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Supreme Court of Virginia Explains When a Duty to Act in Good Faith Attaches to Insurers for Uninsured Motorist Policies

Ebenezer Manu v. GEICO Casualty Company
Record No. 160852 (Supreme Court of Virginia)
by Mark F. Pincelli, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.courts.state.va.us/opinions/opnscvwp/1160852.pdf

When someone who is insured looks to collect on an uninsured motorist (UM) auto policy, the insured must obtain a judgment against the uninsured motorist before a duty is created on the insurer to act in good faith by paying the policy. An insurer cannot act in bad faith on a UM policy until after the insured becomes “legally entitled to recover” damages from the uninsured tortfeaser. The Supreme Court of Virginia looked to the plain language of Virginia Code § 8.01-66.1(D) (1) and § 38.2-2206 to define when the insurer’s obligation to pay the policy triggers, and when an insurer acts in bad faith.

On October 30, 2010, Ebenezer Manu (Manu) was injured in a multi-vehicle crash. GEICO Casualty Company (GEICO) provided a personal auto insurance policy to Manu, which included UM coverage with a $25,000 limit. On November 22, 2010, Manu notified GEICO that there was a potential UM claim in regards to the October 30 accident.

Manu subsequently sued the driver of his car, and John Doe. During discovery, several other drivers stated that the John Doe was the cause of the accident. On September 19, 2013, Manu submitted this information to GEICO, and advised GEICO of his intent to seek the $25,000 in UM coverage. GEICO chose to defend John Doe. After settling with the other defendant, Manu proceeded to trial against John Doe.

On January 30, 2015, Manu offered to settle the case for $12,500 from the UM policy, GEICO countered at $5,000, and Manu refused. At trial, the circuit court held that John Doe was negligent as a matter of law, and that his negligence was the proximate cause of the collision. On February 10, 2015, the court entered a judgment against John Doe for $68,528.24. GEICO promptly paid Manu the $25,000 limit from the UM policy.

After GEICO had paid Manu, on May 14, 2015, Manu filed a complaint against GEICO stating that under Virginia Code § 8.01-66.1, GEICO had acted in bad faith by not settling with Manu for the $25,000 UM limit after Manu’s demand for settlement prior to the trial. Manu sought a judgment against GEICO for the difference between the UM policy limit and the jury award, plus unpaid prejudgment interest, and reasonable attorneys’ fees. GEICO responded that § 8.01-66.1 and § 38.2206 read together do not create an insurer’s duty to pay until after the insured obtains a judgment against the uninsured motorist. The circuit court agreed with GEICO and dismissed Manu’s claim with prejudice.

On appeal, the Supreme Court of Virginia clarified what it meant to be “legally entitled to recover” damages from a UM policy. Under Virginia Code § 38.2-2206, a UM carrier must “pay the insured all sums that he is legally entitled to recover as damages from the owner or operator of an uninsured motor vehicle.” The court defined “legally entitled to recover” as a “legal title” to “obtain (relief) by judgment.” A “judgment” determines “the rights and obligations of parties in a case.” Therefore, an insured is legally entitled to recover damages under a UM policy only after a court has entered a judgment finding liability against the uninsured motorist.

The court rejected Manu’s argument that Aetna Casualty & Surety Co. v. Dodson, 235 Va. 346, 367 S.E.2d 505 (1988), and Colonial Insurance Co. v. Rainey, 237 Va. 270, 377 S.E.2d 393 (1989), altered or overturned the precedents of Willard v. Aetna Casualty & Surety Co., 213 Va. 481, 193 S.E.2d 776 (1973), and Midwest Mut. Ins. Co. v. Aetna Casualty & Surety Co., 216 Va. 926, 193 S.E.2d901 (1976).

In Dodson, the court did not address when there was a legal entitlement to payment under a UM policy, but rather analyzed whether the Workmen’s Compensation Act completely foreclosed the insured’s legal right to recover under a UM policy. In Rainey, the court defined the meaning of “operator” in regards to UM policies. Anything else in Rainey regarding when there was a sufficient legal entitlement under a UM claim was merely dicta. These two cases determined if the insured were within the scope of a UM policy, not whether they were legally entitled to recover damages through a UM policy, and did not alter or change Virginia’s precedent. Furthermore, the court emphasized its decision in State Farm Automobile Insurance Co. v. Kelly, 238 Va. 192, 380 S.E.2d 654 (1989), when it held that a UM carrier’s liability could not arise prior to a legal judgment establishing the liability of the uninsured motorist.

Next, the court clarified when an insurer can act in bad faith by not paying a UM policy. Bad faith in insurance contracts arises when:

(1) the insurer has a contractual liability to pay under the policy; and
(2) the insurer lacks a reasonable basis to deny or compromise the claim.

Bad faith derives from the insurer’s affirmative duty to satisfy the obligations of the contract in good faith. An insurer cannot act in bad faith for not performing an action which the insurer is not contractually obligated to perform.

The insured must have a claim before good faith protection applies to all auto insurance policies, including UM policies. A “claim” must be the “assertion of an existing right.” Under § 38.2-2206, an insurer does not have an existing right under a UM policy until there has been a judgment against the uninsured tortfeaser. Therefore an insured does not get good faith protection until after receiving a judgment in her favor.

Virginia Code § 38.2-2206 also requires an insured to notify a UM carrier of a potential claim. The UM carrier has discretion to participate in the action, but does not have any duty to participate. Since a UM insurer’s pretrial participation is discretionary, it would be illogical for § 8.01-66.1(D) (1) to create a new duty for UM carriers to settle where § 38.2-2206 does not create any duty to participate in the process.

Since Virginia Code § 8.01-66.1(D) (1) is remedial in nature, a wrong cannot be corrected if it has not occurred. Again, in the UM context, no wrong has been done to the insured to give rise to a claim until there has been a judgment. Since there has been no wrong against the insured, the insurer has no duty to act in good faith by settling prior to trial. In a UM situation, the costs of litigation to gain a judgment against an uninsured motorist is not an unjust burden.

Even though the duty of good faith does not attach until after a judgment is entered against an uninsured motorist, Virginia Code § 8.01-66.1(D) (1) does not lack purpose. A breach of the covenant of good faith entitles the non-breaching party to seek contractual remedies. Relying solely on this method of recovery, an insured would only be able to recover the UM policy limit. Code § 8.01-66.1(D) (1) allows an insured to collect the policy limit, plus double the interest and attorneys’ fees.