Negligent Bad Faith? Limiting Insurance Bad Faith to Its Roots

This article appeared in the Georgia Defense Lawyers Association 2018 Law Journal

Although frequently distinguished, an insurance policy is a contract like any other. It is a written agreement between parties that expressly sets forth the parameters of their relationship, including the consideration to be paid, the risks to be borne, and the conditions precedent to enforcement of the contract. Despite this fact, courts often wrestle with how to address perceived imbalances in bargaining power at the time the deal is struck. And while the concepts underpinning contracts of adhesion may be present, for instance, in many form automobile policies, the same cannot be said for many other liability policies, such as those obtained by Fortune 500 companies for D&O, E&O, or specialty liability coverage. Such contracts are customarily heavily negotiated. There is no inequality in bargaining power. It presumably follows then that there are circumstances under which the jurisprudence underlying follow-form auto liability policies should not apply with equal weight to other insurance contracts that are more heavily negotiated. As discussed below, the circumstance where this disparity is most apparent is that of "bad faith" extracontractual liability.

As a general matter, there is no tort of "bad faith" claims handling under Georgia law. O.C.G.A. Section 33-4-6 provides the exclusive remedy for claims of alleged bad faith failure to pay policy proceeds. Under this statute, "an insurer is subject to imposition of a penalty and attorney fees if it refuses in bad faith to pay a covered loss 'within 60 days after a demand has been made by the holder of the policy.'" For the purposes of O.C.G.A. Section 33-4-6, "a refusal to pay in bad faith means a frivolous and unfounded denial of liability." The recovery authorized by Section 33-4-6 serves as a penalty to insurers, and as such, it is disfavored.

Ordinarily, the question of good or bad faith is for the jury. However, as Georgia courts have repeatedly recognized, "when there is no evidence of unfounded reason for nonpayment, or if the issue of liability is close, the court should disallow imposition of bad faith penalties. Good faith is determined by the reasonableness of nonpayment of a claim." Because bad faith penalties are not authorized where an insurer "has any reasonable ground to contest the claim and where there is a disputed question of fact," an insurer with any legal or factual basis for contesting a claim should be entitled to summary judgment as a matter of law.

This principle has been twice reaffirmed by the Georgia Court of Appeals in recent years. First, in American Safety Indemnity Company v. Sto Corporation, an insurer had denied coverage under a CGL policy based on several exclusions to coverage. Unfortunately, however, the trial court found that the insurer's denials followed its accepting the defense of its insured without first adequately reserving its rights to deny coverage. Although the claims adjuster testified he had mailed the reservation of rights letter to the insured in the ordinary course, the insurer was unable to affirmatively prove having sent the letters, which the insured denied receiving. Accordingly, because of Georgia precedent regarding an insurer being estopped from denying coverage after accepting a defense without an adequate reservation of rights, the trial court determined – and the Court of Appeals agreed – that there was no basis to deny coverage as a matter of law. Notwithstanding this fact, the Court of Appeals reversed the trial court on its denial of the insurer's motion for summary judgement on the statutory claim for bad faith:

Based on the record before us, we conclude that [the insurer] was entitled to summary judgment on [its insured's] bad faith claim. The question of whether the previous reservations of rights were still effective had not been squarely answered in Georgia, and it may have appeared from a review of [the insurer's] records that reservation of rights letters had been subsequently sent out once [it] agreed to cover the litigation.

In other words, alleged negligence in the mailing of the reservation of rights letters (itself sufficient to result in an estoppel) was insufficient to support an extra-contractual claim of bad faith under O.C.G.A. Section 33-4-6.

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