Does Bankruptcy Get an Insurance Company Off the Hook for a Personal Injury Judgment?

Winning a personal injury judgment following a car accident does not always guarantee that the victim will actually get paid. There are cases in which a defendant who lacks adequate financial resources will file for protection under federal bankruptcy law. This can delay and in some cases defeat collection of a valid personal injury judgment under Georgia law.

For instance, in a Chapter 7 bankruptcy, the debtor’s non-exempt property is liquidated to pay any creditors to the extent possible. The remaining debts may then be “discharged.” This does not mean that the debt itself is void. Rather, a discharge means that the debtor is no longer legally obligated to repay the debt, and the creditor may take no further collection action against that individual. However, if there are multiple parties liable for a judgment, the bankruptcy of one defendant does not affect the enforceability of the judgment against the other, non-bankrupt defendants.

Flanders v. Jackson

The Georgia Court of Appeals recently addressed a related question–namely, whether an accident victim can seek a judgment in excess of a defendant’s insurance limits if said defendant has already received a Chapter 7 discharge.

Here is what happened. The plaintiff is the mother (and estate administrator) of a deceased son. The victim died as the result of an automobile accident allegedly caused by the defendant. At the time of the accident, the victim was a passenger in the defendant’s car. According to the mother’s lawsuit, the defendant “lost control” of the vehicle while speeding, causing the car to careen off the road, flip over, and eject her son, causing him to sustain fatal injuries.

The driver was covered by his own mother’s auto insurance policy, but this policy only provided a maximum of $25,000 in coverage. The insurer declined to pay even this amount to the plaintiff, however, leading to her filing a personal injury lawsuit against the defendant.

The defendant then turned around and filed a Chapter 7 bankruptcy petition. This automatically stayed (suspended) the personal injury case. The bankruptcy court ultimately granted the defendant a discharge, which included any judgment the plaintiff obtained in her lawsuit.

The defendant then moved for summary judgment in the now-resumed personal injury case, arguing that he could not be held liable for any more than the $25,000 limit on his mother’s insurance policy. The trial court agreed with that reasoning. But the Court of Appeals reversed, holding that nothing in federal bankruptcy law prevents a creditor from establishing a debtor’s potential liability post-discharge “solely for the purpose of collecting the debt from a third party, such as an insurer or guarantor.”

In this case, the plaintiff may no longer be allowed to collect an “excess judgment” from the defendant, but she may still be able to enforce one against the insurance company, especially since its refusal to initially settle prompted the litigation. Under Georgia law, an insurer who refuses to settle a valid claim in “bad faith” is liable for any excess judgment against the insured person. And such a debt is not covered by the insured person’s Chapter 7 discharge.

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