The Equal Consideration Rule
The “Equal Consideration Rule” provides the standard by which an insurance company’s decision to not settle a claim against its insured is measured. The standard was pronounced five years after Smoot I, when the Georgia Court of Appeals in United States Fidelity & Guar. Co. v. Evans expressly recognized that a cause of action against a liability insurer for failing in its duties to properly protect its insured arises “in tort and naturally involves a duty and an alleged breach of that duty.” Deciding that a duty exists begs the question, however, which the court itself asked: “What then is the duty?” The answer to that question, which is the holding in Evans, is best understood in its factual context. The underlying lawsuit in Evans was a typical car-wreck case resulting in a verdict against the insured in excess of policy limits. Following the verdict, the claimant offered to settle for policy limits, apparently preferring quick and certain payment over waiting for an appeal to run its course. The insurer refused, lost the appeal for a new trial and tendered policy limits, leaving the insured “holding the bag” for the amount in excess of policy limits. The insured filed suit against the insurer, and a jury found bad faith, entitling the insured to the difference between the judgment and policy limits. The insurer appealed, arguing that it should not be penalized for exercising its right to appeal a judgment.
The issue of law for the Evans court was whether there could be bad faith if the insurer’s decision to appeal the underlying lawsuit was not frivolous. The insurer had argued that it could not be liable as a matter of law for failure to settle so long as its decision not to settle was supported by a non-frivolous defense pursued on behalf of the insured. The court rejected the standard, suggesting that such an analysis would turn on whether the insurer had sufficiently “consult[ed] its own self interest” in rejecting the settlement offer and deciding to assert the defense on appeal. Such a standard was inadequate, the court reasoned, because it would require no analysis as to whether the insurer had consulted the insured’s interests. Noting that the insurer must do more than merely refrain from making frivolous decisions while handling litigation against its insured, the court held as follows:
As a professional in the defense of suits, [the insurer handling the defense] must use a degree of skill commensurate with such professional standards. As the champion of the insured, [the insurer] must consider as paramount his interests, rather than its own, and may not gamble with his funds.
What The Court Wrote
Stated differently, the court wrote as follows:
[T]he insurer must accord the interest of its insured the same faithful consideration it gives its own interest. While this rule will not be as simple to apply in differing circumstances . . . we think it states the duty owed by any prudent insurer to refrain from taking an unreasonable risk on behalf of its insured, e.g., where the chances of unfavorable results on appeal are out of proportion to the chances of favorable results.
Applied to the facts at issue in Evans, the Court of Appeals held that it could not, as a matter of law, reverse the jury’s determination that the insurer had failed to accord its insured’s interests equal consideration to its own. Indeed, the court reasoned that the insurer was the only party who could possibly benefit from the appeal, as a successful appeal would only subject the insured to another trial and another opportunity to be subject to a judgment in excess of policy limits. A reasonable jury could find that the insurer had failed to consider its insured’s interests in refusing to settle within policy limits, cap everyone’s damages, and remove the insured’s risk of future liability exposure.
The Georgia Supreme Court affirmed Evans with little discussion. Almost 20 years later, Georgia’s highest court approved Evans and expressly held as follows:
An automobile liability insurance company may be liable for damages to its insured for failing to adjust or compromise the claim of a person injured by the insured and covered by its liability policy, where the insurer is guilty of negligence or of fraud or bad faith in failing to adjust or compromise the claim to the injury of the insured. Hence, where a person injured by the insured offers to settle for a sum within the policy limits, and the insurer refuses the offer of settlement, the insurer may be liable to the insured to pay the verdict rendered against the insured even though the verdict exceeds the policy limits of liability. The reason for this rule is that the insurer may not gamble with the funds of its insured by refusing to settle within the policy limits.
In determining whether to settle a claim, an insurance company must give its insured’s interests “equal consideration.” The Georgia Supreme Court described the “equal consideration rule” as follows:
In deciding whether to settle a claim within the policy limits, the insurance company must give equal consideration to the interests of the insured. The jury generally must decide whether the insurer, in view of the existing circumstances, has accorded the insured “the same faithful consideration it gives its own interest.”
The “equal consideration” rule has been stated in many different ways over the years. Its significance, however, is not in the terminology used, but in the definition of the care to be exercised by the insurer. An insured may recover for the insurer’s failure to settle within policy limits if the insurer (1) failed to give equal consideration to the interests of the insured; (2) failed to accord its insured the same faithful consideration it accords its own interests; (3) refused to settle because of an arbitrary or capricious belief that the insured was not liable; or (4) capriciously refused to entertain a settlement offer with no regard given to the position of the insured. The insurer is negligent in failing to settle if the ordinarily prudent insurer would consider that a decision to try the case created an unreasonable risk. The insurer’s liability for the entire judgment, including amounts in excess of policy limits, arises from the failure of the insurer to exercise the proper standard of care in refusing to settle.