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September 28, 2021

The United States Court of Appeals for the Eleventh Circuit recently addressed the issue of whether tendering a policy limits check on a liability policy with an overbroad release could constitute bad faith. In Pelaez v. Government Employees Ins. Co., No. 20-12053, 2021 WL 4258821 (11thCir. September 20, 2021), the court affirmed a summary judgment order in favor of an automobile liability carrier in that situtation. In Pelaez, GEICO’s insured was involved in an automobile accident with a motorcyclist. The claim was reported to GEICO three days later, upon which it immediately opened a claim and began to investigate. The initial investigation indicated that the claimant might be at fault, but a week later, GEICO received a copy of the police report which indicated otherwise. The following day, the GEICO claims representative called the claimant’s attorney and offered the $50,000.00 bodily injury liability limit.

The next day, which was less than two weeks after the crash and nine days after the claim was reported, GEICO hand delivered the settlement check to the claimant attorney. Enclosed with the check was a release of “all claims.” The cover letter with the check explicitly stated that the release was merely proposed, that GEICO invited the attorney to suggest any changes or to re-draft the release himself. Also accompanying the check was a separate letter asking for access to the damaged motorcycle, so that the vehicle could be inspected in order to effectuate a property damage settlement.

The claimant’s attorney rejected the settlement offer, claiming that the release was overbroad and accused GEICO of attempting to secure a release of all claims in exchange for the bodily injury liability limits only, without any payment of the property damage claim. GEICO responded by pointing out that the release was only a proposed release, and that it had invited changes to the release if the claimant’s attorney preferred. The claimant’s response was to file suit. Shortly after suit was filed, the property damage claim settled for just over $7,000.00.

The litigation against the insured resulted in a judgment of $14,900,000.00 and a bad faith suit was then brought against GEICO to recover the excess. The trial court in the bad faith case found that no reasonable jury could conclude that GEICO had acted in bad faith, and entered summary judgment against the plaintiff. The case was then appealed to the Eleventh Circuit Court of Appeals.

In affirming the summary judgment order, the Eleventh Circuit first recognized the duties of a liability insurance carrier under Florida law to act “with the same haste and precision as if it were in the insured’s shoes,” and noted that the focus of the bad faith case is not on the actions of the claimant, but of the insurer, citing Harvey v. GEICO Gen. Ins. Co., 259 So. 3d 1 (Fla. 2018). However, because the insurer’s bad faith must be judged on the “totality of the circumstances,” the conduct of the claimant’s attorney is relevant to that inquiry.

The court found that GEICO fulfilled its duty of good faith by promptly investigating the claim and tendering the policy limits immediately upon determining that liability was clear and damages were likely above the policy limit. The court did not dispute that the release provided with the tender was overbroad, but focused on GEICO’s cover letter, which clearly indicated the release was a proposed release and that the claimant’s attorney (a lawyer with 20 years of experience) could have simply added a sentence preserving property damage claims. In rejecting the plaintiff’s assertion that GEICO was attempting to take advantage of claimants by securing releases of property damage claims without paying for them, the court disapproved of the conduct of claimant’s attorney:

He and his clients kept the insurance claims from settling out of a noble desire to further the wellbeing of humankind, not merely because a $14,900,000 judgment is bigger than a $50,000 settlement. To hear the attorney tell it, the prospect of fourteen million, eight hundred and fifty thousand additional dollars had nothing to do with it. The wellbeing of humankind was the reason he and his clients rejected GEICO’s efforts to settle. Okay, but that does not establish that GEICO acted in bad faith.

The Court then made it very clear that its discussion of the actions of claimant’s attorney did not let GEICO “off the hook.” While GEICO could have “improved its claims-processing practice” by sending a narrower release, the fact that it made it abundantly clear that the release could be edited (together with its rapid investigation and early tender) led to the conclusion that no reasonable jury could find that the failure to settle resulted from bad faith of the insurer.

This is not the only case involving this situation recently addressed by the court. Earlier this year, in Eres v. Progressive Amer. Ins. Co., 988 F.3d 1273 (11th Cir. 2021), the court reached the same conclusion where the offending release contained subrogation language but the carrier expressly allowed modification of the release and agreed to strike the subrogation clause. Be forewarned, however, that providing a non-compliant release in response to a demand can rise to the level of bad faith if the carrier insists on the use of that form of release. See, eg., Maharaj v. GEICO Casualty Co., 996 F.Supp.2d 1303 (S.D. Fla. 2014). Nevertheless, although the carriers escaped extracontractual liability in Peleaz and Eres, consideration should be given to the court’s admonition in both cases to “improve their claims-processing practice.” Providing a narrower release at the outset likely could have relieved the carriers from years of expensive litigation.

For any further questions, please contact David Krouk.