National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Several years ago, the Georgia Supreme Court recognized the dilemma that such cases pose for primary insurers and ruled in Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003) that an insurer is not protected from liability merely because the plaintiff’s demand against it was conditional on a second insurer also making an offer of settlement. In such circumstances, the court ruled that even though the insurer had no control over the involvement of the second carrier, it was nonetheless obligated to give equal consideration to its policyholder’s financial interests by offering its limits.

The Supreme Court disagreed with the 2002 analysis of the intermediate appellate court (256 Ga. App. 451 (2002) that would have imposed an affirmative obligation on the part of the insurer to engage in negotiations concerning a settlement demand within policy limits. The Supreme Court ruled that it was “unwilling to ascribe a duty to insurers to make a counter-offer to every settlement demand that involves a condition beyond their control. Instead, we conclude that an insurance company faced with a demand involving multiple insurers can create a safe harbor from liability for an insured’s bad faith claim under Holt by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured.”

Last month, however, the Georgia Supreme Court held that a primary insurer might have been liable for a bad faith failure to settle notwithstanding the “safe harbor” recognized in Brightman. In Fortner v. Grange Mut. Ins. Co., S09G0492 (Ga. October 19, 2009), the plaintiff was injured in a car accident caused by Alan Arnsdorff. At the time, Arnsdoftf had a $50,000 policy with Grange Mutual as well as a $1 million limit with the Auto Owners policy issued to his plumbing business. Fortner offered to settle the claims for $50,000 contingent on Auto Owners’ payment of $750,000.

Although Auto Owners did not respond within the time limit set forth by Fortner, Grange responded that it would pay its $50,000 limit contingent on Fortner signing a full release within indemnification language and dismissing his claim against Arnsdorff with prejudice. Fortner considered this a rejection of his offer and took the case to trial where he won a $7 million verdict that was affirmed on appeal. As is often the case in such matters, Arnsdorff then assigned his rights to Fortner who brought a bad faith action against Grange for failing to settle.
At trial, the jury ruled in favor of Grange. On appeal, Fortner argued that the trial judge had erred in instructing the jury that it must rule for the insurer if it had offered its policy limits.

This instruction was affirmed by the Georgia Court of Appeals.  On furthe rreview, however, the Georgia Supreme Court ruled on October 19, 2009 that the instruction had precluded the jury from considering whether Grange Mutual had breached its obligations by imposing those conditions. It declared that its earlier analysis in Brightman was limited to situations in which the insurer had done everything within its power to effect a settlement. In this case, it was Grange Mutual that had elected to impose the conditions that the plaintiff enter a full dismissal with prejudice of its rights against the insured and agree to indemnify it.

Noting the fact that Fortner had eventually obtained a $7 million judgment, the court found that any such argument would have required Fortner to forfeit his access to Arnsdorff’s $1 million business policy, a condition that was entirely within Grange Mutual’s control. The Supreme Court declared, therefore, that it was not enough to instruct the jury that a liability insurer is blameless if it has tendered its limits but must also consider whether conditions are added to the offer. The case was therefore remanded to the trial court for further consideration of whether the insurer had acted in an ordinarily prudent manner in its response to Fortner’s settlement offer.
 

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

Michelle’s parents were divorced. She lived with her father, Charles, and grandmother, Evelyn. Her mother lived with a man (Barnett) that had a homeowners policy with Safeco. The claim by the injured boyfriend was tendered under Barnett’s policy.  Safeco denied, was sued, and was ultimately (years and a court decision later) found to be correct.  See Safeco Ins. Co. v. Parks (2004)122 Cal.App.4th 779 (“Safeco I”).

During that bad faith case, discovery was sought of other policies issued by Safeco “providing coverage for the nature and extent of the damages alleged.”  Safeco objected to the discovery. Parks did not move to compel.

Behind the scenes (the Safeco II court tells us), Safeco knew Miller lived with her father. Safeco’s unit manager had apparently instructed the adjuster to determine whether Michelle had other applicable insurance. The court noted that Safeco’s claim file did not show it searched for policies for the adults with whom Michelle resided “nor did Safeco interview Michelle’s father or grandmother to determine whether they had Safeco policies that might cover her claim.”  No mention is made of whether the claimant’s lawyer deposed the father or grandmother or conducted any discovery for policies other than sending the request to Safeco, which the lawyer failed to pursue.

As it turns out the grandmother owned the home in which Michelle lived and had a homeowners policy with Safeco. Once this came to Safeco’s attention, Safeco acted promptly and paid policy limits.  But too much water was already under the bridge. There had been a policy limits demand and an excess judgment.

The lesson in all of this? Follow the claim supervisor’s instructions.  Search for logical sources of insurance coverage for a claim. Document any search conducted. Hindsight is always 20/20.