When a business or an individual purchases an insurance policy, the insurer is placed under a legal obligation to protect them against financial losses and legal claims that may be made against them.  However, it is not uncommon to find insurance companies placing the desire to increase profits far ahead of this obligation to their insured. Such insurers invest very limited human and financial resources in their claims offices and thrive in a culture where customer claims are denied in bad faith.  A bad faith claim against an insurance company arises in cases where such an insurer wrongfully declines or otherwise fails to pay the insured’s claim. It may also arise where the insurer fails to provide the insured with a legal defense when a claim is brought against the insured. When this happens, the insured and claimant are left exposed to suffer loss and thus have a right to sue the insurer for acting in bad faith.

There exists a variety of risks against which individuals and businesses need to protect themselves against. Conversely, insurance companies offer a wide range of policies and insurance covers that individuals and businesses can purchase. For instance, automobile owners normally purchase automobile insurance to protect themselves in the event of a claim or lawsuit being instituted against them by another party (liability insurance) and against financial loss which they may suffer in the form of medical payments, uninsured motorist coverage and others.   Disability coverage is also available for employers and their employees to protect the employees in the event they become disabled at work and are rendered unable to continue working. Homeowners on the other hand purchase insurance cover to protect themselves both against the possible loss of the home and property as well as against negligence claims brought against them. Finally, businesses purchase insurance covers targeted at shielding the business in the event of loss of business assets, interruption of the normal business operations as well as claims instituted against the business. These individuals and businesses stand to suffer tremendous losses in case of the insurer, acting in bad faith, failing to make good the claims placed before it.

What is Bad Faith?

The principle to act in good faith is inferred and inherent in each contract of insurance between the insurer and the insured. This unique insurer-insured relationship, which has been defined by Georgia courts as “fiduciary”, requires that both the insurer and insured uphold the obligations under the insurance contract in trust and utmost good faith in all their dealings. On the part of the insurer, bad faith will usually arise in wrongfully denying, withholding or delaying benefits due to the insured when a legitimate claim has been filed with the insurer arising from a valid policy.

The law requires that once a claim has been brought before an insurance company, then the company has to pay or deny the claim without undue delay. It must also promptly answer any questions and concerns that the person making the claim (the claimant) may have.  The insurer may also not unduly extend the claim period by requiring frivolous paperwork from the claimant or by delaying adjustment of the claim. Where it denies the claim, the insurer must not only show the claimant the provision in the policy that supports the denial, it must also offer an explanation as to why the claim has been denied. Finally, the insurer must protect the insured from an excessive liability judgment, by settling any valid claim in a timely manner. Beyond these responsibilities, bad faith law imposes other good faith and fair dealing obligations that insurance companies must comply with. These are imposed by statute and depend on the type of policy involved.

Bad Faith in First Party Insurance

First party insurance refers to insurance that is taken for the benefit of the insured. That means that the insured is paid directly when he or she sustains loss arising from a risk covered under the policy. Some examples of First Party insurance policies are automobile insurance, whereby the insured receives compensation for collisions, medical payments, and comprehensive losses such as fire and theft; homeowners’ coverage, protecting against damage to property; and commercial insurance protecting against losses arising from business interruptions. While bad faith failure to pay first party claims is not a common law tort in Georgia, a statutory remedy O.C.G.A. § 33-4-6 was introduced by legislators imposing a penalty of the greater between fifty percent of the liability and $5,000 on an insurance company that acts in bad faith. This penalty is awarded to the insured in addition to the loss itself together with fees reasonably payable to an attorney. This statute defined bad faith as a “frivolous and unfounded refusal to pay a claim.”

A number of requirements are however placed on the insured when establishing bad faith, which must be complied with and proven before such an award can be made. These are that a dollar specific demand must have been made, together with an alert to the insurer that the insured is asserting bad faith, and allowing the insurer thereof 60 days to pay the claim

Bad Faith Under The Uninsured Motorist Statute

The applicable Georgia statute in the case of bad faith refusal to pay an uninsured motorist (UM) is O.C.G.A. § 33-7-11. This statute imposes similar penalties upon an insurer where proof is shown that a proper demand has been made, notice given and after 60 days the insurer has in bad faith failed to pay the uninsured motorist (UM) claim. It is however important to note that the demand requirements are specific to each statute.

For instance, compared to the first party insurance scheme, under the UM statute the penalty payable is no more than 25 per cent of the recovery, this of course in addition to payment of the covered loss and attorney fees. Likewise, the only party entitled to pursue bad faith sanctions against the insurer is the uninsured motorist. The insurer takes the place of the UM and pays the claim or defends the same, and a bad faith claim does not arise against the insurer where the insurer rightly denies coverage of the subject vehicle. This statute defines bad faith as “a frivolous and unfounded denial of liability”. Thus no bad faith claim arises where the insurer had a reasonable ground to deny the claim.

Liability Insurance Claims

The insured under liability insurance buys protection from claims that may be brought arising from his negligence. Where an insurer subsequently fails to pay the claim in bad faith, the insured, beyond the loss covered, suffers the threat of financial exposure from further claims. Due to this risk, the award likely to be made where a party brings a bad faith claim against an insurer for improperly or unlawfully handling a liability insurance claim is much higher than would be applicable to first party and UM coverage cases.

What then constitutes bad faith? According to the courts, bad faith may mean a dishonest purpose, an implied conscious wrongdoing or negligence where the same becomes a breach of a known duty. The insurance company will thus be liable to pay damages to its insured where it fails, due to its own negligence, bad faith or fraud, to settle the injured person’s claim.  In such a case, the jury will be directed to weigh the question of whether insurer would have acted the same way if it were its interests at risk.

Where a liability insurer receives a claim to settle a claim in a case where it is aware there is clear liability and the special damages exceed the policy limit, then it must, within the deadline set by the plaintiff’s attorney, communicate its intention to settle the claim to the policy limit. Even where the insurer cannot meet those deadlines, then it must procure an extension of such to avoid placing itself in substantial excess exposure. When it fails to do so, the insurer may be penalized with punitive damages, in addition to attorneys’ fees and such judgment in excess of the policy limits.

Direct Actions for Bad Faith in Automobile Property Damage

The Georgia legislature passed a law in 2001 that now allows direct actions brought by claimants arising from an insurer’s bad faith refusal to settle a liability claim for motor vehicle damage. This law, O.C.G.A. § 33-4-7 requires liability insurers to make a fair and prompt adjustment of property loss claims, undertake all efforts in investigating and evaluating such claims, and to make a good faith attempt and effort to settle such automobile accident property damage claims. The statute imposes a penalty of the greater between fifty percent of the liability and $5,000 on an insurance company that acts in bad faith, in addition to compensating the loss itself and paying attorney fees thereof.

The requirement for a dollar specific demand and 60 days alert notice to be given to the insurer remains. In the event that the insurer still does not pay, then the claimant may obtain a judgment from the court which, if the judgment is equal to or in excess of the sum claimed, then the court will award bad faith penalties to the claimant.

Conclusion

Where an insurer acts in breach of its contractual duty and acts in bad faith, then the insured policyholder may institute a lawsuit against the insurer for compensation of the loss suffered as well as damages and attorneys’ fees. One however needs to be careful to note which statute is applicable to his claim depending on the type of subject insurance policy. Although there exists some barriers on recovery, many policyholders are these days filing claims against their insurers for acting in bad faith. We would be glad to be of assistance to you should you have a bad faith claim against your insurer. Please contact us here for a free consultation.

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