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Georgia Supreme Court Clarifies the Essential Elements of a Failure to Settle Claim within Policy Limits

Posted on: March 18th, 2019

By: Phil Savrin

In recent years, Georgia has become fertile ground for setting up insurance companies for extra-contractual damages based on the failure to settle a liability claim within policy limits. Partly, the reason for this reputation is that the “ordinary negligence” standard governs these types of claims and there is broad language in the cases that a jury must generally resolve the reasonableness of the insurer’s decision not to settle the claim at issue. Of course, by the time the claim even exists there will have been a judgment entered in the liability case in excess of the limits of the policy, making it difficult to tease through the chronology of the case without the benefit of 20-20 hindsight. The challenge in defending these types of claims is often reconstructing the “lay of the land’ at the time the decision was made without the judge or jury focusing on what occurred or developed thereafter.

In 2003, the Supreme Court issued its decision in Cotton States Insurance Company v. Brightman, whose main holding is that an insurer can avoid a “failure to settle” claim altogether by tendering its limits even if the demand is conditioned on payments by other insurers over whom it has no control. A lesser known holding of Brightman, however, is its rejection of the intermediate appellate court’s holding that an insurer has an “affirmative duty” to engage in negotiations to determine whether the case can be settled within limits. Although implicit in this reasoning is that a demand for limits needs to have been made, subsequent case law has muddied the waters by suggesting that all that needs to be shown is that there was a “reasonable opportunity” for settlement within limits to state a claim for failure to settle within limits.  And because an ordinary negligence standard applies, insurers have had to defend against assertions – often backed up by expert witnesses – as to whether the insurer knew or should have known that the case could settle within the limits of coverage even in the absence of a demand.

The Supreme Court put an end to that uncertainty in First Acceptance Insurance Company of Georgia, Inc. v. Hughes, decided March 11, 2019. In a very powerful decision, the justices stated succinctly that “an insurer’s duty to settle arises when the injured party presents a valid offer to settle within the insured’s policy limits.” From that short holding it was relatively simple to find that First Acceptance could not be liable for the $5.3 million judgment because there had not been a valid time-limited demand for the policy limits of only $25,000.

Essentially, the holding of the case is that the burden is squarely on the injured party to make clear to the insurer that the liability claim against the insured can be resolved within the coverage of the policy. Although not stated expressly in the opinion, this holding makes sense given that the injured party is the only one (as opposed to the insurer or the insured) who knows at the time whether the case will settle within limits. Likewise, the effect of the decision is that the injured party must put its cards on the table in terms of its willingness to settle and not be allowed to reap rewards from keeping the insurance company in the dark as to the ability to settle within limits. In that manner, the decision restores a degree of sanity to the adjudication of these disputes by restricting the exposure to instances in which the insurance company has rejected a clear demand for settlement within its limits, with the remaining issue being whether the insurer acted reasonably considering all the circumstances that existed at that time.

If you have any questions or would like more information, please contact Phil Savrin at [email protected].

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