When an Insurer Fulfills its Promises There Can Never be “Bad Faith”

Barry Zalma | Zalma on Insurance

It is Contumacious to Sue an Insurer Who Fulfills all Promises Made by its Policy

An insurance contract is nothing more than mutual promises made by the insurer to the insured and from the insured to the insurer. When an insurer keeps all of the promises it made, settles a claim made against its insured before suit is filed, it has fulfilled all of the promises made by the policy.

In NL Corp., Inc. v. Seneca Specialty Insurance Company, Appellate Case No. 28927, 2021 Ohio 1610, Court Of Appeals Of Ohio Second Appellate District Montgomery County (May 7, 2021) NL sued its insurer for bad faith after it settled a wrongful death claim and obtained a release in favor of NL of all potential claims. Regardless, NL sued only to see Seneca obtain a summary judgment requiring NL to pay its deductible as it promised.

NL Corp., Inc. appealed from the judgment. NL contended that Seneca’s wrongful conduct in handling the matter required NL to retain an attorney, and that Seneca refused to reimburse NL for the attorney’s fees and costs. NL also appealed from the trial court’s granting summary judgment on Seneca’s counterclaim for the deductible owed under the insurance policy, which NL had refused to pay. Seneca contended that, because it paid the claim, NL was obligated to pay the deductible.

Factual Background

NL operates a nightclub in the Dayton area. On May 11, 2014, a patron at the club, Adam Bishop, fell in the parking lot after a confrontation with club security and struck his head on the pavement; he died several days later. The police took witness statements and prepared a police report, and the police were given surveillance video that had recorded Bishop’s fall.

Fearing criminal and civil liability, NL retained attorney Scott Jones. About a month after the incident, NL reported the incident to its insurance company, Seneca. NL, after months of delay and refusal to cooperate, finally gave Seneca the surveillance tape. Seneca advised its insured outlining its preliminary coverage position that it concluded the $250,000 assault-and-battery limit under the policy may apply to the claim and indicated that NL had not cooperated with Seneca’s investigation of the claim.

Seneca maintained that it had no obligation to pay for counsel for NL, because no suit had been filed. Nevertheless, at Jones’s insistence, Seneca appointed attorney David Ross to represent NL in the investigation. But NL was not satisfied. It wanted separate counsel, unbeholden to Seneca, because NL was concerned about a potential conflict of interest between it and Seneca in the event that the Bishop family brought a claim for an intentional tort or over-the-limit coverage questions arose.

Bishop was a resident of Missouri at the time of his death, and under Missouri law, a settlement of a wrongful-death claim had to be approved by a Missouri probate court. A probate case was opened, and on December 15, 2015, the Bishop family’s settlement agreement with Seneca was approved by the court. Seneca paid the family the agreed $250,000 under the policy’s coverage for assault and battery.

After the settlement NL sued Seneca, claiming that Seneca claiming it had breached the insurance policy by refusing to reimburse it for it’s independent counsel, Jones’s, fees and costs. Seneca counterclaimed that NL had refused to pay the $5,000 deductible that it owed under the policy after Seneca made the payment to the Bishop family.

Seneca moved for summary judgment on NL’s claims and on its counterclaim for payment of the deductible. The trial court sustained Seneca’s motion.


Other than its failure to mention the affidavit of NL’s expert there was no evidence suggesting that the trial court did not consider the affidavit. Regardless the court had good reason not to consider the expert’s opinion since an expert cannot properly give an opinion on the law that applies in a dispute.

Breach Of Contract, Bad Faith, And The Deductible

NL claimed that Seneca breached the insurance policy by not providing NL an adequate or continuing defense, not adequately and timely investigating the incident and coverage obligations, and refusing to reimburse NL for the attorney fees and costs that it incurred in using independent counsel to protect its interests.

Applying the contract language Seneca agreed to pay those amounts that NL became legally obligated to pay as damages because of Bishop’s injury. Seneca reserved the right and duty to defend NL against any “suit” seeking those damages. In many places, the insurance contract distinguishes between a “suit” and a “claim.” With respect to the Bishop occurrence, Seneca’s contractual duty to defend NL was never triggered because there was never a “suit.” There was only a claim made directly to Seneca by the Bishop family. The probate case in Missouri was a “civil proceeding,” but it did not seek damages, being merely a proceeding to approve the settlement. Therefore, Seneca was not obligated to appoint counsel for NL.

Seneca did not have a contractual duty to reimburse NL for the fees and costs that NL incurred by retaining Jones as its attorney before the occurrence was even reported to Seneca. Under the insurance contract, Seneca agreed to pay reasonable expenses incurred at its request. However, Seneca never asked NL to hire an attorney. The policy, by its terms, NL agreed that it would not voluntarily incur any expense “without our [Seneca’s] consent.” The insurance contract here did not require Seneca to provide NL a defense until there was a lawsuit for damages. While NL’s hiring of an attorney to investigate and prepare for potential litigation might have been a good idea, it was not something for which Seneca was obligated to pay.

A “suit” was needed to trigger Seneca’s obligation to assign counsel for a defense. There was no “suit.” Seneca had no contractual duty to defend NL and no contractual obligation to reimburse NL for the attorney that NL voluntarily retained.

Bad-Faith Claim

The Court of Appeal saw nothing unreasonable about Seneca’s refusal to provide a defense since there was no suit.  NL presented no evidence that anything Seneca did was arguably unreasonable, given the circumstances and undisputed terms of the contract.

The Deductible

As to Seneca’s counterclaim for the deductible that it said NL owed under the insurance contract, NL argued that Seneca’s failure to reimburse it for attorney fees and costs constituted a material breach that relieved NL from paying the deductible.

There was no dispute that an endorsement required NL to pay Seneca a $5,000 deductible. Seneca settled the Bishop family’s claim for the full amount available under the policy’s assault-and-battery coverage, triggering NL’s obligation to pay and protected NL from a judgment in excess of the policy limit. Since the Court of Appeal concluded that Seneca had no obligation to reimburse NL for its counsel’s fees the deductible was owed.

NL failed to produce summary judgment evidence to create a genuine issue of material fact as to whether Seneca breached the insurance contract, whether Seneca acted in bad faith, or that NL did not owe the deductible.  Seneca was not obligated to pay the fees and costs of the attorney that NL voluntarily retained. Further, Seneca did not act in bad faith in its handling of the matter. And, because Seneca paid the claim, NL is obligated to pay the required deductible.


An insurer that – with little assistance from its insured – kept all the promises made by it in the policy of insurance should be praised for its conduct not sued. But since no good deed goes unpunished it was sued for breach of contract and bad faith by the insured it protected. The Ohio Court properly refused to allow NL to bludgeon its insurer to pay for actions it did not agree to pay by making a claim of bad faith. It failed because the court actually read the policy and found that Seneca did exactly what it promised to do and should have been rewarded for its conduct not accused improperly of wrongdoing.

Can a Settlement Demand Above Policy Limits Fall within Limits? A Calif. Appellate Court Says Yes

Michael Melendez and Rebeka Shapiro | Cozen O’Connor

California law generally requires that an insurer reject a reasonable settlement demand within the policy limits before it can be liable for a bad faith failure to settle. See Samson v. Transamerica Ins. Co., 30 Cal.3d 220, 237 (1981). But a recent California Court of Appeal (4th Dist.) decision held that a pre-litigation demand exceeding the policy limits could — under the right circumstances — provide the factual basis to assert that an insurer missed the opportunity to settle. Planet Bingo LLC v. Burlington Ins. Co., E074759, 2021 WL 1034830 (Cal. Ct. App. Mar. 18, 2021).

Burlington Insurance Company’s insured, Planet Bingo LLC, designed and supplied electronic gaming devices. In 2008, a fire broke out in a bingo hall in the United Kingdom owned and operated by Beacon Bingo. Security camera footage showed that the fire originated in or very near the racks where Planet Bingo’s devices were stored. Beacon notified Burlington that Beacon’s estimated losses totaled $2.6 million.

Beacon and Burlington conducted lengthy investigations regarding the claim. Because Beacon did not provide information to Burlington, Burlington hired its own investigator. In 2010, Burlington’s investigator concluded that one of Planet Bingo’s devices was the most likely cause of the fire. Nevertheless, in September 2010, Burlington concluded that Planet Bingo was not liable; that there were “coverage issues” relating to the claim; and that neither the distributor of Planet Bingo’s devices, Leisure Electronics Ltd., nor Leisure’s insurer seemed to be pursuing the claim.

During the ensuing nine months, Burlington conducted little further investigation. Planet Bingo complained to Burlington that it was losing business because the unpaid claim was damaging its reputation. In 2011, Burlington informed Planet Bingo that because no one appeared to be pursuing Planet Bingo for the damages, Burlington was closing its file.

Three years later, Leisure’s insurer, AIG Europe Ltd., wrote to Planet Bingo advising that Leisure settled with Beacon for approximately $2.6 million. AIG demanded that amount from Planet Bingo, but stated that it would be willing to engage in alternative dispute resolution: “We are instructed to recover our client’s outlay …. With the objective of avoiding the costs of litigation, our client is prepared to enter into alternative forms of dispute resolution. … [T]he options available … are discussions and negotiations or mediation. Please confirm which option you agree to.” (Ellipses in original.)

The court noted that AIG’s $2.6 million demand was more than twice the Burlington policy’s limits. But Planet Bingo’s expert testified that Burlington should have considered the larger context. Namely, that such an excess demand in the subrogation context actually was an invitation to settle at policy limits. Specifically, that there was an “industry custom in such subrogation claims for accepting policy limits for a full release [o]f the insured.”

Burlington did not read between the lines of AIG’s demand. Instead, Burlington denied coverage on the grounds that the claim arose outside the coverage territory and no suit had been filed in the United States or Canada, as required for Burlington to have a duty to defend. Subsequently, AIG filed suit in California, and Burlington defended its insured. Nine months into the suit, Burlington settled for the policy limits.

After the settlement, Planet Bingo sued Burlington, claiming that Burlington’s failure to settle earlier harmed Planet Bingo. Burlington prevailed on summary judgment based on the argument that because a demand was never made at or below the policy limits, it did not have the opportunity to settle within the policy limits. (Burlington did not address the lack of an excess judgment against the insured.) The question before the appellate court was whether Planet Bingo could make a prima facia case against Burlington when Burlington did not receive a formal demand within the policy limits.

Burlington argued that the lack of such a demand was dispositive, citing Howard v. American National Fire Ins. Co., 187 Cal. App. 4th 498, 525 (2010) (“the opportunity to settle is typically shown by proof that the injured party made a reasonable settlement offer within the policy limits and the insurer rejected it”). But the court ruled that this was not the typical case. It relied heavily on Boicourt v. Amex Assurance Co., 78 Cal. App. 4th 1390 (2000). There, the claimant asked the insurer to disclose the policy limits prior to filing any suit. The Boicourt court held that the pre-suit request to disclose available coverage limits signaled a willingness to settle for the limits, and that an insurer could be liable for failing to act on the opportunity.

The Planet Bingo court ruled “that the existence of an opportunity to settle can be shown by evidence other than a formal settlement offer.” Planet Bingo’s expert testified that AIG’s excess demand to settle its subrogation claim actually signaled a willingness to settle for the limits. The court ruled that this testimony created a triable issue of material fact as to whether Planet Bingo had an earlier opportunity to settle the case within limits.

The takeaway from this decision is that where a settlement demand above limits is made on an insured, a liability insurer cannot merely assume that the demand is not an opportunity to settle within the policy limits. Especially in circumstances where the insured’s liability could exceed the policy limits, the insurer should explore whether the party making the demand is actually seeking to settle within the limits.

Admissibility of Expert Opinions in Insurance Bad Faith Trials

David McLain | Colorado Construction Litigation| October 8, 2019

In 2010, Hansen Construction was sued for construction defects and was defended by three separate insurance carriers pursuant to various primary CGL insurance policies.[i]  One of Hansen’s primary carriers, Maxum Indemnity Company, issued two primary policies, one from 2006-2007 and one from 2007-2008.  Everest National Insurance Company issued a single excess liability policy for the 2007-2008 policy year, and which was to drop down and provide additional coverage should the 2007-2008 Maxum policy become exhausted.  In November 2010, Maxum denied coverage under its 2007-2008 primarily policy but agreed to defend under the 2006-2007 primarily policy.  When Maxum denied coverage under its 2007-2008 primary policy, Everest National Insurance denied under its excess liability policy. 

In 2016, pursuant to a settlement agreement between Hansen Construction and Maxum, Maxum retroactively reallocated funds it owed to Hansen Construction from the 2006-2007 Maxum primary policy to the 2007-2008 Maxum primary policy, which became exhausted by the payment.  Thereafter, Hansen Construction demanded coverage from Everest National, which continued to deny the claim.  Hansen Construction then sued Everest National for, among other things, bad faith breach of contract.

In the bad faith action, both parties retained experts to testify at trial regarding insurance industry standards of care and whether Everest National’s conduct in handling Hansen Construction’s claim was reasonable.  Both parties sought to strike the other’s expert testimony as improper and inadmissible under Federal Rule of Evidence 702.
In striking both sides’ expert opinions, the U.S. District Court Judge Christine Arguello set forth the standards for the admissibility of expert opinions in Federal Court:

Under Daubert, the trial court acts as a “gatekeeper” by reviewing a proffered expert opinion for relevance pursuant to Federal Rule of Evidence 401, and reliability pursuant to Federal Rule of Evidence 702.[ii]  The proponent of the expert must demonstrate by a preponderance of the evidence that the expert’s testimony and opinion are admissible.[iii]  This Court has discretion to evaluate whether an expert is helpful, qualified, and reliable under Rule 702.[iv]

Federal Rule of Evidence 702 governs the admissibility of expert testimony. Rule 702 provides that a witness who is qualified as an expert by “knowledge, skill, experience, training, or education” may testify if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.
Fed. R. Evid. 702.

In deciding whether expert testimony is admissible, the Court must make multiple determinations. First, it must first determine whether the expert is qualified “by knowledge, skill, experience, training, or education” to render an opinion.[v]  Second, if the expert is sufficiently qualified, the Court must determine whether the proposed testimony is sufficiently “relevant to the task at hand,” such that it “logically advances a material aspect of the case.”[vi]  “Doubts about whether an expert’s testimony will be useful should generally be resolved in favor of admissibility unless there are strong factors such as time or surprise favoring exclusions.”[vii]

Third, the Court examines whether the expert’s opinion “has ‘a reliable basis in the knowledge and experience of his [or her] discipline.’”[viii]  In determining reliability, a district court must decide “whether the reasoning or methodology underlying the testimony is scientifically valid.”[ix]  In making this determination, a court may consider: “(1) whether a theory has been or can be tested or falsified, (2) whether the theory or technique has been subject to peer review and publication, (3) whether there are known or potential rates of error with regard to specific techniques, and (4) whether the theory or approach has general acceptance.”[x]

The Supreme Court has made clear that this list is neither definitive nor exhaustive.[xi]  In short, “[p]roposed testimony must be supported by appropriate validation—i.e., ‘good grounds,’ based on what is known.”[xii]

The requirement that testimony must be reliable does not mean that the party offering such testimony must prove “that the expert is indisputably correct.”[xiii]  Rather, the party need only prove that “the method employed by the expert in reaching the conclusion is scientifically sound and that the opinion is based on facts which sufficiently satisfy Rule 702’s reliability requirements.”[xiv]  Guided by these principles, this Court has “broad discretion” to evaluate whether an expert is helpful, qualified, and reliable under the “flexible” standard of Fed. R. Evid. 702.[xv]

With respect to helpfulness of expert opinions, Judge Arguello explained:

Federal Rule of Evidence 704 allows an expert witness to testify about an ultimate question of fact.[xvi]  To be admissible, however, an expert’s testimony must be helpful to the trier of fact.[xvii]  To ensure testimony is helpful, “[a]n expert may not state legal conclusions drawn by applying the law to the facts, but an expert may refer to the law in expressing his or her opinion.”[xviii]

“The line between a permissible opinion on an ultimate issue and an impermissible legal conclusion is not always easy to discern.”[xix]  Permissible testimony provides the jury with the “tools to evaluate an expert’s ultimate conclusion and focuses on questions of fact that are amenable to the scientific, technical, or other specialized knowledge within the expert’s field.”[xx]

However, “an expert may not simply tell the jury what result it should reach….”[xxi]  Further, “expert testimony is not admissible to inform the trier of fact as to the law that it will be instructed to apply to the facts in deciding the case.”[xxii]  Similarly, contract interpretation is not a proper subject for expert testimony.[xxiii]

Finding that all three of the experts intended to offer opinions that were objectionable on the basis of helpfulness, Judge Arguello granted both parties’ motions to exclude the expert testimony of the opposing experts. 

[i] Hansen Construction, Inc. v. Everest National Insurance Company, 2019 WL 2602510 (D. Colo. June 25, 2019).

[ii]See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589–95 (1993); see also Goebel v. Denver & Rio Grande W. R.R. Co., 215 F.3d 1083, 1087 (10th Cir. 2000).

[iii]United States v. Nacchio, 555 F.3d 1234, 1241 (10th Cir. 2009); United States v. Crabbe, F. Supp. 2d 1217, 1220–21 (D. Colo. 2008); Fed. R. Evid. 702 advisory comm. notes.

[iv]See Goebel, 214 F.3d at 1087; United States v. Velarde, 214 F.3d 1204, 1208–09 (10th Cir. 2000).

[v]Nacchio, 555 F.3d at 1241.

[vi]Norris v. Baxter Healthcare Corp., 397 F.3d 878, 884, 884 n.2 (10th Cir. 2005).

[vii]Robinson v. Mo. Pac. R.R. Co., 16 F.3d 1083, 1090 (10th Cir. 1994) (quotation omitted).

[viii]Norris, 397 F.3d at 884, 884 n.2 (quoting Daubert, 509 U.S. at 592).

[ix] Id. (quoting Daubert, 509 U.S. at 592–93).

[x]Norris, 397 F.3d at 884 (citing Daubert, 509 U.S. at 593–94).

[xi]Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999).

[xii]Daubert, 509 U.S. at 590.

[xiii]Bitler v. A.O. Smith Corp., 400 F.3d 1227, 1233 (10th Cir. 2004) (quoting Mitchell v. Gencorp Inc., 165 F.3d 778, 781 (10th Cir. 1999)).

[xiv] Id.

[xv]Velarde, 214 F.3d at 1208–09; Daubert, 509 U.S. at 594.

[xvi] United States v. Richter, 796 F.3d 1173, 1195 (10th Cir. 2015).

[xvii] Fed. R. Evid. 702.

[xviii] Richter, 796 F.3d at 1195 (quoting United States v. Bedford, 536 F.3d 1148, 1158 (10th Cir. 2008)); see, e.g., Killion v. KeHE Distribs., LLC, 761 F.3d 574, 592 (6th Cir. 2014) (report by proffered “liability expert,” which read “as a legal brief” exceeded scope of an expert’s permission to “opine on and embrace factual issues, not legal ones.”).

[xix] Richter, 796 F.3d at 1195 (quoting United States v. McIver, 470 F.3d 550, 562 (4th Cir. 2006)).

[xx] Id. (citing United States v. Dazey, 403 F.3d 1147, 1171–72 (10th Cir. 2005) (“Even if [an expert’s] testimony arguably embraced the ultimate issue, such testimony is permissible as long as the expert’s testimony assists, rather than supplants, the jury’s judgment.”)).

[xxi] Id. at 1195–96 (quoting Dazey, 403 F.3d at 1171).

[xxii] 4 Jack B. Weinstein et al., Weinstein’s Federal Evidence § 702.03[3] (supp. 2019) (citing, e.g., Hygh v. Jacobs, 961 F.2d 359, 361–62 (2d Cir. 1992) (expert witnesses may not compete with the court in instructing the jury)).

[xxiii] Id. (citing, e.g., Breezy Point Coop. v. Cigna Prop. & Cas. Co., 868 F. Supp. 33, 35–36 (E.D.N.Y. 1994) (expert witness’s proposed testimony that failure to give timely notice of loss violated terms of insurance policy was inadmissible because it would improperly interpret terms of a contract)). 

Using Unfair Claim Settlement Statutes To Prove Bad Faith

Mikaela Whitman | Law.com | October 11, 2019

The covenant of good faith and fair dealing is implied in all insurance contracts. While most states recognize that an action for breach of this covenant (also known as “bad faith”) sounds in breach of contract, some states also recognize an independent tort that can be separate from or in addition to the breach of contract claim. All states also have an insurance code that imposes liability on an insurer which fails to meet the statutory standards. These claims settlement practices statutes are modeled after the National Association of Insurance Commissions’ Model Unfair Claims Settlement Practices Act and often contain a long list of proscribed insurer practices, including whether in an insurer’s defense or settlement of its insured’s claim (third-party bad faith) or its unreasonable refusal or delay in adjusting or resolving an insured’s first-party claim (first-party bad faith).

For example, New York Insurance Law §2601 defines certain acts that constitute “unfair claim settlement practices,” including, among others, “failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies” and failing to “advise the claimant of acceptance or denial of the claim within thirty working days.” NY Ins. §2601(a)(3), (a)(4) (2018). However, most jurisdictions, including New York, may not recognize a private cause of action in favor of an insured and only the state’s insurance commissioner can bring a cause of action alleging a violation of these statutes. See, e.g., Rocanova v. Equitable Life Assurance Soc’y, 83 N.Y.2d 603, 614 (1994) (New York law does not “recognize a private cause of action under Insurance Law §2601”); Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, 304 (1988) (violations of Insurance Code §790.03 and the Fair Claims Settlement Practices Regulations do not by themselves give rise to a separate right of action and are not bad faith per se); Davidson v. Travelers Home and Marine Ins. Co., 2011 WL 7063521, at *2 (Del. Super. Dec. 30, 2011) (holding that the purpose of the Delaware Unfair Trade Practices Act is to regulate trade practices in the insurance business and only the Insurance Commissioner has the authority to investigate or file claims of alleged bad faith acts).

Yet even though these statutes may not provide insureds a private cause of action, insureds should not disregard their benefit as violations of and failures to comply with these statutes can still be used as evidence of an insurers’ bad faith. See, e.g., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) (discussing that while there is no private civil cause of action against an insurer that commits one of the various acts listed in statutes governing unfair claims settlement practices, violations of the section may evidence the insurer’s breach of duty to its insured under the implied covenant of good faith and fair dealing); Davidson, 2011 WL 7063521, at *2 (stating that “[t]he court assumes without deciding here, however, that an insurer’s violation of the [Unfair Trade Practices] Act may be used as evidence of bad faith”); State of N.Y. v. Merchants Ins. Co. of New Hampshire, 109 A.D.2d 935, 926 (3d Dept. 1985) (in a private cause of action for bad faith, court relied on NY Insurance Law 2601 as evidence that the insurer acted in bad faith).

In Belco Petroleum v. AIG Oil Rig, the First Department held that not only can these statutes be used as evidence of bad faith, but they can also be used as evidence when seeking punitive damages for a bad faith claim, stating: “Now, an insured aggrieved by an unfair claim settlement practice can take his grievance to the Superintendent of Insurance; if the grievance has merit, the Superintendent will presumably take it up and investigate; the insured, be he of modest means or substantial, should then be able to use the results of that investigation in pressing a claim for punitive damages.” 164 A.D.2d 583, 591 (1st Dept. 1991).

The use of these statutes as evidence of insurer bad faith takes on greater significance when one considers the standard most jurisdictions apply to determine whether an insurer has acted in bad faith. This broad and general standard typically requires the insurer to act “fairly” and “reasonably.” See N.Y. Univ. v. Cont’l. Ins. Co., 87 N.Y.2d 308, 318 (1995) (bad faith claims can be predicated on an insurer’s failure to investigate, process, or pay an insurance claim, or a general business practice of denying insurance claims without a reasonable basis). As a result, insureds, insurers and courts alike are left to puzzle what it means to act “reasonably” and how to prove that an insurers’ acts were or were not “reasonable.” While traditional sources of proof such as legal precedent, expert testimony, an insurers’ past acts, industry customs, and legal consensuses (i.e., the Restatement), should certainly be considered, unfair claim settlement statutes likewise should not be overlooked.

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

Tiffany L. Powers, Kyle G.A. Wallace and Bryan W. Lutz | Alston & Bird | March 20, 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).