A Good-Faith Attempt to Limit Unwarranted Bad-Faith Liability in Georgia

Bryan Lutz, Tiffany Powers, and Kyle Wallace | Alston & Bird | March 21, 2019

A victory for insurers in Georgia’s Supreme Court clarifies state law on liability for failing to settle a claim. Our Insurance Litigation & Regulatory Team offers three key holdings that will limit an insurer’s potential exposure.

  • The injured party must present a valid offer
  • Whether a claimant has made a valid offer to settle is a legal question
  • Insurers may exhaust the policy limits by settling one of multiple claims

In a recent victory for insurers by Alston & Bird’s insurance team before the Georgia Supreme Court, the court issued an opinion in First Acceptance Insurance Co. of Georgia v. Hughes clarifying longstanding (and much debated) Georgia law governing an insurer’s liability for failing to settle a claim within the policy limits. The court held that a claimant’s ambiguous demand letter did not create a duty for the insurer to settle a claim, shedding light on three key aspects of Georgia law:

  • Insurers have no duty to settle a claim until they receive a valid offer to settle.
  • Demand letters are construed by the court with the principles of general contract construction, with ambiguous terms to be construed against the drafter.
  • Insurers have no duty to settle one of multiple claims when there is no time-limited demand and the claimant has expressed a willingness to engage in a joint settlement conference.

Georgia Law on Liability for Bad-Faith Failure to Settle Claims Against an Insured

The Georgia Supreme Court recently stepped in to clarify Georgia’s law governing an insurer’s liability for failing to settle a claim within the policy limits. Decades ago, the Georgia Supreme Court announced a rule in Southern General Insurance Co. v. Holtthat if an insurer acts in bad faith by refusing to settle a claim for an amount within the policy limits, it may be liable for the full amount of any judgment against the insured. The reason for the rule was simple: to encourage insurers to settle to avoid liability to their insured for judgment amounts exceeding the insurance coverage rather than take a chance at a trial where the insurer will face the same policy-limits maximum exposure but will possibly save money if the insured is found not liable.

In the 27 years following Holt, however, the rule has been weaponized. Plaintiffs’ attorneys have recognized that when the person at fault in a catastrophic accident may be rendered insolvent by a massive judgment, the insurer is often the only possible source to collect from. In these instances, plaintiffs’ attorneys have every incentive to break through the contractual limits of the insurance policy and to seek collection of the entire judgment from the insurer. Holt provided an inlet with its bright-line rule. As a result, rather than promoting settlement, the Holt rule has often been used as a trap to ensnare unwary insurers through the use of strategic “set-up” demands to create bad-faith liability even when the claimant never truly intends to settle their claim for an amount within the policy limits. Set-up tactics have included demand letters that require hand delivery of settlement payments within an unrealistic timeframe and vague and confusing demands that may not fully release all claims. These tactics have become so widespread that plaintiffs’ attorneys have actually created continuing legal education seminars to instruct on their use.

The Georgia Supreme Court’s Opinion in Hughes

Although the Georgia legislature took action to curb the abusive tactic of sending time-limited demands,[1] the Georgia Supreme Court recognized in Hughes that the law governing bad-faith liability needed further reform. In Hughes, the insured caused a car accident that seriously injured multiple parties and resulted in the insured’s death. The insurer, recognizing the $50,000 policy limit would quickly be exhausted, attempted to schedule a joint settlement conference with all injured parties. One of the injured parties (on her own behalf and her minor child’s) sent two letters to the insurer on the same day: (1) a letter expressing interest in a joint settlement conference and alternatively offering a limited release that would carve out claims for uninsured motorist coverage upon payment of the policy limits and receipt of coverage information; and (2) a letter requesting coverage information within 30 days.

After 41 days, the attorney “withdrew” the offer, filed suit, and the claimants at issue were awarded a judgment of $5.3 million against the insured’s estate. The estate then filed suit against the insurer for the full amount of the judgment. The trial court granted the insurer’s motion for summary judgment, finding that the insurer could not have reasonably known that all of the injured parties’ claims could have been settled within the policy limits. The Georgia Court of Appeals reversed, relying on a rigid application of Holt, finding that a jury could find that a demand had been made with a “purported 30-day time limit” and that the insurer failed to settle the two claims at issue within that timeframe. The Georgia Supreme Court reversed the court of appeals, finding that there was no “time-limited” demand for settlement and that the insurer could not be liable for bad-faith failure to settle when the claimant unilaterally withdrew a pending offer that had no express time limit. 

Georgia’s highest court in Hughes made three key holdings that work to further limit an insurer’s potential exposure from the use of set-up demands:

An insurer’s duty to settle does not arise until the injured party presents a valid offer.

The court in Hughes held that insurers cannot be liable for excess judgments if the claimant never presented a valid offer to settle a claim within the insured’s policy limits. Before Hughes, courts had openly questioned whether under Georgia law an insurer could be liable for bad-faith failure to settle even without an express offer to settle for the policy limits. Many plaintiffs argued that an insurer had an obligation to initiate settlement discussions or make an offer even if the claimant had not. However, the court in Hughes recognized that such a rule would encourage after-the-fact testimony that a claimant would have settled every time a judgment is entered that exceeds the policy limit. 

By holding that a claimant must first present a valid offer to settle within the policy limits, the court has provided insurers with a powerful defense to set-up demands that are vague, contradictory, or fail to settle the entire claim. In those instances, insurers can argue that there was no valid offer to “accept” that would avoid future liability for the insured.

Whether a claimant has made a valid offer to settle is a legal question decided by the court according to the general rules of contract construction.

The court also struck at the heart of set-up demands that provide vague, confusing, or contradictory terms by holding that courts must construe the validity of an offer as a matter of law, resorting to a jury only if ambiguity remains after applying the rules of contract construction. Ambiguous demand letters are construed against the drafter—in this instance, the claimant. Before Hughes, plaintiffs often sought to avoid summary judgment (and to appeal to sympathetic jurors) by arguing that the interpretation or intent of a demand letter was a fact question that was appropriately resolved at trial and by arguing that agreements are generally construed in favor of the insured or claimant.

The court in Hughes clarified that demand letters are to be construed against the injured party, and that if its terms are “too indefinite for a court to [ ] determine, there can be no assent thereto” and the offer is not valid. Applying this basic rule of contract interpretation, the court held as a matter of law that there was no time-limited demand when a claimant mailed two separate letters—one expressing a willingness to attend a joint settlement conference or, in the alternative, to settle the claims if insurance information was provided, and the other requesting insurance information within 30 days. In light of Hughes, insurers will have a powerful defense when faced with vague, confusing, or contradictory demand letters.

Insurers may exhaust the policy limits by settling one of multiple claims, but need not do so absent a time-limited demand.

Finally, the court addressed the situation insurers face when there are multiple claimants involved. It has long been the rule that an insurer may settle one claim that exhausts the policy limits without incurring liability for excess judgments resulting from litigation by the non-settling claimants. However, Hughes clarifies that an insurer has no obligation to settle one of multiple claims for the full policy limits, absent a time-limited demand.

However, Hughes should not be seen as limiting an insurer’s potential liability in the face of a valid time-limited demand—even in the context of multiple claimants. The court noted that in Hughes, the two claimants at issue “expressed their interest in attending a settlement conference with the other claimants.” Consequently, the insurer’s failure to settle with the two individual claimants was “reasonable as an ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”


[1]  Effective July 1, 2013, Georgia enacted a law that provided insurers with a minimum of 30 days to respond to a time-limited demand and clarified that an insurer’s request for clarification of an offer letter will not be deemed a rejection and counteroffer. O.C.G.A. § 9-11-67.1(a)(1), (d).

Will Your Next Insurance Coverage Dispute be Heard in Georgia’s Business Court?

Abby Vineyard | Barnes & Thornburg LLP | April 24, 2019

In 2020, Georgia corporate policyholders may have a new court to hear insurance coverage disputes. The Georgia General Assembly passed House Bill 239 on Day 40 of the legislative session, outlining how Georgia’s new statewide business court will operate.

The court will have jurisdiction over claims falling under Georgia’s Uniform Commercial Code, Business Corporation Code, Trade Secrets Act, Uniform Securities Act, and—of particular relevance to policyholders—over contract claims “between businesses arising out of business transactions or relationships” and more. The amount in controversy must exceed $500,000, but the court will also have the powers of a court of equity and thus be able to hear declaratory judgment actions.

There will be one division and one judge, appointed by the governor, who will have at least 15 years of experience as a complex business litigator or judge. The court may be located in Atlanta or Macon, both large metropolitan areas.

A plaintiff can initiate an action in business court, or a case can be transferred to the business court with all parties’ consent. If less than all parties consent, a party may move to transfer the case but must overcome the presumption of the case remaining in the original court. The filing fee is a hefty $3,000, which is paid by the plaintiff or allocated among the transferring parties.

However, the court has wide latitude in deciding which cases it wants to hear: the bill states that the court has the power to transfer any case filed in business court to the state or superior court and reject any petitions to transfer to the business court, even if such claims are within its jurisdiction. Additionally, a defendant may petition the court to move the case to the state or superior court, which compels the court to transfer the case unless the contract at issue specifically states that disputes must be litigated in business court.

So, what does this mean for policyholders? It depends.

In some ways, this is a positive development in that it provides for streamlined litigation without the common issue of an overcrowded docket. The court will not have to split time presiding over criminal, domestic, or other non-business-related civil matters. And the judge will be a seasoned business litigator or judge, offering an expertise and familiarity with nuanced contract issues that not all judges have.

However, there are a few drawbacks that might outweigh the benefits of filing suit in business court. Given the court’s considerable leeway over its docket, the policyholder has no guarantee that the case will remain in business court, and the unusually high filing fee makes this a bigger risk than normal. Without having seen this court in action, it is hard to imagine how many cases the single-judge court will agree to take on. A carrier’s ability to compel a transfer in the absence of a policy provision prohibiting such an action also makes for less stability. It will be interesting to see how many cases filed in business court actually remain in business court.

Assuming the governor signs the bill, the court will begin taking cases on August 1, 2020. Of course, it goes without saying that this development is of interest beyond policyholder v. carrier disputes. Any entity that has a business-related dispute arise in Georgia should at least consider the merits of litigating in business court instead of traditional court. Whether litigating in business court makes sense will be a case-by-case inquiry.

Georgia District Court Finds Reservation of Rights to Named Insured Ineffective as to Individual Insureds

Jason M. Taylor | Traub Lieberman Straus & Shrewsberry | February 25, 2019

In Auto-Owners Ins. Co. v. Cribb, 2019 WL 451555 (N.D. Ga. Feb. 5, 2019), the U.S. District Court for the Northern District of Georgia found that an insurer, Auto Owners, was estopped from denying coverage to two individual insureds under a commercial general liability policy issued to B.R. Mountain Homes, LLC.  Specifically, the District Court held that a reservation of rights issued to the Named Insured was ineffective as to two individual defendant-insureds, who were not explicitly included in the original reservation of rights.

In the underlying action, B.R. Mountain Homes was sued by Jimmey Cribb for injuries suffered on a construction site.  Cribb initially sued BR Mount Homes, but later amended his complaint to add claims against James Brian Thurman (“Thurman”) and Richard Scott Davis (“Davis”), who were officers and employees of B.R. Mountain Homes.  Auto-Owners agreed to defend BR Mountain Homes under a reservation of rights issued and addressed to BR Mountain Homes, and retained defense counsel to file an answer on behalf of the company.  When the complaint was amended to add Thurman and Davis as parties, defense counsel filed an answer on their behalf and began defending the individuals.  Auto-Owners, however, did not immediately issue any coverage position letter or reservation of rights to the individuals, who were identified as “Insureds” on the policy.  Ultimately, Auto-Owners filed a declaratory judgment action seeking a coverage determination with respect to several policy exclusions and “late notice” of an occurrence under the policy.

In the coverage action, the insureds argued that Auto-Owners was estopped from denying coverage to Thurman and Davis due to its failure to effectively reserve rights before providing Thurman and Davis with a defense.   The District Court agreed.  According to the court, an insurer that defends an insured in the absence of an express and specific reservation of rights to deny coverage is estopped from later denying coverage.  

The District Court noted that the policy was issued to “Insured: Brian Thurman & Richard Davis DBA BR Mountain Homes, LLC.”  Per the language of the policy, each insured is treated separately for purposes of coverage, by way of the “separation of insureds” provision in the policy.  The first reservation of rights letter was addressed to “BR Mountain Homes, LLC, Attn: Mr. Brian Thurman.”  While Auto-Owners ultimately sent second and third reservation of rights letters to Thurman and Davis respectively, “c/o B.R. Mountain Homes, LLC,” they were not sent until months after Auto-Owners began defending the individuals.  In addition, the first reservation letter was not addressed to Thurman or Davis individually and was sent before Thurman and Davis were ever sued by Cribb.  Thus, the District Court concluded that the first reservation of rights letter was insufficient for the insurer to reserve its rights as to Thurman and Davis, and therefore, ineffective as to the individual insureds.  Under the circumstances, the District Court held that Auto-Owners’ defense of Thurman and Davis in the absence of an effective reservation of rights served to estop Auto-Owners from denying coverage to the them, regardless of the merits of Auto-Owners’ coverage defenses.

Georgia Court of Appeals Holds Lay Witness Can Provide Opinion Testimony on the Value of a Property If the Witness Had an Opportunity to Form a Reasoned Opinion

Gus Sara | The Subrogation Strategist | September 4, 2018

In Woodrum v. Ga. Farm Bureau Mut. Ins. Co., 815 S.E.2d 650 (Ga. Ct. App. 2018), the Court of Appeals of Georgia considered whether the lower court properly disqualified a contractor as an expert witness and excluded the contractor from offering lay opinion testimony regarding the value of a property. The Court of Appeals held that, while the lower court properly disqualified the contractor as an expert witness, it improperly excluded the general contractor’s lay opinion testimony regarding the value of the property. This case establishes that, in Georgia, a lay witness can provide opinion testimony on the value of a property if the proponent of the testimony demonstrates that the witness had an opportunity to form a reasoned opinion.

In Woodrum, the plaintiffs sued their property casualty insurance carrier, Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), because of a dispute over the appropriate value of their insurance claim after a tree fell on their home. The plaintiffs argued that the tree fall caused cracks in the foundation, which diminished the value of the property. Farm Bureau Mutual disagreed with the plaintiffs’ contentions and only paid for repairing the damage. In support of their argument, the plaintiffs introduced an affidavit from the general contractor who made the repairs to their home. The contractor opined, based on his experience and visual inspection of the home, that the cracks in the foundation diminished the value of the property. Farm Bureau Mutual filed a motion to exclude the contractor as an expert witness. The lower court granted the motion and, in addition, excluded the contractor’s lay opinion testimony as to the value of the property. The court then granted Farm Bureau’s motion for summary judgment, which the plaintiffs appealed.

The Court of Appeals agreed with Farm Bureau Mutual that the contractor did not sufficiently describe the methodology by which he formed his opinion, and thus could not offer expert opinion testimony. However, the Court of Appeals held that the lower court erred in excluding the contractor’s lay opinion testimony. The appeals court’s decision was based primarily on Georgia statute OCGA 24-7-701(b), which states that a witness need not be an expert to testify as to a property’s value if he or she has had an opportunity to form a reasoned opinion. In determining whether the contractor had an opportunity to form a reasoned opinion, the appeals court considered whether the contractor had sufficient knowledge, experience and familiarity with the property. The court found that the contractor’s affidavit and deposition testimony established that he had sufficient knowledge and experience in building homes, as well as familiarity with the home and, thus, he could offer a lay opinion as to the diminished value of the home. As such, the Court of Appeals reversed the lower court’s ruling that the contractor could not offer lay opinion testimony on the property’s value and, in addition, reversed the lower court’s decision granting summary judgment in Farm Bureau Mutual’s favor.

The Woodrum decision reminds us that, in Georgia, a witness does not need to qualify as an expert to testify about the diminished value of a property if the witness has had an opportunity to form a reasoned opinion. The Court of Appeals’ holding is helpful to subrogation plaintiffs because the admissibility standard for lay opinion testimony is far less burdensome than the admissibility standards for expert witnesses.

Georgia’s Bad Faith Demand Requirements

Ashley Harris | Property Insurance Coverage Law Blog | March 31, 2018

I’ve previously discussed Georgia’s bad faith demand requirements in Georgia Unfair Claims Handling. A recent Georgia appellate court opinion1 highlights how strictly OCGA § 33-4-6 is construed by the courts.

OCGA § 33-4-6 provides, in relevant part:

In the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liable to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees for the prosecution of the action against the insurer.

Georgia courts have held that to bring a claim under this statute the policyholder must prove:

  1. That the claim is covered by the relevant insurance policy;
  2. That a demand for payment was made by the policyholder at least 60 days prior to filing suit; and
  3. That the carrier’s failure to pay was motivated by bad faith.2

In Thompson v. Homesite Insurance Company of Georgia, the policyholder’s home was damaged when a tree fell on it during a storm. The policyholder sustained damages to her home and expenses to remove the tree and other debris from her property. Homesite’s initial payment for these damages was $1,812.33.

The policyholder disagreed with Homesite’s valuation of her claim, and made a number of complaints to and about Homesite regarding the handling of her claims. Specifically, the policyholder filed a formal complaint with the Georgia insurance commissioner and sent several messages to Homesite representatives in May 2011, inquiring about, and criticizing, the handling of her claims. After receiving documentation of the expenses incurred by the policyholder for removal of the tree and other debris in June 2011, Homesite issued an additional payment for $1,800 on October 6, 2011.

In a letter dated October 12, 2011, the policyholder’s counsel demanded payment for the reimbursement for the policyholder’s tree and debris removal expenses. In this letter, the policyholder’s counsel threatened to file a bad faith claim against Homesite under OCGA § 33-4-6 if Homesite did not properly reimbursement the policyholder for the tree and debris removal expenses. This letter also notified Homesite that the policyholder disagreed with Homesite’s estimate of damages to repair her home.

The parties ultimately went to appraisal and an umpire awarded the policyholder $50,713.69 less the $1,000 deductible and prior payments. Homesite issued payment for the umpire’s award.

The policyholder then sued Homesite claiming that Homesite unreasonably delayed reimbursing her for the tree and debris removal expense and that it had underpaid on the umpire’s award, subjecting Homesite to liability under OCGA § 33-4-6. Homesite moved for summary judgment on these claims.

The court analyzed whether the policyholder’s communications with Homesite were sufficient to support recovery under the bad faith statute. The court concluded that statements by the policyholder to Homesite and the Georgia insurance commissioner that she was unhappy with the progress of her claim were not sufficient to alert Homesite she was considering filing a bad faith claim.

The court held that a demand under OCGA § 33-4-6 must not only express displeasure with the insurer’s handling of the claims process but actually alert the insurer that the insured plans to take legal action for bad faith if the claim is not paid.

The only communication the policyholder had with Homesite in which potential litigation was threatened was the October 12, 2011, letter sent by her counsel. However, this threat of litigation pertained only to the Homesite’s failure at the time to reimburse the policyholder for tree and debris removal expenses. Since Homesite paid the policyholder for those expenses on October 6, 2011, Homesite had already satisfied the specific demand made by the policyholder. As the policyholder never threatened to invoke OCGA § 33-4-6 regarding any remaining portions of her claim with Homesite, the appellate court affirmed the trial court’s grant of summary judgment on the policyholder’s bad faith claim.

While Georgia courts have held that no special language is necessary for the demand under OCGA § 33-4-6, this opinion emphasizes how strictly courts will review and interpret the demands in order to hold carriers liable under the bad faith statute.
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1 Thompson v. Homesite Ins. Co. of Georgia, No. A17A1938 (Ga. App. Mar. 14, 2018).
2 BayRock Mortg. Corp. v. Chicago Title Ins. Co., 286 Ga.App. 18, 19 (648 S.E.2d 433) (2007).