Legal Ethics in Insurance Practice
In the world of uninsured/underinsured motorist (hereinafter “UM”) litigation, the lawyer for the UM carrier faces several quandaries from the moment that a new file is assigned. As with every new case, the first question is, “Who is my client?” The answer at this early stage of the UM context is easy: the insurance carrier. What follows is a myriad of questions ranging from an assessment of the client’s potential exposure, possible defenses, and impediments to resolution. Coverage issues, conflicts of interest, and post-judgment recovery of attorneys’ fees and expenses of litigation are all considerations that weigh heavily on the mind of a lawyer and claims adjuster at the outset of a claim for UM benefits.
The purpose of this paper is to evaluate claims of attorney-client privilege and other ethical dilemmas that arise in the scope of a claim for UM benefits. It is essential that UM counsel and adjuster are on the same page when it comes to approaching these dilemmas
I. Preserving Attorney-Client Privilege
Attorney-client privilege concerns often arise in the context of insurance defense due to the unique nature of the tripartite relationship between counsel, the insurer, and the insured. While it may be clear to the sophisticated attorneys and insurers that counsel represents only the insured, the line of demarcation could become blurred for an insured who understands that his insurance company has hired him a lawyer, but does not understand that the lawyer should be protecting his best interests. Many insureds and some adjusters are under the mistaken impression that what an insured reports to his or her insurance company is protected by the attorney-client privilege. This is not the case. While communications between a lawyer and client are indeed privileged, communications between the insured and his or her insurance company may only be protected if they are generated in anticipation of litigation. See O.C.G.A. § 9-11-26(b)(3); see also McKesson HBOC, Inc. v. Adler, 254 Ga. App. 500 (2002).
When first presented with a claim for UM benefits, the carrier should first examine whether the claimant insured is afforded coverage under the applicable policy, including whether the claimant has complied with the necessary notice provisions of the applicable policy. See Lankford v. State Farm Mut. Auto. Ins. Co., 307 Ga. App. 12, 13 (2011). Communication between adjuster and UM counsel regarding these issues is protected by the attorney-client privilege. Before accepting coverage for a questionable claim, the best practice would be for the claims adjuster to seek the advice of counsel to evaluate any and all potential coverage issues. Allowing counsel for the carrier to serve as the communication medium between claimant insured and the carrier is the best practice to avoid any unintentional waiver of the attorney-client privilege.
II. Avoiding Conflicts of Interest In Multiple Representations
A. Initial Representation and Responsive Pleadings by Carrier
If counsel is tasked with representing the UM carrier and the carrier alone, the conflict of interest analysis is simple. However, it depends how a UM carrier responds to the plaintiff’s complaint. Georgia law provides a UM carrier with three (3) options when presented with a plaintiff’s claim for UM benefits: (1) file an answer in its own name. See Hulsey v. Standard Guar. Ins. Co., 195 Ga. App. 803 (1990) (holding that a UM carrier is “permitted to become a party; it has the option and may elect to do so.”); (2) appear in the name of the named defendant. See Moss v. Cincinnati Ins. Co., 154 Ga. App. 165, 167 (1980); and, (3) “do nothing” and do not file any responsive pleadings whatsoever. See Knight v. Georgia Farm Bureau Mut. Ins. Co., 184 Ga. App. 312 (1987), compare Kelly v. Harris, 329 Ga. App. 752 (2014) (holding that the premise that a UM carrier may never be in default is at odds with Georgia law and that the Rules of Civil Procedure governing parties’ filings of responsive pleadings apply to UM carriers). Given the Court’s ruling in Kelly, the “do nothing” approach has certainly fallen out of favor with carriers, attorneys, and judges. The “do nothing” approach is not the favored approach.
Georgia courts have long recognized that while an action for uninsured/underinsured motorist benefits is against the uninsured/underinsured motorist, it is an action in which the carrier of uninsured motorist coverage for the plaintiff is a party at interest.” Id. In doing so, the UM carrier has the ability to contest both tort liability of the alleged uninsured/underinsured motorist and contractual liability under the plaintiff insured’s policy. Moss, 154 Ga. App. at 165; see also Hall v. Regal Ins. Co., 202 Ga. App. 511 (1991). This dual pursuit will be explained next.
B. UM Carrier’s Dual Pursuit
One advantage to a UM carrier defending in its own name is that the carrier enjoys the same rights as a party defendant and may fully participate in the litigation, including conducting discovery. See Hall v. Regal Ins. Co., 202 Ga. App. 511 (1991). Most significantly, this includes litigation of coverage issues without the expense of a separate action. Defending in the UM carrier’s own name obviates the requirement that judgment be entered against the tortfeasor as a condition precedent to determination of questions of coverage. See Moss, 154 Ga. App. at 165. In other words, coverage issues as to the UM carrier can be litigated on summary judgment or at trial in the underlying tort action without the need (and expense) for a separate declaratory judgment action.
By answering in its own name and conducting discovery as a named party, the carrier subjects itself to the status of a named party during the course of the litigation. See Moss, 154 Ga. App. at 165. In the never-ending attempt of the Plaintiffs’ Bar to inject big, bad insurance companies into the conscious of the American jurors as footing the bill of every adverse judgment in an automobile accident case, many plaintiffs’ attorneys will argue that once the UM carrier has answered in the name of the insurance company, the deed is done. They argue that once the UM carrier appears in the name of the named defendant, that decision binds the carrier until the conclusion of the litigation. They argue that the bell may not be “un-rung.”
However, the decision of a UM carrier to answer and proceed in its own name is not irreversible. Allen v. Spiker, 301 Ga. App. 893 (2009); see also Keenan v. Hill, 190 Ga. App. 108 (1989). “The statute [O.C.G.A. § 33-7-11] shows the choice to participate or not to participate is left to the insurer, but nothing in the statute prevents the insurer from changing its position during the course of litigation.” Singleton v. Phillips, 229 Ga. App. 286, 288 (1997). That being said, there is a dearth of authority which would prevent the UM carrier from answering in its own name, litigating the coverage issue on summary judgment, and if unsuccessful, subsequently withdrawing its answer and defending in the name of the tortfeasor at trial. Georgia appellate courts could view this withdrawal as a waiver by the UM carrier to any challenge of coverage issues in the appellate courts. A UM carrier has the right to withdraw from the case “once the insurer determine[s] no contractual issues exist[].” Id. (citation omitted). However, UM counsel should carefully consider whether or not this strategy would result in waiver of the coverage issue on appeal post-trial (assuming the trial court denied a request for certificate of immediate review or the Court of Appeals denied an application for interlocutory appeal). If the UM carrier truly believes the coverage question is a legitimate appellate issue, the UM carrier should not abandon that issue at trial by defending in the name of the tortfeasor.
Perhaps the better course of action under those circumstances would be to litigate the coverage issue in a separate declaratory judgment action. However, this might require answering in the tortfeasor’s name from the beginning of the litigation. In Tennessee Farmers Mut. Ins. Co. v. Wheeler, 170 Ga. App. 380, 381 (1984), the Court of Appeals held that a UM carrier who answers in its own name has “gained the opportunity to receive an adjudication on the coverage questions without resorting to a separate action for declaratory judgment,” and, at least in that case, the trial court’s injunction precluding the UM carrier from pursuing a separate declaratory judgment action in Tennessee was proper. It is not clear whether or not the same reasoning would apply to a UM carrier that answers in its own name, withdraws its answer, and subsequently files a declaratory judgment action, but one would certainly expect to see that argument raised.
In cases where the named defendant faces allegations of punitive damages, driving under the influence, or other punitive conduct, a UM carrier may not want to appear in the name of the “undesirable” defendant to whom the carrier owes no obligation. Weighing the negative impression of this “undesirable” defendant with the carrier’s desire to keep insurance out of a potential trial is a consideration which weighs heavily on the minds of UM counsel and adjuster in the weeks and months leading up to trial.
C. Subrogation Issues
However, if the UM carrier answers the plaintiff’s complaint in the name of the named defendant, the UM carrier may not assert a cross-claim against the named defendant for subrogation in its answer. As a practical matter, it is difficult to imagine a situation in which the UM carrier would answer in the name of the defendant tortfeasor, defend the case on behalf of the tortfeasor, and then turn around and pursue a cross-claim against the defendant tortfeasor for subrogation. In that scenario, and in the absence of any express waiver of subrogation rights, the tortfeasor has no real motivation to cooperate with the UM carrier, other than to arguably reduce his/her own subrogation exposure in the event of an excess judgment – not to mention the potential conflict that could arise for UM counsel.
The common practice is for the agreement to defend the case in the name of the tortfeasor to be accompanied by an agreement that the tortfeasor will cooperate with the defense in exchange for a waiver of subrogation rights. The carrier would then be appearing in the name of the named defendant so maintaining a cross-claim against its “named” client impermissible under the Model Rules of Professional Conduct. See ABA Model Rule of Professional Conduct 1.7. Rule 1.7 provides in relevant part:
“(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”
It is easy to see how the lawyer’s representation of the UM carrier and/or the named defendant would be “materially limited” if the lawyer were asked to stand in front of a jury and claim to represent the named defendant before turning around at the conclusion of the case and asking for judgment on its cross-claim against the very client the lawyer claimed to represent during the underlying tort trial. If the UM carrier asserted a cross-claim in its answer to the plaintiff’s complaint, it must dismiss its cross-claim when it appears in the name of the defendant at trial. See supra, Model Rule of Professional Conduct 1.7.
UM carriers preparing for trial face a difficult decision: keep their existence outside the knowledge of the jury or maintain the ability to pursue their cross-claim against the named defendant. As a carrier, competing considerations must be weighed. A business decision or a legal decision. The presence of an insurance carrier in the caption of the case will undoubtedly increase the perceived value of the case for a plaintiffs’ lawyer and a jury. The UM carrier may preserve their cross-claim, but to what end? The pursuit of pointless subrogation cross-claims against penniless defendant tortfeasors has become an overwhelming reality in the world of insurance defense litigation. If the defendant tortfeasor was wealthy enough to carry enough liability insurance in the first place, then UM insurance may never have been implicated.
III. Determining and Collecting Attorneys’ Fees
A. Attorneys’ Fees & Expenses of Litigation Pursuant to O.C.G.A. § 13-6-11
Under O.C.G.A. § 13-6-11, a party can recover attorney’s fees only if the opposing party has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense. “Bad faith,” as it is used in the statute, relates to the transaction giving rise to the cause of action, not to the conduct or motives of the parties during the course of litigation. David G. Brown, P.E., Inc. v. Kent, 274 Ga. 849, 850 (2002); Holbrook v. Stansell, 254 Ga. App. 553, 554 (2002).
The Georgia Court of Appeals decided in 2008 that a UM carrier could not be responsible for the “bad faith” attorneys’ fees of a defendant tortfeasor pursuant to the plain language of O.C.G.A. § 13-6-11 and O.C.G.A. § 33-7-11. Smith v. Stoddard, 294 Ga. App. 679, 680-81 (2008). In that case, the plaintiff attempted to hold the UM carrier responsible for an attorneys’ fees award arising out of the defendant tortfeasor’s bad faith and/or stubborn litigiousness under O.C.G.A. § 33-7-11. The Court drew a close distinction between the UM statute, providing UM benefits “because of bodily injury to or death” and the attorneys’ fees statute, allowing an award of attorneys’ fees “because of some aspect of the tortfeasor’s conduct which caused [the plaintiff’s] loss.” Id. at 681. (citations omitted). The Court found that the disconnect between the defendant tortfeasor’s conduct and the nature of the plaintiff’s suit for UM benefits was too great to impose an award of attorneys’ fees against the carrier for the conduct of a tortfeasor not under its control. Indeed, the only provision in the UM statute which provides for a recovery of attorneys’ fees and expenses of litigation is O.C.G.A. § 33-7-11(j), which will be discussed in brief detail herein.
B. Bad Faith Penalties Under O.C.G.A. § 33-7-11(j)
A bad faith claim against an UM carrier in Georgia is a creature of statute. O.C.G.A. § 33-7-11(j) provides, in pertinent part, as follows:
“If the insurer shall refuse to pay any insured any loss covered by this Code section within 60 days after a demand has been made by the insured and a finding has been made that such refusal was made in bad faith, the insurer shall be liable to the insured in addition to any recovery under this Code section for not more than 25 percent of the recovery and all reasonable attorney’s fees for the prosecution of the case under this Code section.” O.C.G.A. § 33-7-11(j).
After an insurer refuses to meet a demand under the UM statute, the plaintiff must obtain an excess judgment against the tortfeasor. Only after obtaining that judgment does a potential UM bad faith claim arise. Assuming the insurer failed to meet the demand and the plaintiff obtains an excess judgment against the tortfeasor, the question then becomes whether or not the insurer’s refusal to pay was in fact in bad faith. As expressed in the UM statute, the relevant time period for purposes of determining bad faith is the time of the refusal. O.C.G.A. 33-7-11(j). In other words, a court must look at whether the insurer’s refusal was made in bad faith on the basis of the facts appearing to the insurer at the time of the refusal.
A “bad faith” refusal has been defined as “any frivolous and unfounded refusal in law or in fact to comply with the demand of the policyholder to pay according to the terms of the policy.” Fortson v. Cotton States Mut. Ins. Co., 168 Ga. App. 155,156 (1983). This definition of a “bad faith” has been applied in the context of UM claims. See Georgia Farm Bureau Mut. Ins. Co. v. Williams, 266 Ga. App. 540 (2004) citing Fortson, 168 Ga .App. at 157.
Although the question of bad faith is ordinarily reserved for the jury, courts disallow the imposition of bad faith penalties as a matter of law where there is “no evidence of a frivolous or unfounded reason” for refusing to pay a demand. Govt. Employees Ins. Co. v. Presley, 174 Ga. App. 562, 566 (1985) (emphasis added) citing Georgia Farm Bureau Mut. Ins. Co. v. Matthews, 149 Ga. App. 350 (1979). See also Sentry Indem. Co. v. Peoples, 856 F.2d 1479, 1481 (11th Cir. 1988).
Courts have also found that, as a matter of law, insurers that act reasonably do not act in bad faith. Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683 (2003) (hereinafter “Brightman”). See also Govt. Employees Ins. Co. v. Gingold, 249 Ga. 156 (1982) (insurer acted reasonably in failing to settle claim where insured provided no input as to propriety of settlement). Compare United Servs. Auto. Ass’n v. Carroll, 226 Ga. App. 144, 148 (1997) (finding that the insurer did not have reasonable grounds to exclude coverage on a claim that was not completely investigated).
“The general rule is that the issue of an insurer’s bad faith depends on whether the insurance company acted reasonably in responding to a settlement offer.” Brightman, 276 Ga. at 685 (applying the standard of the ordinarily prudent insurer). See also Baker v. Huff, 323 Ga. App. 357 (2013) (“no reasonable trier of fact could conclude that [the insurer] acted unreasonably when it failed to tender the $100,000 policy limits…”). “If there is any reasonable ground for contesting the claim, there is no bad faith, and it is error to award penalty and attorney’s fees.” Home Indem. Co. v. Godley, 122 Ga. App. 356 (1970) (citing Dependable Ins. Co. v. Gibbs, 218 Ga. 305, 316 (1962)) (emphasis added). Such a reasonable ground exists where “the evidence is such that reasonable minds may examine it and differ as to its meaning.” Godley, 122 Ga. App. at 363.
In short, proving and then collecting bad faith attorneys’ fees and expenses under O.C.G.A. § 33-7-11(j) requires a Plaintiff’s attorney to climb multiple mountains before a court will award any such fees.
C. Georgia’s Offer of Settlement Statute: O.C.G.A. § 9-11-68
As many know, a claim for UM benefits under Georgia law is a claim that sounds in contract law. Williams v. Safeway Ins. Co., 223 Ga. App. 93 (1996). Naturally, for the action to arise under the contract, a tort must have occurred. But the plain language of O.C.G.A. § 9-11-68 suggests that an Offer of Settlement pursuant to this Code section is invalid, although Georgia appellate courts have not weighed in on the issue. O.C.G.A. § 9-11-68 reads in relevant part:
“(a) At any time more than 30 days after the service of a summons and complaint on a party but not less than 30 days (or 20 days if it is a counteroffer) before trial, either party may serve upon the other party, but shall not file with the court, a written offer, denominated as an offer under this Code section, to settle a tort claim for the money specified in the offer and to enter into an agreement dismissing the claim or to allow judgment to be entered accordingly.” O.C.G.A. § 9-11-68(a) (emphasis added)
For two separate reasons, it is anticipated that the Georgia appellate courts would find that an Offer of Settlement under O.C.G.A. § 9-11-68 made by or to a UM carrier would be legally invalid. First, the only way that a UM carrier assumes the status of a “party” is by filing an answer in its own name and participating in the litigation as a named party. See Hall v. Regal Ins. Co., 202 Ga. App. 511 (1991).
Second, even if the UM carrier assumes the status of a named party, another roadblock prevents the possible application of O.C.G.A. § 9-11-68 to offers made to and by UM carriers. As noted above, a claim for UM benefits under Georgia law sounds in contract law while an Offer of Settlement under O.C.G.A. § 9-11-68 can only offer to settle tort claims. The fact that the contract action arises out of a tort is likely irrelevant because the plaintiff must prove the existence of the insurance policy before recovering anything against the UM carrier. A suit to recover benefits on that policy stems from the plaintiff’s payment of insurance premiums to the UM carrier in exchange for a determined amount of UM coverage. See Williams v. Safeway Ins. Co., 223 Ga. App. 93 (1996). This foundation in contract law is what would likely prevent the application of O.C.G.A. § 9-11-68 in the UM context.
When faced with a plaintiff’s attorney who attempts to serve an Offer of Settlement pursuant to O.C.G.A. § 9-11-68 upon your carrier, consult with counsel and/or your adjuster for the proper approach and response.
Blair J. Cash is a partner in the Alpharetta office of Lueder, Larkin & Hunter where his practice focuses on commercial and common carrier liability, automobile liability, premises liability, dram shop liability, and general civil defense litigation. He can be reached at bcash@luederlaw.com