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Federal Judge Says Auto Insurer Can’t Preempt Non-Existent Lawsuit

In 1992, the Georgia Supreme Court held an auto insurance company may be liable if it is “guilty of negligence, fraud, or bad faith” in failing to settle a potential claim against a policyholder. The case involved a woman who was responsible for a car accident. The victim’s attorney presented the driver’s insurance company with an offer to settle her personal injury claims. The offer had a ten-day limit. The insurance company failed to respond. The Supreme Court said the company could be held liable for acting in bad faith, not just for refusing to respond before the deadline, but because it knew its policyholder was responsible for the accident, and the claim was therefore valid.

Owners Insurance Company v. Parsons

Another insurance company attempted to invoke this 1992 case in more recent litigation. Here, the subject is a 2013 automobile accident. Driver A accused Driver B of causing the accident. Driver A then sent Driver B’s insurance company a “time-limited settlement offer” seeking the policy limit of $50,000. The time limit was 30 days.

As in the above case, the insurance company did not accept the offer within the specified time period. But this time, the insurer went on the offensive and sought a declaratory judgment in federal court that it could not be held liable under the 1992 Supreme Court decision for failing to respond. Keep in mind, Driver B has not actually sued the insurance company. (Driver B has sued Driver A and the owner of his car in Georgia state court.) The insurer is essentially trying to preempt possible litigation.

As it turned out, the insurance company acted too quickly. A federal judge dismissed the company’s lawsuit in a December 2014 order. The judge agreed with the defendants—Driver B, who stands to benefit from any damages recovered—that this was a premature action. As a general rule, a federal court can only decide an active controversy. That is, if there was an “imminent” threat of Driver B suing the insurance company, the court could entertain the request for a declaratory judgment to the contrary. But the mere possibility of a lawsuit does not afford the court jurisdiction.

It is true Driver B and the insurance company presently have a “disagreement” over whether it improperly rejected the settlement offer. But the judge explained disagreement about a possible legal question is not the same thing as legal “controversy,” which is required before someone can actually bring a lawsuit. The insurance company “must show that a judicial response to that legal or factual question will resolve an imminent controversy that poses some risk of injury.” This is not to say Driver B won’t sue the insurance company in the future, or even that a settlement may be forthcoming between the parties. Again, the judge simply decided there were no grounds for preempting litigation that Driver B has not actually brought or even threatened.