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IN GEORGIA, INSURERS’ REASONABLE DENIAL OF COVERAGE VITIATES BAD FAITH CLAIM

Posted by Susan J. Levy

Most jurisdictions agree that a first party insurer reasonably handling an insured’s claim will not be liable for bad faith as long as it has a “legitimate, arguable or fairly debatable reason for denying (or delaying payment) of a claim.” Patrick J. Brighton and Ronald J. Clark, Preventive Measures to Avoid or Minimize Bad Faith Risks, DRI Presentation – Insurance Bad Faith (June, 2007).

Every insurer has what bad faith legal expert Ronald Clark calls a “right to be wrong” or, put another way, the right to deny coverage reasonably, even if incorrectly. Douglas G. Houser, Ronald J. Clark, and Linda M. Bolduan, Good Faith as a Matter of Law – An Update on the Insurance Company’s ‘Right to Be Wrong,’ Tort Trial & Ins. Practice L.J., Summer 2004 (39:4)

Georgia is no exception: If there are reasonable grounds for contesting the insured’s claim, it is error for courts to award bad faith penalties and attorneys’ fees. Georgia courts also recognize that dispositive motions to dismiss and for summary judgment are the proper vehicles to enforce the rights of insurance companies to reasonably deny claims, without resorting to a jury trial.

The law on bad faith penalties in Georgia is governed by O.C.G.A. § 33-4-6, Liability of Insurer for Damages and Attorneys’ Fees:

[I]n the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liable to pay such holder, in addition to the loss, not more than 50% of the liability of the insurer for the loss or $5,000, whichever is greater, and all reasonable attorneys’ fees.

Under this statute, the insured bears the burden of proving that the refusal to pay the claim was made in bad faith. Southern Fire & Cas. Ins. Co. v. Northwest Ga. Bank, 209 Ga. App. 867 (1993); (Interstate Life & Accident Ins. Co. v. Williamson, 220 Ga. App. 323 (1964)). Penalties for bad faith are not authorized where the insurance company has any reasonable grounds to contest the claim and where there is a disputed question of fact. The insurer’s investigation need not be flawless, as long as its refusal to pay on the policy was not for “frivolous” or “unfounded” reasons. Moon v. Mercury Ins. Co. of Ga., 253 Ga. App. 506 (2002) (Quoting Southern Fire, 209 Ga. App. at 868). Worsham v. Providence Co. clarified the standard: “A defense going far enough to show reasonable and probable cause for making [the refusal] . . . would vindicate the good faith of the company as effectually as would a complete defense to the action.” Worsham v. Providence Co., 249 F. Supp. 2d 1325, 1342 (N.D. Ga. 2003).

In another case, the plaintiff sued the insurer for bad faith breach of the terms of her automobile insurance policy when it refused to pay covered losses allegedly caused by theft of her vehicle. The jury awarded plaintiff damages on the breach of contract claim as well as bad faith penalties and attorneys’ fees pursuant to O.C.G.A. § 33-4-6. The appeals court reversed the bad faith award, despite affirming the portion of the jury’s verdict finding that the loss was covered by the policy. The court focused on evidence introduced by the insurer that under the policy, plaintiff’s claim was fraudulent.

Since there was a genuine conflict about whether plaintiff’s claim was legitimate, the insurer’s grounds for refusing to pay the claim could not be “frivolous” or “unfounded.” “It is the very fact that certain factual issues regarding the merits of the claim are in genuine conflict that causes there to be no conflict, as a matter of law, whether an insurance company had reasonable grounds to contest the particular claim.” So, even though the plaintiff produced evidence that her claim was not fraudulent and the insurer was obligated to pay for the loss under the policy, the appeals court reversed the jury’s verdict that the insurers refusal to pay was in bad faith. Allstate Ins. Co. v. Smith, 266 Ga. App. 411 (2004).