Insurers’ expanding exposure for bad faith failure to settle

This article was published in the October 2021 edition of Insurance Law Essentials Deep Dives by the International Risk Management Institute, Inc. (IRMI).

A recent decision of the Supreme Court of Georgia illustrates the changing landscape and increased exposure to liability insurers for bad faith failure to settle claims against insureds. In GEICO Indemnity Co. v. Whiteside, 311 Ga. 346, 857 S.E.2d  654  (2021), answering questions certified by the United States Court of Appeals for the Eleventh Circuit, the Court found that an insurer was liable for an excess verdict against an insured even though the insurer had never received notice that a lawsuit had been filed against the insured. Moreover, the Court   appears to  have based the damages on an uncontested hearing after a default judgment against the insured, rather than giving the insurer an opportunity to contest damages. This case demonstrates the increasing risks to insurers from excess judgments and the need to be increasingly careful in handling claims against their insureds. This case is part of a years’ long trend of expanding the potential liability to insurers.

In the past, an insurer could be liable for bad faith failure to settle in situations where it received notice of a suit against the insured, defended the insured without reservation, received a demand for policy limits from the plaintiff’s attorney, failed to settle, and went to trial which resulted in a verdict in excess of policy limits. If a court subsequently found that the insurer failed to accept the limits demand in bad faith, then it would be liable for the entire verdict even in excess of policy limits. More recently, some of these elements have begun to loosen and insurers have greater exposure. For example, an insurer can be liable for an excess verdict where it fails to accept a limits demand made before the a lawsuit is filed.

In other cases, insureds (or excess insurers) have settled an underlying claim for an amount in excess of policy limits and been permitted to recover the full settlement from the primary insurer. The result of this trend is to create an environment where insurers need to be proactive in handling claims and thoroughly train claim professionals to be aware of their obligations in the given jurisdiction and to take all necessary actions to protect the policyholder.

GEICO Indemnity v. Whiteside: No Notice Required

The facts

Like most bad faith cases, the facts of Whiteside are somewhat complicated, but it is important to review the facts in some detail. In February 2012, Bonnie Winslett (“Winslett”) was driving a car with permission of the owner, Karen Griffis. Winslett struck and injured Terry Guthrie (“Guthrie”) who was riding a bicycle. Griffis’s vehicle was insured by GEICO. The policy limit was $30,000 per person.

GEICO was notified of the accident and sent a letter to Winslett stating that “based on the evidence we have gathered, we are responsible for the accident, Mr. Gutherie was injured in this accident and we will be handling this injury directly with” Gutherie’s attorney. The Court specifically noted that Winslett was not the named insured on the policy and did not have a copy of the policy. Importantly, the Court also noted that “GEICO did not ask Winslett to forward to it any accident-related legal documents, even though its claims manual advised its claims examiners to do so.” In addition, GEICO did not inform Winslett that she had an obligation pursuant to the policy to notify GEICO if she was sued.” 857 S.E.2d at 658.

On May 15, 2012, with no suit pending, Gutherie’s lawyer sent a letter to GEICO demanding that GEICO tender its $30,000 policy limit within thirty days to settle the claim against Winslett. The letter advised GEICO that as of that date, Gutherie’s medical expenses exceeded $10,000, and that additional treatment would be necessary. On May 23, GEICO rejected the demand and made a counteroffer of $12,409. When it made the counteroffer, GEICO had been informed that Gutherie’s medical expenses were closer to $15,000. Gutherie’s counsel did not respond to the counteroffer. GEICO’s claim professional continued her efforts to contact Gutherie’s attorney regarding settlement. She followed up on her counteroffer about a week after it was made by calling counsel and leaving a voicemail. About a month later, she tried calling again and left another voicemail. She tried calling again a few weeks later but was told that counsel and his paralegal were not available. Counsel did not respond to those calls. Id. There is no indication that Winslett was contacted by the claim professional.

On May 29, six days after GEICO rejected the settlement demand, Gutherie filed suit against Winslett in Georgia state court. Gutherie’s attorney did not inform GEICO of the suit or provide a courtesy copy of the complaint. Winslett was served with the complaint but did not inform GEICO or send the suit papers to it. She called Gutherie’s law firm and a paralegal instructed her to contact GEICO. Despite this instruction, Winslett discarded the papers without advising GEICO. She explained that she did not notify GEICO of the suit because she thought GEICO was already handling it based on its communication with her. Winslett did not answer the complaint or appear in court. Id. at 658-59.

On August 1, 2012, following a hearing, the trial court entered a default judgment against Winslett in the amount of $2,916,204. The Supreme Court did not describe what occurred procedurally, but it appears to have been essentially an uncontested prove-up. Gutherie’s counsel informed GEICO of the judgment a week later. GEICO retained counsel on Winslett’s behalf, which filed a motion to set aside the judgment. On November 30, following an evidentiary hearing, the superior court denied the motion. The Georgia Court of Appeals affirmed. After the appeal was completed, Gutherie began attempting to collect on the judgment. He forced Winslett into involuntary Chapter 7 bankruptcy, and the bankruptcy court appointed a bankruptcy trustee, Whiteside. On the motion of Whiteside, the bankruptcy court appointed Gutherie’s personal injury attorney to represent the bankruptcy estate in investigating a failure-to-settle action against GEICO. Id. at 659.

Whiteside then filed suit against GEICO in federal court in Georgia, alleging that GEICO negligently or in bad faith failed to settle Gutherie’s claim against Winslett, which resulted in a judgment in excess of policy limits. During trial, GEICO filed dispositive motions arguing that Winslett’s failure to provide notice of the suit relieved it of any liability to pay the judgment. GEICO also argued that it could not be the proximate cause of the default judgment because it was Winslett that failed to notify it of the suit. GEICO further argued that it was unconstitutional to use the default judgment as the measure of damages because GEICO did not have an opportunity to contest the damages in the underlying case. Id. at 659-60.

The district court denied the motions. The court found that Winslett’s failure to give the required notice of the suit did not prevent her from recovering against GEICO for failure to settle where GEICO was a proximate cause of Winslett’s failure to give notice of the suit. The district court instructed the jury that if GEICO was a cause of the default judgment, then it would be responsible for paying Winslett’s compensatory damages. The court also used the default judgment as the appropriate measure of damages. The jury found that GEICO was 70% liable for the default judgment and Winslett was 30% liable. Judgment was entered against GEICO for $2.7 million.

The Supreme Court's legal analysis

On appeal to the Eleventh Circuit, the court certified three questions to the Georgia Supreme Court:

(a) When an insurer has no notice of a lawsuit against its insured, does OCGA § 33-7-15 [requiring notice provisions] and a virtually identical insuring provision relieve the insurer of liability from a follow-on suit for bad faith?

(b) If the notice provisions do not bar liability for a bad faith claim, can an insured sue the insurer for bad faith when, after the insurer refused to settle but before judgment was entered against the insured, the insured lost coverage for failure to comply with the notice provision?

(c) Does a party have the right to contest actual damages in a follow-on suit for bad faith if that party had no prior notice of or participation in the original suit?

Id. at 660.

On the first question, the Court answered with a “qualified no.” Id. at 363. In reaching this conclusion, the Court relied on distinctions between contractual duties and tort duties:

At issue in the matter before us is not whether Winslett breached a condition precedent to coverage under the contract of insurance. Clearly she did. Rather, in this tort action, the question is whether Winslett’s breach was an intervening act sufficient to break the causal chain between GEICO’s unreasonable rejection of Gutherie’s settlement demand and the excess default judgment entered against Winslett. The answer to this question turns on whether the facts of the case supported a finding that GEICO reasonably should have foreseen Winslett’s breach and the consequences flowing from it.

In other words, the Court found that GEICO had unreasonably failed to accept the limits demand made prior to the underlying plaintiff filing suit and that this was a cause of the subsequent excess judgment. The question was whether Winslett’s admitted breach of the notice provision was an intervening or superseding cause of the excess judgment. The Court  thus used a tort analysis to evaluate the consequences of failure to comply with a condition precedent to coverage.

In its analysis of this issue, the Court relied heavily on the fact that the claim professional never explicitly informed Winslett that she should notify GEICO if she was sued. The Court reasoned that GEICO knew that Winslett was not the named insured and likely would not have had a copy of the policy. The Court also noted several facts available to GEICO that would have put it on notice of Winslett’s unreliability and lack of sophistication. Winslett had testified that she did nothing after being served because she believed GEICO was handling the claim based on its prior contact with her. Id. at 664.

Returning to the tort/contract distinction, the Court found that the notice provision related to obligations when a suit is brought against the insured for losses covered under the policy for which the insurer would be obligated to pay on behalf of the insured for the insured’s liability to another. Whiteside’s suit did not relate to a liability claim under the policy, but rather Whiteside asserted a tort claim for breach of GEICO’s duty to settle and sought damages owed to Winslett, not owed on her behalf. While an insured’s breach of the notice provision could preclude a bad faith claim if it were the sole proximate cause of the excess judgment, under the facts of this case the breach of the provision did not bar bad faith liability as a matter of law. Id. at 665–66. An important reason was the court’s finding that GEICO breached its duty to settle before suit was filed.

On the second question, the Court answered with a qualified yes, reasoning that before receiving a settlement demand, GEICO had accepted responsibility for the accident and had determined that Winslett was an insured. As Winslett was covered under the policy at that time, GEICO’s duty to settle arose as soon as GEICO received the time-limited policy limits demand, and GEICO breached this duty when it unreasonably rejected the demand. After the breach of that duty, the question for the jury was whether GEICO should have foreseen Winslett’s failure to notify it of any suit and any consequences of that failure.

On the third question, the court answered no. The Court reasoned that the measure of damages in a failure to settle case is the amount by which the judgment exceeds the policy limits. The Court rejected GEICO’s argument that it was deprived of due process where it did not have an opportunity to litigate the true value of Guthrie’s damages. The Court also found that allowing GEICO to relitigate the amount of damages would potentially result in Winslett not being made whole for the full amount of the judgment against her.

Although the insurer never received any notice of the lawsuit, it is fair to wonder whether the outcome of Whiteside might have been different had the claim professional better communicated with Winslett regarding the  claim, including advising her to notify GEICO  if she was served with a complaint. Many claim professionals advise the insured in writing if there is a settlement demand within limits and provide an explanation of why the demand was not accepted. If the demand is before suit, the  claim professional could also specifically tell the insured (especially if she is not the named insured) that if she is served  with  a complaint to immediately advise the claim professional and forward a copy of the complaint.

In addition, there was no evidence that the  GEICO  claim professional ever attempted to contact Ms. Winslett when the claimant’s attorney failed to respond to her calls or written communications.

Had the insurer learned of the complaint when it was filed, the claimant may still not have accepted any offer to settle and the case may still have gone to trial resulting in an award of damages. However, GEICO would have had an opportunity to defend, to conduct discovery, and to put on a defense at trial, rather than having a prove-up. Discovery and a full trial could have allowed GEICO to potentially vindicate the evident doubts leading it to make the pre-suit offer that it did.

Lessons for Insurers and Insureds

The Whiteside decision is only the most recent example of the expanding exposure to insurers from claims for bad faith failure to settle and the potential perils to insurers. Historically, the typical bad faith case involved an insurer defending a lawsuit against the insured and controlling defense and settlement, a settlement demand within policy limits from the underlying plaintiff, the insurer’s rejection of the settlement demand in bad faith, and a judgment against the insured in excess of policy limits after a trial. See, e.g., Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 524, 675 N.E.2d  897, 903 (1996). Over time, the situations in which an insurer may be found liable for third-party bad  faith have  expanded, putting more pressure on insurers in  the handling of claims. Some potential issues demonstrated by the Whiteside case are discussed below.

A Limits Demand Can Be Made Prior to Initiation of a Suit Against the Insured

As the Whiteside court relied on the fact that GEICO did not specifically advise Winslett to notify it if any lawsuit were filed and to forward a copy of the complaint, it is easy to assume that the outcome would have been different had GEICO provided that advice. However, it is important to recall that the limits demand in the Whiteside case came before the lawsuit was filed. The Court found that GEICO breached its duty to settle when it made a counteroffer, therefore rejecting the plaintiff’s demand for policy limits. The GEICO policy limit was $30,000, and GEICO made a settlement offer of $12,000, which was less than the medical expenses at that time. The Court evidently believed that the insurer had sufficient information before suit to determine that the insured’s potential exposure was well above policy limits. Just because a lawsuit has not yet been filed does not necessarily mean that an insurer is not liable for bad faith failure to settle.

Courts in other states have also held that a lawsuit against the insured is not necessary to give rise to a duty to accept a demand within policy limits. For example, in Haddick v. Valor Ins. Co., 198 Ill. 2d 409, 415-16, 763 N.E.2d 299, 303–04 (2001), the Illinois Supreme Court rejected an insurers argument that because the duty to settle arises from the duty to defend, the duty to settle could not arise before suit was filed. The Court held that the duty to settle arises when there is a reasonable probability of a finding of liability against the insured and a recovery in excess of policy limits. Generally, a duty to settle within policy limits will be determined based on the specific facts of the case, including the potential damages and liability of the insured, and will not depend on whether the demand is made before or after a suit is filed against the insured.

A Demand within Limits May Not Be Necessary To Trigger a Duty To Settle

The Whiteside Court stated unequivocally that the law in Georgia is that a demand within limits is necessary to give rise to a duty to settle. 311 Ga. at 359, 857 S.E.2d at 666. This is consistent with courts in some other jurisdictions. See, e.g., Haddick, 198 Ill. 2d at 417, 763 N.E.2d at 304–05 (“Illinois generally does not require an insurance provider to initiate settlement negotiations…), Graciano v. Mercury General Corp., 231 Cal.App.4th 414, 425, 179 Cal.Rptr. 3d 717, 726 (2014)) (“An insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires that the third party made a reasonable offer to settle the claims against the insured for an amount within policy limits.”).

However, there is a division among jurisdictions and there seems to be an emerging trend in favor of requiring insurers to initiate settlement negotiations. As early as 1974, the New Jersey Supreme Court held that an insurer has an affirmative duty to explore settlement possibilities. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 493, 65 A.2d 495, 505 (1974) (“The better view is that the insurer has an affirmative duty to explore settlement possibilities.”) More recently, the Supreme Court of Louisiana held that an insurer can be held liable for bad faith failure to settle in the absence of a “firm settlement offer.” Smith v. State Farm Fire & Cas. Co., 169 So.2d 328, 340–41 (La. 2015). A Florida appellate court has reached the same conclusion. Powell v. Prudential Prop. & Cas. Co., 584, So.2d 12, 14 (Fla. App. 1991) (“Where liability is clear, and injuries so serious that a judgment in excess of policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.”). It is important for the insurer and the policyholder to be aware of the jurisdiction, the applicable law, and the specific rules that may apply.

The Insured May Be Permitted To Settle with the Claimant for an Amount in Excess of Policy Limits and Hold the Insurer Liable for Bad Faith Failure To Settle

Although it was apparently an uncontested hearing after a default judgment, the claimant in Whiteside obtained a judgment against the insured before pursuing remedies for bad faith failure to settle. Some courts have recently relaxed this requirement as well. In recent cases, the insured (or an excess insurer) and the claimant have reached a settlement in excess of policy limits (even in cases where the primary insurer is defending) and then pursued the primary insurer for the full amount of the settlement. The primary insurers in those cases would argue that they have a right (not just a duty) to defend and have the right to try cases against the insured that they believe are defensible. They argue that they cannot be held liable for bad faith until a bad faith judgment is actually entered. Nonetheless, some courts have found that an insurer is liable for an excess settlement.

In Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, 828 (Mo. 2014), the Missouri Supreme Court held that an excess judgment is not necessary to pursue a bad faith claim finding that where an insurer refuses to settle, the insured’s “loss is suffered regardless of whether there is an excess judgment or settlement.” It does not appear that the primary insurer argued that there were any potential defenses to liability to explain its refusal to settle. Instead, it argued only that there was no excess judgment and that it ultimately agreed to contribute its $1,000,000 limit to a settlement along with $1,000,000 from the excess. The Court observed, however, that the plaintiffs initially demanded $1,000,000 to settle, which the primary insurer declined. That demand was subsequently withdrawn making it necessary for the excess insurer to contribute.

The courts in California have been split on this issue. Compare, Fortman v. Safeco Ins. Co., 221 Cal.App.3d 1394, 271 Cal.Rptr.3d 1394 (1990) (finding judgment not necessary) with RLI Ins. Co. v. CNA Cas. Co. of Cal., 141 Cal.App.4th 75, 45 Cal.Rptr.3d 667 (2006) (finding judgment necessary). In Ace Am. Ins. Co. v. Fireman’s Fund Ins. Co., 2 Cal.App.5th 159, 206 Cal.Rptr.3d 176 (2016), a California appellate panel followed Fortman, holding that an excess judgment was not a required element of a claim by an insured or an excess insurer against a primary insurer for bad faith failure to settle. It appeared that the California Supreme Court might address this split when it accepted Ace Am. for review, but the review was ultimately withdrawn because the parties settled. It does not appear that the decision was ever vacated or depublished. The case provides a broad discussion of the California case law on the issue and should be reviewed by anyone facing this issue in California.


Like many areas involving insurance in recent decades, the landscape surrounding the issue of bad faith failure to settle is constantly shifting and the potential exposure of insurers to such claims is expanding in certain ways. The Whiteside case illustrates the potential perils to insurers and shows the need for clear and consistent communication with the insured. It also demonstrates that, particularly with lower limit policies, a pre-suit opportunity to settle may be the last opportunity to settle, so insurers must carefully and promptly investigate the facts and determine the exposure to the insured. Insurers must also be aware of the applicable law as to whether they are obligated to initiate settlement negotiations or whether they may wait for a limits demand. Policyholder counsel should also be aware of whether they must specifically make a demand that the insurer settle within limits in order to trigger an insurer’s obligation to settle. Policyholder counsel should also be aware of whether they have a right to step in and settle with the claimant in the event the insurer declines to do so, or whether it must sit and wait for an excess judgment. These are a select few of the issues facing practitioners in this area. Counsel must stay abreast of the law of the jurisdiction in advising clients on any insurance issue.