Auto insurance is designed to pay for damages caused by an accident. In many cases an insurer will negotiate a settlement with the injured party. While the insurer is not obligated to pay claims it determines are unsubstantiated, the insurer cannot simply refuse to pay without consequence. Under Georgia law, an insurer can be held liable for “bad faith or negligent refusal to settle a personal claim within the policy limits.”
What does this mean in practice? Say you have a policy that covers $100,000 for bodily injury claims per accident. You are subsequently involved in an accident and are determined to be at fault. The other driver offers to release any potential personal injury claim against you in exchange for the limit of your policy, i.e. $100,000. The insurer refuses to settle. The other driver sues you in court and the jury returns a verdict of $500,000. You could then turn around and sue the insurer for the $400,000 excess you had to pay as a result of its bad faith refusal to settle.
Whiteside v. GEICO Indemnity Company
Of course, an insurer may be able to avoid a bad faith claim if it can show the accident or personal injury judgment is not covered by the policy. For instance, if the insured person fails to follow certain notification requirements in the policy itself, that may be sufficient grounds to deny coverage.
Consider this recent decision by a federal judge in Columbus, Georgia. This particular case has a long and complicated history. In 2012 a woman driving a car hit a bicyclist. The woman was not the owner of the vehicle, but she was covered by the insurance policy.
The insurer initially informed the driver that it was “responsible for the accident.” The bicyclist, acting through a personal injury lawyer, sent a demand letter to the insurer seeking the limit of the policy, which was $30,000 for bodily injury. The insurer declined to settle, believing the bicyclist’s claim was only worth about $12,000.
The bicyclist then sued the driver. The driver, assuming the insurance company was taking care of things, effectively ignored the lawsuit. She did not inform the insurer about the lawsuit or apparently make any effort to defend the case. A Georgia state court ultimately entered a default judgment in excess of $2.9 million.
The bicyclist then filed an involuntary bankruptcy petition as a creditor of the driver. The bankruptcy trustee then brought a bad faith claim against the insurer. This case remains pending before a federal judge, who in a December 12 decision denied both sides’ motions for summary judgment.
In essence, the judge said a jury will have to decide whether the insurer “acted reasonably” in rejecting the bicyclist’s initial demand for the policy limit. The jury must also determine if the insurer is off the hook for a bad faith claim because of the driver’s failure to inform it of the bicyclist’s lawsuit. The judge noted these are separate issues. In other words, the insurer may be liable for rejecting the settlement demand but not necessarily the full amount of the $2.9 million judgment.