by | Mar 24, 2022 | Insurance Law

The Georgia Supreme Court recently permitted a bad faith failure to settle lawsuit to proceed against the insured even when the insurer had not received notice of the underlying personal injury lawsuit.

In Geico Indemnity Co. v. Whiteside, 857 S.E.2d 654 (Ga. 2021), the Georgia Supreme Court held that a liability insurance company’s refusal to settle a case pre-litigation could give rise to a bad faith failure to settle claim, even though the insured breached the policy by failing to notify the insurer of a lawsuit against her.  The focus of the Court was whether the insurance company should have reasonably foreseen that the insured would breach the policy, as well as reasonably foreseeing the consequences that would flow from such a breach.

The Whiteside case involved a permissive user of a vehicle insured by Geico.  The permissive user, Bonnie Winslett, caused an accident with a bicyclist.  Geico investigated, and then acknowledged, that Winslett was a permissive user of the insured vehicle and that Winslett was at fault for causing the accident.  When Geico learned about the accident, it notified Winslett that Geico would negotiate a settlement of the claim directly with the bicyclist’s attorney.  Winslett was not provided with a copy of the Geico policy, nor was Winslett advised regarding her obligations under the policy to cooperate and to provide notice of lawsuits.  Specifically, Geico did not advise Winslett that she had an obligation under both the insurance policy and Georgia statute OCGA §33-7-15(b) to notify Geico when she was served with a complaint.

Prior to the filing of the lawsuit, the bicyclist’s attorney made a time limit demand for policy limits.  Geico made a counteroffer to the policy limits demand.  The bicyclist’s attorney did not respond to the counteroffer and ignored multiple Geico follow-up calls and letters.  Thereafter the bicyclist’s attorney filed suit against Winslett.  The attorney did not inform Geico of the lawsuit.  Winslett did not inform Geico that she had been sued, nor did Winslett forward the suit papers to Geico.  Nevertheless, Winslett called the bicyclist’s attorney and was instructed by a paralegal to contact Geico.  Instead of doing as she was instructed, Winslett discarded the summons and complaint.  Later in the proceeding, Winslett asserted that she did not notify Geico of the lawsuit because she thought Geico was already handling the lawsuit based on the prior communication where Geico notified her it would negotiate a settlement of the claim.

After hearing, the trial court entered a default judgment in excess of $2.9 million against Winslett.  As a result, Winslett declared involuntary bankruptcy.  Thereafter, the  bankruptcy trustee, Whiteside, filed a bad faith failure to settle lawsuit against Geico.  Both during and after the jury in the bad faith lawsuit reached its verdict, Geico sought a ruling from the court, as a matter of law, that Winslett’s breach of both its policy notice provision and her statutory obligation to notify the insurer precluded liability.  The motion was denied with the District Court ruling that Geico was a proximate cause of Winslett’s failure to notify Geico of the lawsuit.  The verdict was then appealed to the 11th Circuit Court of Appeals.

The 11th Circuit U.S. Court of Appeals certified the issues to the Georgia Supreme Court.  Regarding the first certified question – when an insurance company receives no notice of the lawsuit against its insured did OCGA §33-7-15 and the policy relieve the insurer of liability?  The Supreme Court answered this question with a “qualified no.”  Regarding the second certified question – if the notice provisions do not bar liability for a bad faith claim, can an insured still sue the insurer for bad faith when the insured has lost coverage for failure to comply with the notice provisions before the judgment is entered?  The Georgia Supreme Court answered this question with a “qualified yes.”

The Court found that there was a flaw in Geico’s argument.  The trustee did not seek remedies for breach of the insurance contract.  With respect to a breach of contract claim, it would be correct that Winslett’s breach would have precluded the breach of contract claim.  Given this situation, the issue was not whether Winslett breached a condition precedent to coverage under the contract.  Rather, the trustee’s actions sounded in tort for failure to settle.  Thus, the question was “whether Winslett’s breach was an intervening act sufficient to break the causal chain between Geico’s unreasonable rejection of the bicyclist’s settlement demand and the excess default judgment entered against Winslett.  With respect to this issue, the Georgia Supreme Court noted that Geico reasonably should have foreseen Winslett’s breach and the consequences flowing from it, then the breach did not break the causal chain.  The Court ascribed to Geico knowledge of Winslett’s unreliability and lack of sophistication and as a knowledgeable insurer, Geico should have concluded that such a person did not notify Geico of a lawsuit or respond to one served upon her.