Property Casualty Focus

If at first you don’t succeed, try, try again. An age-old adage that now provides critical guidance for insurers seeking to protect themselves in the face of bad faith failure to settle claims.

In McGranahan v. Geico Indemnity Co., Michael McGranahan appealed a California district court’s order against him that granted Geico’s motion for summary judgment. In the district court, McGranahan asserted that Geico breached the implied covenant of good faith and fair dealing when Geico failed to respond to McGranahan’s time-limited settlement demand within his stated deadline. The district court found that Geico did not act in bad faith by failing to either accept or reject the demand. The Ninth Circuit Court of Appeals affirmed the district court’s order. The central question was whether Geico’s conduct, as a liability insurer, was reasonable under the totality of the circumstances.

On June 30, 2014, Geico’s insured, Maria Zabala, was involved in an automobile versus motorcycle accident with McGranahan. After Zabala notified Geico of the accident, Geico obtained the police report with McGranahan’s contact information. On September 1, 2014, Geico sent McGranahan two letters, one of which informed McGranahan that if he intended to pursue a claim, he would need to provide Geico with supporting documentation regarding his injuries, treatment, and incurred/paid expenses. Geico continued these efforts and attempted nine times to obtain McGranahan’s medical records and bills — repeatedly stating that these documents were “essential” to its evaluation.

On July 20, 2015, Geico received a settlement demand letter from McGranahan with a response deadline of August 17, 2015. The demand letter specifically claimed that McGranahan suffered “significant” injuries and incurred medical bills exceeding $1 million. In response, on August 6, 2015, Geico again requested corroborating medical records or medical authorization forms. McGranahan failed to respond to Geico’s 10th request. On August 13, 2015, having received no response from McGranahan, Geico called his girlfriend Cindy Porter to ask for an extension of the deadline for the settlement demand. At the time the demand was pending, Porter’s statements and a redacted police report showed McGranahan had been badly injured; however, these statements and report provided no quantifiable medical costs associated with the injury. Geico did not receive the requested extension and did not obtain McGranahan’s medical records or a medical authorization form by the settlement deadline. As a result, Geico did not respond to McGranahan’s time-limited settlement demand. McGranahan subsequently sued Geico for bad faith.

On appeal, the Ninth Circuit analyzed the relevant issues under California law, which implies a covenant of good faith and fair dealing in liability insurance policies. That covenant recognizes an implied duty to settle. An element for breach of the implied duty to settle is that the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. The reasonableness of an insurer’s conduct is a question of law where the evidence is undisputed and only one reasonable inference can be drawn from it. The adequacy of an insurer’s claim investigation is an important factor when evaluating whether an insurer’s conduct was reasonable, and an unreasonable failure to investigate may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. In determining whether the insurer acted in bad faith, the analysis hinges on the amount of information at the insurer’s disposal at the time of the settlement decision, when considering the totality of the circumstances.

In affirming the district court’s order in favor of Geico, the Ninth Circuit emphasized Geico’s 10 ignored requests for McGranahan’s medical records and bills, while also noting Geico made 18 total attempts to obtain McGranahan’s medical information before he initiated the underlying suit against Geico’s insureds. The appeals court held that without McGranahan’s medical information, it was reasonable that Geico was unable to determine if its insureds’ liability would exceed the policy limit. Further, the appeals court reasoned that because the medical records and bills were essential to evaluating McGranahan’s settlement offer, Geico did not act in bad faith when it failed to respond to the time-limited settlement demand so that Geico could continue to investigate and evaluate McGranahan’s claim. In a dissenting opinion, Judge Friedland noted that bad faith is ordinarily a question of law and that a jury could have found Geico might have taken other steps to investigate the claim, especially when it seemed undisputed that the grave nature of the injuries made it likely that the medical bills would exceed the policy limit. Nevertheless, the Ninth Circuit majority agreed with the district court and Geico that Geico acted reasonably when considering the totality of the circumstances and thus affirmed the order granting Geico’s motion for summary judgment.