Insurers Beware: Extra-Contractual Liability Lurks In Policy Limits Demands


By:  Phil Savrin and Darl Champion
The Georgia Supreme Court has issued an important decision on an insurer’s exposure to extra-contractual damages when rejecting a settlement demand within policy limits.  In Fortner v. Grange Mut. Ins. Co., Case No. 209G0492, 2009 WL 3334632 (Ga. Oct. 19, 2009), the insured was sued for injuries received in a car accident.  The insured had two liability policies:  one with Grange Mutual Casualty Company that had a $50,000 liability limit, and annother with Auto Owners Insurance Company that had a $1 million limit.  The plaintiff made a limits demand to Grange Mutual contingent on Auto Owners paying $750,000.  Grange Mutual agreed to pay its $50,000 limit, but only if plaintiff dismissed the claims against the insured.  The plaintiff regarded Grange Mutual’s offer as a rejection of the demand and proceeded to trial, where he obtained a $7 million judgment against the insured.
The insured then assigned its claims to plaintiff, who sued Grange Mutual directly for unreasonably rejecting the limits demand.  The claim was brought under case law that holds an insurer liable for the full amount of a judgment if it unreasonably refuses to pay policy limits, thereby placing its own pecuniary interests above those of the insured in forcing the case to trial.  Stated otherwise, the insurer can play with its own money but not with the insured’s.  The bad faith case itself proceeded to trial, where the jury was instructed that an insurer faced with a policy limits demand can avoid liability by tendering its policy limits.  This instruction was based on Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003), where a policy limits demand was conditioned on the acceptance of a demand on another insurer as well.  In that situation, the Supreme Court had reasoned, the insurer could avoid liability by tendering its policy limits and allowing the plaintiff to negotiate with the other insurer.  Even if the case does not settle, the insurer would be doing everything within its control to meet the plaintiff’s demand.
Based on the instruction provided, the jury returned a verdict for Grange Mutual, finding its response to the policy limits demand was reasonable.  Plaintiff appealed to the Court of Appeals, which affirmed the verdict.  Fortner v. Grange Mutual Cas. Co., 294 Ga. App. 671, 669 S.E.2d 658 (2008).  The Supreme Court granted certiorari review, however, and reversed.  The Supreme Court focused on the fact that the condition imposed by Grange Mutual of dismissing the insured would have required plaintiff to forego access to the $1 million Auto Owners policy.  The jury instruction was erroneous because it did not account for the conditions imposed by Grange Mutual.  The Supreme Court expressed no opinion on the reasonableness of that condition but simply vacated the judgment in favor of Grange Mutual based on the erroneous instruction.
Although Grange Mutual’s conditions may have made acceptance impractical, the insurer may have been motivated to put the insured’s interestsabove its own by agreeing to pay the limit only if the insured was protected as well.  It is unclear from the opinion whether Grange Mutual attempted to obtain a limited release under O.C.G.A. § 33-24-41.1, which allows automobile liability insurers to tender their limits in exchange for a release of the insurer and any personal liability of the insured, leaving other insurers only exposed to liability.  An offer under this statute might have been viewed differently by the Supreme Court.  Nevertheless, insurers should be wary of responding to demands within policy limits with any conditions at all.  As this decision shows, even conditions beneficial to the insured can create grounds for extra-contractual liability if the conditions would have an adverse effect on the plaintiff.