Many are familiar with the delineation between the duties to defend and to indemnify that are owed by an insurer to its insured. A third duty has emerged in the case law, however, that has no explicit contractual source: the obligation to settle a claim in certain circumstances when demanded by the adverse claimant within policy limits. Because the relationship between an insurance company and its insured is somewhat of a fiduciary one, an insurer is negligent in failing to settle if proceeding to trial involves an unreasonable risk of unfavorable results. Consequently, the measure of damages to compensate the insured for the insurer’s breach of the duty to settle is the full amount of damages awarded regardless of the liability limits of the policy.
The Supreme Court of Georgia considered a permutation of the duty to settle in 2003 when it decided Cotton States Mutual Insurance Co. v. Brightman. In that case, the claimant made a policy-limit settlement offer that was contingent upon two separate insurers both agreeing to tender their policy limits. Neither company responded to the offer within the time period specified. After a verdict was returned for approximately $1.8 million, the insured assigned her claims to the plaintiff who then convinced a jury that the refusal to settle was wrongful.
The Court of Appeals found that even though the demand was contingent on payment by two insurers, there is "an affirmative duty by the insurer to engage the injured party in discussions regarding an initial settlement demand in excess of policy limits." Upon certiorari review, the Supreme Court rejected the Court of Appeals’ holding that an insurance company has a duty to explore settlement. The Supreme Court acknowledged that a claimant must make an unequivocal demand within policy limits so that the record may be clear as to the potential for resolution. Nevertheless, the Supreme Court affirmed, explaining that an insurer faced with a demand contingent on agreements with others (such as when there are other insurers) can still "meet the portion of the demand over which it has control, thus doing what it can to effectuate the settlement."
The shift in the duty that was subtle in Brightman has been brought to the fore in Fortner v. Grange Mutual Insurance Co., which was decided by the Supreme Court of Georgia a few months ago. In Fortner, the claimant made a policy-limits demand contingent upon another insurer paying an additional amount. The insurer tendered its limit in exchange for a full release of its insured with indemnification, including dismissing the claim against its insured with prejudice. The claimant treated the counteroffer as a rejection and proceeded to trial, where a jury returned a verdict for the claimant for $7 million. The tortfeasor subsequently assigned his failure-to-settle claim to the claimant. Following a trial on the failure-to-settle claim, the jury returned a verdict for the insurance company.
The Court of Appeals affirmed the jury verdict based on the Brightman safe harbor rule, but the Supreme Court reversed, finding that the insurance company had not offered its limits because it required full release of its insured. The Supreme Court concluded, the jury should have been instructed to consider whether the condition was reasonable. Consequently, even though the insurer was seeking to protect its insured by negotiating for a dismissal, a jury must determine whether that effort was reasonable.
An insurance company’s duty to act reasonably in considering settlement demands is based on the duties owed to the insured, not the claimant. The insurance company’s request for a full release in Fortner was intended to protect its policyholder from excess liability. Nonetheless, based on Fortner, an insurance company may still be found to have breached its duty to settle since the claimant may have been left without full recourse. This shift continues to broaden the insurance company’s duty to settle from considering the interests of the insured to including the interests of the claimant as well.