Lack of Notice No Excuse for Failure to Settle

Cozen O'Connor
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Cozen O'Connor

An insurer can no longer claim its lack of notice of a lawsuit against its insured excuses it for failing to settle the suit after the Georgia Supreme Court’s recent decision in GEICO Indemnity Co. v. Whiteside, Case No. S21Q0227 (Ga. April 19, 2021). In Whiteside, the Georgia Supreme Court held that an insurer’s bad faith failure to settle a claim may result in liability for judgments in excess of the insured’s policy, even in cases where the insured also breaches its contractual duty to notify the insurer of a suit brought against it.

The facts of the case arose from a 2012 accident in which a permissive driver of a vehicle insured by GEICO struck and injured a bicyclist. GEICO subsequently informed the driver that she was covered by the vehicle’s owner’s policy, but failed to ask her to notify GEICO of any accident-related legal documents or inform her of her obligation under the policy to notify GEICO if she was sued. The injured bicyclist’s lawyer then demanded that GEICO settle by paying the $30,000 limit of that policy. GEICO refused, counteroffering $12,409. The bicyclist’s attorney never responded to this offer.  

The bicyclist proceeded to file suit against the driver. The driver never notified GEICO of the suit, even though she had been advised to do so by a paralegal for the bicyclist’s attorney. Instead, the driver discarded the summons and complaint and failed to appear in court, resulting in a default judgment against her totaling $2,916,204.

This judgment eventually forced the driver into involuntary bankruptcy. The bankruptcy trustee then brought suit against GEICO in federal district court, claiming GEICO negligently or in bad faith failed to settle the bicyclist’s claim, thereby causing a judgment against the driver in excess of the policy limits. The jury found the driver 30 percent liable and GEICO 70 percent liable, and ultimately entered a judgment of $2.7 million against GEICO.

GEICO appealed to the Eleventh Circuit, which certified three questions to the Georgia Supreme Court, including whether an insurer is relieved of liability from a bad faith suit when it had no notice of the underlying suit against its insured. To this question, the Georgia Supreme Court responded with a “qualified ‘no.’” The court stated that GEICO “should have foreseen” that the driver would breach her contractual duty, given GEICO’s failure to inform her of this duty, as well as the fact that the driver led an unstable lifestyle and was unlikely to have a copy of the policy because she was not listed on it. Accordingly, GEICO was subject to liability for the total judgment in the underlying suit against the driver even though it exceeded the policy limits.

Despite the somewhat “qualified” nature of the court’s holding and the court’s acknowledgment that this case might be limited to its facts, the court’s ruling establishes that an insurer’s lack of notice of a lawsuit brought against its insured does not preclude a future claim against it for bad faith failure to settle the underlying claim. Insurers should therefore proactively monitor potential lawsuits brought against their insureds even if their policies require insureds to provide notice of any lawsuit filed against them.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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