Bad faith is found if disputed issue of fact concerns a collateral issue and the insurer failed to investigate.When a disputed question of fact regards a collateral issue, however, the insurer does not have a reasonable ground for contesting liability for damages from a covered claim.
Georgia Farm Bureau Mut. Ins. Co. v. Murphy
In Georgia Farm Bureau Mut. Ins. Co. v. Murphy, the insured was driving while intoxicated, lost control of her car and hit a tree. Although a front tire was flat, she drove another 11 miles. Her right rear assembly fell off, but she continued driving another 20 miles until her car caught fire. The insured sought coverage for a total loss to her vehicle. The insurer denied, arguing that the damages stemmed from the fire rather than the impact with the tree. The insured’s expert examined the car and testified that the frame was so warped by the impact with the tree that the car was totaled before it ever caught fire. The jury found in favor of the insured on coverage and awarded bad-faith damages.
The Court of Appeals affirmed, reasoning that the insurer had failed to investigate whether the car was totaled by the impact with the tree.
“[A] failure upon the part of [an insurer] to investigate [an] alleged loss or damage, and a denial upon the part of the company of any liability whatsoever upon the ground that such loss or damage was not recoverable under the policy, but arose from some cause not covered by the policy, may be considered as evidence of bad faith on the part of the insurance company in refusing to pay for such loss or damage.”1 The court noted that the insurer “knew at the time the claim was investigated that the car was damaged by its collision with the tree before it was damaged by the fire, and that there was no question that [the insurer] was liable under the policy for the damage stemming from that original collision.” Therefore, there was no reasonable basis for the insurer’s failure to investigate the extent of damage caused by the covered collision. Questions of fact regarding a collateral issue – the post-collision fire – were not a “reasonable ground” for the insurer to contest its liability for damages stemming from a covered claim.
Federal Ins. Co. v. National Distributing Co., Inc.
In Federal Ins. Co. v. National Distributing Co., Inc., an alcohol distributor based in Georgia employed a Florida resident as a salesperson. The employee caused an auto accident in Florida while traveling on company business. The claimant sought punitive damages. The insurance policy provided coverage for punitive damages. Coverage for punitive damages is allowed in Georgia, but Florida courts have ruled that insurance coverage for punitive damages is contrary to public policy. The insured settled the case, and the insurer refused to indemnify the insured for the settlement amount that reflected punitive damages, arguing that Florida law applied to the issue of insurance coverage. The appellate court concluded that Georgia law applied to insurance coverage, meaning there was coverage for punitive damages. Nonetheless, the insurer was not liable for bad-faith damages as a matter of law, because the choice-of-law issue was reasonably disputed.