Supreme Court of Georgia Raises the Bar for Bad Faith Claimants

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In a long-anticipated ruling, the Supreme Court of Georgia clarified the state’s law on the prerequisites for an insured to sue its insurance carrier for bad faith failure to settle. The court asked the parties to address a specific question: does an insurer’s duty to settle arise only when an injured party presents a valid offer to settle within the insured’s policy limits or, even absent such an offer, does a duty arise when the insurer knows or reasonably should know that settlement within policy limits is possible? The court concluded that an insurer’s duty to settle arises only when the injured party presents a valid offer to settle within the insured’s policy limits.

The facts of First Acceptance Insurance Company of Georgia, Inc. v. Hughes, — S.E.2d —- (2019), 2019 WL 1103831 (Ga. Mar. 11, 2019) ran as follows: First Acceptance’s insured, Ronald Jackson, caused a serious auto accident in which he was killed. Five other parties received injuries, some of them permanent. First Acceptance’s investigation revealed that Jackson was liable for the loss, that his insurance policy covered the loss, and that the total exposure would exceed the policy limits. Counsel for the two most seriously injured parties, An and Hong, sent letters expressing a willingness to settle their claims for the available policy limits. First Acceptance did not respond to the offer to settle, and An and Hong filed suit and revoked the settlement offer. First Acceptance later offered them its policy limits ($50,000), but An and Hong declined and later refused to attend a global settlement conference. A judgment was then entered in An and Hong’s favor against Jackson’s estate for over $5.3 million. Facing such a large excess judgment, the executor of Jackson’s estate brought suit against First Acceptance alleging bad faith refusal to settle.

The court reasoned that to subject an insurer to a bad faith claim for failure to settle based on the insurer’s refusal to tender its policy limits before a settlement offer is withdrawn, a “valid” offer of settlement must contain a time limit within which the insurer must accept the offer. The court found that the letters from An and Hong did not contain any time limit within which First Acceptance was required to except their offer of settlement. The executor argued that the letters did contain a time limit because they requested insurance information within 30 days. Interestingly, the court applied the doctrine of contra preferentem in favor of the insurance company, holding that the letters did not clearly evidence a time limit to the demand for policy limits. Thus, under this doctrine, where an agreement is capable of being construed two ways, it will be construed against the preparer and in favor of the non-preparer. On the facts before it, the court held that First Acceptance could not have reasonably known that it needed to respond to the offer of settlement within a certain time limit or risk that Jackson’s estate would be subjected to an excess judgment. Thus, the court ruled that First Acceptance had not acted in bad faith by failing to accept An and Hong’s settlement offer before it was withdrawn.

The court’s decision should help to slow the advance in Georgia of so-called “bad faith setup” claims, where an injured party transmits a vague or unworkable settlement demand to an insurer, without a clear time limit in which the insurer must tender its policy limits, knowing the insurer likely will not or cannot accept the offer by the “deadline.” If the insured is later subjected to an excess judgment at trial, the earlier settlement offer is used as the basis for a bad faith lawsuit against the insurer. Under the court’s ruling in First Acceptance, claimants in Georgia will now have to make affirmative, time-limited offers to settle before an insurer can be sued for bad faith failure to settle.