Statutory Bad Faith

Explanation of Bad Faith Failure to Pay an Insurance Claim

The relationship between you and your insurance company is based on the insurance policy, which is a type of contract. If your insurance company fails to pay a valid claim, it is a breach of the insurance contract. Usually, breach of contract allows an insured to recover only the amounts that would have been due under the insurance contract if the insurance company had paid the claim. In this situation, an insured who has to hire an attorney to get its claim paid is not “made whole.” This is because the insured has to wait a long time for the money it should have been paid earlier and has to pay attorneys’ fees. Insurance companies know this. Insurance companies know that the expense, risk and duration of litigation cause insureds to abandon or compromise their claims.

To partly alleviate these situations, Georgia has an insurance “bad faith” statute, O.C.G.A. § 33-4-6. Georgia’s insurance bad faith statute allows an insured to recover additional damages as a penalty and attorneys’ fees when an insurance company, following a demand from the insured, persists in its refusal to pay amounts due under a policy in “bad faith.” The purpose of the bad faith statute is to remove the incentive for unnecessary delay and to create a situation allowing an insured to be made whole in the event the insured is forced to go to court to enforce the insurance contract.

O.C.G.A. § 33-4-6 states, in part, as follows:

In 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 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney’s fees for the prosecution of the action against the insurer. The action for bad faith shall not be abated by payment after the 60 day period nor shall the testimony or opinion of an expert witness be the sole basis for a summary judgment or directed verdict on the issue of bad faith. The amount of any reasonable attorney’s fees shall be determined by the trial jury and shall be included in any judgment which is rendered in the action; provided, however, the attorney’s fees shall be fixed on the basis of competent expert evidence as to the reasonable value of the services based on the time spent and legal and factual issues involved in accordance with prevailing fees in the locality where the action is pending; provided, further, the trial court shall have the discretion, if it finds the jury verdict fixing attorney’s fees to be greatly excessive or inadequate, to review and amend the portion of the verdict fixing attorney’s fees without the necessity of disapproving the entire verdict. The limitations contained in this Code section in reference to the amount of attorney’s fees are not controlling as to the fees which may be agreed upon by the plaintiff and the plaintiff’s attorney for the services of the attorney in the action against the insurer.

The insurance bad faith statute was supposed to help normal people. Unfortunately, courts have construed it to make difficult to recover bad faith penalties unless the insured jumps through certain hoops. For example, the insured must send a “demand letter” to the insurance company before filing a lawsuit. If the insured does not send the demand letter at the right time, and if the demand letter does not say the right things, a judge will rule that the insured can recover no bad faith penalties, even if the insurance company was wrong to deny the claim.

Many insureds lose their right to a statutory bad faith claim by failing to follow the requirements of the bad faith statute. The timing and content of a demand letter has been made unnecessarily tricky, so you should consider getting legal advice if one is necessary.

Slappey & Sadd specializes in handling insurance bad faith claims under O.C.G.A. § 33-4-6. If you believe your insurance company has acted in bad faith in not paying your claim, you should consider getting legal advice so that the demand letter and other aspects of the claim are properly handled.

The vast majority of cases applying O.C.G.A. § 33-4-6 involve the insurance company’s failure to pay a loss under “first-party” coverage. First-party coverage includes claims involving only the insured and the insurer, such as payment for property damage to a home following a fire or the payment of benefits under a life or disability policy.

What is statutory bad faith in Georgia?

Many people are surprised to learn that simply because an insurance company fails to pay a valid claim, the insurance company is not necessarily guilty of bad faith. Rather, actual “bad faith” must be shown. Georgia courts have stated the test for bad faith in various ways over the years:

(1) Some courts have referred to a lack of “reasonable and probable cause” for failing to pay the claim as a test for bad faith.

(2) Other courts have looked to the absence of “good cause” for failing to pay the claim.

(3) Other courts have stated that the refusal to pay the claim must be for some “frivolous or unfounded” reason.

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