages:

(1) special damages

Bad Faith And Genuine Conflict

July 20, 2015 | by Slappey & Sadd, LLC

Bad faith And Factual Position

An insurer’s defense “going far enough to show reasonable and probable cause for making it” vindicates the good faith of the insurer and precludes a finding of bad faith. The facts must, however, be “in genuine conflict” for the insurance company to be released from bad faith as a matter of law. Indeed, when faced with conflicting facts, the court’s duty is to “carefully scrutinize” those facts to preclude the insurance company from relying on “fanciful allegations of factual conflict to delay or avoid legitimate claims payment.”

Cincinnati Ins. Co. v. Kastner

Bad Faith And Ambiguous Policy Provisions

July 16, 2015 | by Slappey & Sadd, LLC

Most bad-faith cases involve disagreements over the meaning of a particular provision of the insurance policy, the resolution of which resolves the issue of coverage. Where the insured prevails on the coverage issue in such cases, it will sometimes be because the court found the provision ambiguous and construed it in favor of coverage. Notwithstanding a ruling in favor of coverage in a particular case, the issue of whether the insurance company relied on the ambiguous provision in “bad faith” would still remain. The cases are mixed as to whether an insurer can face liability for bad faith when the insurer denies coverage in reliance on an ambiguous policy provision. As shown below, however, the modern trend appears to be that an insurance company’s reliance on an ambiguous provision does not shield the insurer from bad faith as a matter of law.

The Northwestern Mut. Life Ins. Co. v. Ross

One of the earliest bad-faith cases involved ambiguity in an insurance policy. In The Northwestern Mut. Life Ins. Co. v. Ross, the Supreme Court of Georgia found that the insurance company had relied on an ambiguous policy in denying coverage. Construing the ambiguity in favor of the insured, the Court found that coverage existed and affirmed the verdict in favor of the insured. In discussing its conclusion as to the meaning of the operative clause, the Court referred to the fact that other jurisdictions had reached an opposite conclusion as to the meaning of the operative clause. bad faith and ambigous policy

Insurance Coverage: Timely Demand

July 15, 2015 | by Slappey & Sadd, LLC

What Is Considered Timely Demand?

A proper “demand” for payment that complies with O.C.G.A. § 33-4-6 is essential to recovery. In evaluating the sufficiency of a demand, a court should consider its purpose. The purpose of the demand requirement “is to adequately notify an insurer that it is facing a bad faith claim so that it may make a decision about whether to pay, deny or further investigate the claim within the 60-day deadline.”

On its face, the demand requirement is straightforward. The statute’s plain language would appear to require only that the insurer refuse to pay within 60 days of a demand. This straightforward language notwithstanding, courts have added additional requirements to the demand through case law.