For an insurer, fully evaluating a time limited demand in an automobile negligence action can be difficult and uncertain. A comprehensive investigation requires skillful work; often involving review of complex medical records and interviews of fact witnesses. The pressure of a time limited demand is coupled with the duties imposed by Georgia law requiring insurers to act in “good faith” when faced with a valid and reasonable offer, within policy limits, to settle claims against its insured. However, the duties imposed are not a one-way street. Insurance policies impose duties on both parties to the contact. The duties of the insured that are most commonly examined are the insured’s requirement to provide notice to the insurer and the insured’s duty to fully cooperate with the insurer in the investigation and defense of a plaintiff’s claim.
What happens when both parties allegedly breach a duty imposed by their insurance contract and a subsequent judgment is entered against the insured? Does a breach of the insured which would give the insurer cause to deny coverage relieve the insurer of potential bad faith exposure? In the recent Supreme Court decision, GEICO Indem. Co. v. Whiteside, No. S21Q0227, 2021 WL 1521527 (Ga. Apr. 19, 2021), the answer may be no.
In Whiteside, a permissive user of the insured’s vehicle caused an accident with a bicyclist, necessitating extensive emergency treatment and hospitalization of the bicyclist. It was undisputedly the fault of the insured driver, and the insurer notified the driver that, “based on the evidence we have gathered, we are responsible for the accident.” Importantly to the Court, the insurer also failed to inform the driver, who was not the named insured, of her duty to cooperate, to forward any accident-related legal documents, or even to notify the insurer if she was subsequently sued.
The insurer was sent a time limited demand for the $30,000 policy limits, supported by the bicyclist’s $15,000 in medical bills. The insurer responded with a counteroffer and the bicyclist’s attorney never responded to the counteroffer. The insurer continued in its efforts to contact the bicyclist’s attorney to continue negotiations. Unbeknownst to the insurer, the bicyclist’s attorney filed suit and server the permissive use driver. Neither the driver nor the bicyclist’s attorney ever noticed the insurer of the suit.
The driver never filed an answer and the bicyclist’s attorney moved for a default judgment. Default was entered and the trial court entered an award of just under $3 million against the driver. At this point, the driver informed the insurer of the judgment against her. After a series of unsuccessful appeals, the bicyclist sought to enforce his judgment, forcing the driver into involuntary bankruptcy. Following this, the driver hired counsel to investigate a bad faith failure to settle claim against the insurer.
The insurer moved for a motion for judgment as a matter of law and subsequently renewed the motion after a federal court jury returned a verdict in favor of the driver. However, the district court ruled that whether the failure to settle or the default judgment was the proximate cause of the judgment against the driver was a question of fact for the jury. Ultimately, the jury determined that the insurer’s failure to settle was 70 percent responsible for judgment, resulting in a $2.7 million award against the insurer. The insurer appealed and the Eleventh Circuit certified three questions to the Supreme Court of Georgia. First, does a lack of notice pursuant to O.C.G.A. § 33-7-15 relieve an insurer of liability from a follow-on bad faith suit? Second, if the action is not barred, can an insured sue an insurer when the insured failed to comply with the proper and enforceable provisions of an insurance contract? Finally, does an insurer have a right to contest damages in a bad faith suit when the insurer had no notice of, or participation in, the original suit?
In response to the first question, the Supreme Court ruled that the requirements of O.C.G.A. § 33-7-15 or related insurance policy provisions requiring notice do not relieve an insurer of potential liability for a bad faith action, even when the insurer never receives notice. Importantly, the Supreme Court stated that the driver clearly breached the provisions of the policy but that her breach is not, in and of itself, sufficient to sever the causal link between the failure to settle and a rejection of a time limited demand. In fact, the Court opined that the insurer should have reasonably foreseen the driver’s breach and the consequence flowing from it. The Supreme Court quoted the Order from the district court stating that the insurer should have considered and foreseen that the driver was a flight risk. She apparently lived in substandard housing with no furniture. Finally, the district court stated that the insurer never explicitly stated to the driver that she needed to notify the insurer of all legal paperwork.
There are two practical takeaways from this decision. First, an insurer must reasonably assess the potential for an uncooperative insured. It is now Georgia law that a complete failure to abide by the notice provisions of an insurance policy does not sever the causal connection between a failure to settle and an excess verdict. Second, upon receipt of a time limited demand, it is now an absolute necessity to send a letter to the insured or covered driver explicitly stating that they are required to give notice of all received documents relating to the accident. Although the Court’s ruling is broad, there are still caveats for intentional actions taken by the insured preventing settlement. Gov’t Emps. Ins. Co. v. Gingold, 249 Ga. 156, 288 S.E.2d 557 (1982) (When acceptance of a time limited demand was prevented by insured’s willful concealment and refusal to execute required affidavit).
The second question involves a legal technicality. Even though the actions of the driver were later sufficient to support a denial of coverage, those actions had not occurred at the time of the rejection of the time limited demand. Under Georgia law, the duty to settle arises at the moment an insurer receives a time limited demand. First Acceptance Ins. Co. of Georgia, Inc. v. Hughes, 305 Ga. 489, 826 S.E.2d 71 (2019). At this moment, the insurer still had the duties to defend and indemnify the driver. And, as stated above, the court concluded that the insurer should have foreseen the possibility that this insured would be noncompliant (and factored that into its evaluation of the time limited demand).
The Court concluded by holding that an insurer does not have an opportunity to contest damages even when it was not notified of, and did not participate in, the underlying action. The rationale was that the proper measure of damages in a negligent failure to settle action is the full award against the insured.
Practically speaking, this case presents an added wrinkle in assessing time limited demands. An insurer now must assess the expected level of cooperation from the insured and act reasonably in light of that assessment. Temporally, the duty to settle in good faith arises before any subsequent coverage defense and we now have clear law that dictates a subsequent coverage defense does not sever the causal connection between a “bad faith” failure to settle and an eventual jury award. Even when the subsequent coverage defense relates to something extremely prejudicial, such as an entry of default judgment and a failure to appear for a damages hearing. It is now imperative to outline early exactly what level of cooperation is expected from an insured, what their duties are under the policy, and the potential ramifications of failing to meet the expected standard. Furthermore, although not explicit in the case, there appears to be a heightened standard when the insured driver is not a named insured or policy holder. The logic behind this appears sound; how could a covered driver, who has never seen the contents of the policy and is not a direct party to the contract, be aware of the exact terms? Therefore, when faced with a time limited demand for a covered driver who is not a policy holder, extra attention should be paid to outlining notice and cooperation requirements at the outset. In dealing with a time limited demand and an uncooperative or disappearing insured, time is absolutely of the essence.