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Changes To Um/Uim Coverage In Georgia And Avoiding Bad Faith In Responding To Demands Within Policy Limits

March 04, 2013 BY Brian Moore

Beginning January 1, 2009, changes to uninsured/underinsured motorist coverage (herein UM coverage) went into effect to allow the option for stacking of UM coverage.  The stated intent of the bill passed by the Georgia Senate in March 2008 was “to change the definition of “uninsured motor vehicle” to allow uninsured motorist coverage to be stacked with other available liability coverages.”  Senate Bill 276. 

            This stacking provision or “add-on” coverage allows an insured the opportunity to seek recovery fromboth the at-fault driver’s (tortfeasor) automobile liability coverage in addition to the total amount of available UM coverage.

            Before January 1, 2009 The UM Coverage Had To Be Greater Than The Available Liability Coverage.

            Before 1/1/2009, O.C.G.A. § 33-7-11(b)(1)(D) provided that insureds could potentially recoup damages under an available UM policy only to the extent the total amount of UM coverage exceeded the total amount of the liability coverage available to the at-fault driver.  Dewberry v. State Farm Mutual Auto Insurance Company, 197 Ga. App. 248, 249, 398 S.E.2d 266 (1990).

                •     “Reduction” UM coverage provides UM benefits to an injured insured only when the insured’s UM coverage is greater than the tortfeasor’s (at fault party) available liability coverage. 

                •     Under the “reduction” rule, the UM coverage is reduced by the amount of recovery under the tortfeasor’s liability coverage. 

            The “reduction” rule can be illustrated as follows:

            The insured is involved in a rear-end motor vehicle accident with a tortfeasor.  The UM policy limits of the insured is $100,000 and the liability of the tortfeasor’s policy is $25,000. 

                •     The insured must obtain a judgment in excess of $25,000 in order to expose the UM coverage.

                •     Pursuant to the “reduction” rule the available UM coverage is $75,000 ($100,000 UM policy minus the $25,000 liability policy).

            Under the “reduction” rule, if the insured’s UM limits are less than or equal to the available liability limits of the torfeasor, the insured would not be able to recover from the UM policy.

                •     If the UM coverage limits are equal to the tortfeasor’s available liability limits, the “reduction” rule prevented recovery from the UM coverage. Dewberry v. State Farm Mutual Auto Insurance Company, 197 Ga. App. 248, supra.

                •     Under the reduction rule, UM benefits are calculated by stacking the limits of all of the available uninsured motorist coverage and setting off the limits of the available liability coverage. 

                •     See Crouch v. Federated Mut. Ins. Co., 257 Ga. App. 604, 571 S.E.2d 574 (2002). (The court held that the available UM coverage was $5,000 for the plaintiff in a case with $50,000 liability limits from the tortfeasor, $15,000 UM limits from plaintiff’s personal policy and UM limits of $40,000 from a policy of plaintiff’s employer which owned the vehicle operated by the plaintiff).

            “Add On” UM Coverage Is The Default For Policies Issued, Delivered, Or Renewed After 1/1/09 Unless Specifically Rejected By The Insured.

            “Add on” coverage provides UM benefits any time the tortfeasor’s liability coverage is less than the amount of the insured’s damages without any reduction or set off by the available liability coverage.  “Add on” coverage is the default provision when the insured elects UM coverage unless the insured rejects the coverage in writing and selects in writing the “reduction” type UM coverage.  O.C.G.A. §33-7-11(b)(1)(D)(ii)(I) and (II); see also O.C.G.A. §33-7-11 (a)(3). 

            “Add on” UM coverage can be shown as follows: 

            The insured is involved in a rear-end motor vehicle accident with a tortfeasor.  The UM policy limits of the insured is $25,000 and the liability of the tortfeasor’s policy is $100,000.

                •     Under “add on” coverage the UM coverage is triggered if the judgment exceeds the liability limits of $100,000.

                •     No set off or reduction of the liability limits apply, therefore the available coverage would be $125,000 (the $100,000 liability limit plus the $25,000 UM policy limit). 

            Statutory Penalties For Bad Faith May Apply For The Refusal To Pay Losses Made Under The UM Coverage.

            The Georgia statute dealing with UM policies sets forth a specific penalty and cause of action against insurers for refusal to pay a covered loss.  Essentially, O.C.G.A. §33-7-11(j) provides:

                •     An Insurer has 60 days after a demand is made to pay a covered loss.

                •     If a judgment is entered against the UM motorist/carrier a plaintiff can then pursue a claim for the bad faith statutory penalties.

                •     If a finding is made that an insurer, in bad faith, refused to pay a covered loss the plaintiff can seek 25% of all reasonable attorney’s fees in prosecuting the claim for bad faith statutory penalties.

            An Insurer May Not Be Able To Wait To Consider The Merits Of The Claim Until After Judgment Against The Uninsured Motorist.

            Georgia case law provides that “[i]t is clear that a plaintiff must obtain a judgment against the uninsured motorist before filing suit against the [UM carrier] for the bad faith penalty and attorney fees.”  Lewis v. Cherokee Ins. Co., 258 Ga. App. 839, 375 S.E.2d 850 (1989); see also Travelers Ins. Co. v. Harris,  226 Ga. App. 269, 486 S.E.2d 427 (1997).  However, a judgment is not a prerequisite for a demand made against the UM insurer under the statute.  William H. Danne, Jr. Penalty and Attorney’s Fees for Insurer’s Bad-Faith Refusal to Pay for Covered Loss, 16 Ga. Jur. Insurance § 20:59.

                •     A valid claim may be made months or years before the claimant obtains a judgment against the uninsured motorist. 

                •     The statute contemplates a pre-suit demand against the insurer. 

                •     The statute does not permit the UM insurer to wait until after the plaintiff obtains a judgment against the uninsured motorist before it considers the merits of the claim. 

                •     Instead, the insurer is required to pay a valid claim within 60 days of it being made. 

                •     The bad faith, if any, of the UM insurer in failing to pay a valid claim would be based upon the insurer’s failure to pay the claim within the 60 day statutory period from the demand.  

            Care Must Be Taken When Responding To Demands Within The Policy Limits In An Effort To Avoid The “Gotcha” Effect Of Bad Faith.

            In Georgia, an insurer has the legal duty to carefully protect the interest of the insured to “‘the same faithful consideration it gives its own interest.’”  Southern General Insurance Company v. Holt, 262 Ga. 267, 416 S.E.2d 274 (1992); see also J. Smith Lanier & Company v. Acceptance Indemnity Insurance Company, 272 Ga.App. 789, 612 S.E.2d 843 (2005).

                •     The insurer may be held liable to the insured to pay the verdict rendered against the insured even though the verdict exceeds the policy limit of liability. 

                •     The reason for this rule is that the insurer “may not gamble” with the funds of its insured by refusing to settle within the policy limits.  Driskell v. Empire Fire & Marine Insurance Co., 249 Ga.App. 56, 547 S.E.2d 360 (2001). 

                •     Bad faith by the insurer alone is not required to create liability for a verdict in excess of policy limits.  Davis v. Cincinnati Insurance Co., 160 Ga.App. 813, 288 S.E.2d 233 (1982). 

                •     An insurer in Georgia can be liable for failure to settle a claim against an insured if the failure to settle is motivated or caused by negligence or bad faith.  Alexander Underwriters General Agency v. Lovett, 182 Ga.App. 769, 357 S.E.2d 256 (1987).

                •     The test for negligence is whether a reasonable insurer, under all the facts, would have settled the case for the policy limit demand.  Holt, 262 Ga. at 269, supra.

                •     “[T]he insurer is negligent in failing to settle if the ordinarily prudent insurer would consider choosing to try the case created an unreasonable risk.”  Brightman, 276 Ga. at 685, 580 S.E.2d at 521.

      In regards to a demand for compromise within the policy limits, an insurer should consider among numerous factors whether: 

                •     The insurer has knowledge that the case involves clear liability; and

                •     Plaintiff’s special damages exceed the policy limits. 

      An Unliquidated Damage Interest Demand Allows 30 Days To Respond.

            An unliquidated damages/time limit demand pursuant to O.C.G.A. § 51-12-14 allows plaintiff to receive interest on the amount demanded if the demand letter meets the following statutory requirements:

                •     Must be sent by registered or certified mail or statutory overnight delivery to a person against whom the claim is made or their attorney.

                •     Must allow the receiving party thirty days to respond from the date of the mailing or delivery of the letter.

                •     The plaintiff can seek interest only if the case proceeds to trial and plaintiff obtains a judgment for the amount demanded or higher. 

            Holt Demands Do Not Require Any Minimum Time To Respond.

            For the last 20 years, plaintiff lawyers have used Holt demands to set up insurers for bad faith, excess judgments, and punitive damage claims.  An insurer that fails through negligence to accept a settlement demand within policy limits may be held liable for any jury verdict in excess of the policy limits.  Holt, supra, see alsoCotton States Mutual Insurance Company v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003).

            The Holt case involved a clear liability auto accident case with damages in excess of policy limits.  The plaintiff submitted a time-limited demand for the policy limits which the insurer did not pay by the time the demand expired (initially 10 days but later extended to 15 days). The case proceeded to trial, and the jury returned a verdict in excess of 5 times the special damages.  In a subsequent action for bad faith the jury returned a verdict against the insurer for the special damages as well as $100,000 in punitive damages.  The appellate courts held that there was sufficient evidence for bad faith to uphold a the jury verdict for the injured plaintiff against the insurer for the amount of the verdict which exceeded the policy limits. 

            In Holt, the Supreme Court of Georgia stated that "[n]othing in this decision is intended to lay down a rule of law that would mean that a Plaintiff's attorney under similar circumstances could 'set up' an insurer for an excess judgment merely by offering to settle within the policy limits and by imposing an unreasonably short time within which the offer would remain open."  However, this quote seems to have been largely ignored by trial courts and juries when deciding bad faith damages.

            A “Safe Harbor” From Bad Faith May Not Really Be That Safe.

            Deciding how to respond to plaintiff’s demand can be further complicated when the demand involves multiple insurers.  In these situations, plaintiffs sometimes condition settlement upon the first insurer paying its policy limits and the subsequent insurer(s) paying all or a portion of their limits. 

            In 2003 the Georgia Supreme Court in Cotton States Mutual Insurance Company v. Brightman, 276 Ga. 683, supra. held that when demands are contingent upon the actions of multiple insurers, the first insurer can create a “safe harbor” from bad faith liability by meeting the portion of the demand over which it has control, thereby doing what it can to settle the claims against its insured.  In Brightman, the court explained that, when the settlement offer contains a condition that is beyond the control of an insurer, the insurer can create a “safe harbor” by “meeting the portion of the demand over which it has control.”  Id. at 687.  Thus, where two or more insurers are involved, an insurer can prevent a bad faith claim by tendering its policy limits, although the other insurers may not do the same. 

            However, this “safe harbor” that protected the first insurer from a bad faith claim, was modified by the Georgia Supreme Court in Fortner v. Grange Mutual Insurance Co., 286 Ga. 189, 686 S.E.2d 93 (2009), when an insurer agreed to settle for the policy limits if plaintiff agreed to sign a release and dismiss his claims with prejudice.  Essentially, the court determined that the settlement conditions imposed by the insurer were not consistent with “safe harbor” protection because the settlement conditions raise the question whether the insurer acted reasonably in responding to plaintiff’s demand. 

            In Southern General Ins. Co. v. Wellstar Health Systems, Inc., 315 Ga. App. 26, 726 S.E.2d 488 (2012), the court held that it is possible for an insurer to create a “safe harbor” from bad faith liability underHolt and its progeny.  The court summarized: "[W]hen the failure to settle a Holt-scenario claim is based solely on the plaintiff's unreasonable refusal to agree to a reasonably and narrowly tailored provision assuring that any hospital liens will be satisfied from the settlement proceeds, that cannot, as a matter of law, constitute a bad faith failure to settle when the insurer is merely attempting to comply with its legal obligations."  Id.  According to the court the insurer creates a safe harbor from bad faith liability when:

                •     The insurer promptly acts to settle a case involving clear liability and special damages in excess of the applicable policy limits, and

                •     The sole reason for the parties' inability to reach a settlement is the plaintiff's unreasonable refusal to assure the satisfaction of any outstanding hospital liens.

                •     If the insurer makes a policy limit offer, and the claimant refuses to make assurances that medical liens would be satisfied, "the insurer is (at that point) under no obligation to tender policy limits directly to the plaintiff.”  Id.

                •     “[T]he insurer would be free (at that point) to simply verify the validity of any liens, make payment directly to the hospital, and then disburse any remaining funds to the plaintiff.

                •     " In doing so, the insurer would create a safe harbor from liability under Holt and its progeny.”  Id.

The Legislature Is Attempting To Set Some Rules Concerning The Use Of Holt Demands But The Legislation Remains Somewhat Uncertain.

     The Georgia General Assembly considered legislation related to bad faith claims and Holt demands during the 2012 session, including House Bill 1175, which would have allowed an insurer at least 60 days to respond to a settlement demand and required demands to include copies of medical records and billing statements. However, the legislation failed.

            Currently the Georgia General Assembly is working on House Bill 336 which would require the following in a pre-suit demand:  

                •     The time period within which the demand must be accepted shall be not less than 30 days from receipt of the demand;

                •     The demand must set forth the amount of monetary payment;

                •     The demand must identify the party or parties the claimant or claimants will release if such offer is accepted.

                •     The demand must identify the type of release, if any, the claimant or claimants will provide to each release.

                •     The demand must identify the claims to be released.

                •     Payment cannot be required less than 10 days from the acceptance of the demand.

Upon receipt of the demand the recipient shall have the right to seek clarification regarding terms, liens, subrogation claims, standing to release claims, medical bills, medical records, and other relevant facts. An attempt to seek reasonable clarification by the recipient of the demand shall not be deemed a counteroffer. 

            HB 336 has not yet been signed into law. 

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley