Alabama Federal District Court Holds Insurer Has No Bad Faith Liability to Third Party Beneficiary

July 26, 2009

Recently, the U.S. District Court for the Southern District of Alabama held, in a case of first impression in the state, that an insurer’s liability for bad faith did not extend to a third party beneficiary to an insurance contract.  In Jones v. General Ins. Co. of America, the plaintiff was a homeowner who had failed to obtain insurance coverage for her home, in violation of her mortgage agreement.  After giving notice, the lender purchased “force placed” coverage from General.

Th policy named the lender as the sole named insured, and the plaintiff was named as the “borrower.”  It further stated that any covered amounts in excess of the lender’s interest would be paid to the borrower.

Her Mobile, Alabama area home was damaged as a result of Hurricane Katrina.  General paid a portion the claim, but denied another portion, in which she asserted damage to its foundation.  Jones sued General, alleging bad faith, and General moved for summary judgment.

The Court specifically found that the plaintiff was a third party beneficiary of the contract, pursuant to the policy’s language. However, recognizing that “the Alabama Supreme Court has explained in no uncertain terms that ‘a party cannot bring an action against an insurance company for bad-faith failure to pay an insurance claim if the party does not have a direct contractual relationship with the insurance company,’” Williams v. State Farm, 886 So.2d 72 (Ala. 2003), the Court held that the policy’s clear language identified the “insured” as the lender, and not the plaintiff.  The Court further cited Peninsular Life Ins. Co. v. Blackmon, 476 So.2d 87 (Ala. 1985):

The tort of bad faith refusal to pay a claim has heretofore been applied only in those situations where a typical insurer/insured relationship existed; that is, where the insured or his employer entered into a written contract of insurance with an insurer and premiums were paid into a central fund out of which claims were to be paid.  We are very hesitant to expand the tort beyond these narrow circumstances.

Based upon the above precedent, the Court held that as a third party beneficiary, the plaintiff lacked standing to sue for bad faith, and granted summary judgment in favor of the insurer.


Georgia Supreme Court Finds No Bad Faith in Failure to Settle Lawsuit

June 15, 2009

Recently, the Georgia Supreme Court found in favor of an insurer in a suit alleging failure to settle a claim in bad faith.  Trinity Outdoor, LLC v Central Mut. Ins. Co., No. SO9Q0605 (June 1, 2009).  In that matter, the insured, Trinity, had demanded that its insurer, Central Mutual, pay its policy limits of $2 million to settle a premises liability/wrongful death matter.  The claims against Trinity were settled during pretrial mediation for a payment of $954,530, which consisted of $200,000 from Central Mutual, and the remainder from the insurer of a co-defendant, against which Trinity had filed a demand for indemnity and contribution.

In its opinion, the Court held that an Central Mutual could not be liable to Trinity for bad faith in the absence of a jury verdict against it.  It further found that Central Mutual had provided a defense to Trinity, that the additional $754,530 paid by the co-defendant’s insurer was a “voluntary payment” to which Central Mutual had not consented, and that the policy’s language did not subject the insurer to liability for such payments.  Further, the Court noted that Trinity’s liability was debatable.

Alabama precedent suggests that its courts would come to similar holdings.  In National Security v Bowen, 417 So.2d 179 (Ala. 1982), the Court held that:

An insurer is liable for its refusal to pay a direct claim when there is no lawful basis for the refusal coupled with actual knowledge of that fact.  No lawful basis means that the insurer lacks a legitimate or arguable reason for failing to pay the claim.  When a claim is “fairly debatable,” the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.

Further:

In Waters v. American Cas. Co., 261 Ala 252, 73 So.2d 524 (1953), this Court recognized that if an insurer negligently failed to settle a case, the insurer should be liable for the full amount of any judgment, including any excess over the policy limits. This Court has on several occasions addressed the tort of negligent or bad-faith failure to settle.  Each time, the Court has held that a cause of action arising out of a failure to settle a third-party claim made against the insured does not accrue unless and until the claimant obtains a final judgment in excess of the policy limits.  Federal Ins. Co. v. Travelers, 843 So.2d 140 (Ala. 2002).


Kentucky Jury Awards $3.8 Million on Third Party Bad Faith Claim

June 7, 2009

On June 3, a Jefferson County, Kentucky jury awarded a woman $3.8 million in a bad faith suit against her doctor’s insurer, American Physican’s Assurance Corp.  Shortly after Debbie Daniels underwent a hysterectomy and tummy tuck, her insision opened, necesitating emergency surgery and a lengthy and difficult recovery.

The insurer’s claim file indicated that, although it determined that its insured was liable and evaluated the claim at $1 million, it refused to enter into settlement negotiations for two years before offering $75,000, according to the Louisville Courier-Journal.  Daniels eventually settled with her doctor for $650,000, and reserved the right to sue American Physican’s Assurance.

I don’t claim to know much about Kentucky law, and can’t offer any opinion on whether the verdict will stand up on appeal, but it isn’t likely that such a claim would survive in Alabama, where longstanding law provides that “a party may not bring an action against an insurance company for bad-faith failure to pay an insurance claim if the party does not have a direct contractual relationship with the insurance company.”  Williams v State Farm Mut. Auto. Ins. Co., 886 So.2d 72 (Ala. 2003).


Bad Faith in the Uninsured Motorist Context

May 17, 2009

It’s crucial that both practitioners and claims professionals understand the inherent pitfalls associated with uninsured motorist claims, and particularly the duty that a carrier owes to its insured. In my experience, UM claims are often treated by claims professionals in the same manner as liability claims. This is a perilous practice, and can transform a simple claim into one with punitive exposure.  Simply stated, a carrier has a duty of good faith to its insured that is not present in dealings with third party claimants.

In LeFevere v. Westbury, 590 So.2d 154 (Ala. 1991), the Supreme Court clearly stated that an uninsured motorist situation is a hybrid in that it blends the futures of both a first party claim and a third party claim. The Supreme Court also stated that in an uninsured motorist situation there is an adversarial relationship between the insured and the insurer. To assist claims adjusters and attorneys alike, the Supreme Court in LeFevere applied a balancing test, and set out a procedure or general rules which should apply in the handling of an uninsured motorist claim. The general rules are as follows:

1. When a claim is filed by an insured, the uninsured carrier has an obligation to diligently investigate the facts, fairly evaluate the claim, and act promptly and reasonably.

2. The uninsured motorist carrier should conclude its investigation within a reasonable time and should notify its insured of the action it proposes with regard to the claim for uninsured motorist benefits.

3. Mere delay does not constitute vexatious or unreasonable delay in the investigation of a claim if there is a bona fide dispute on the issue of liability.

4. Likewise, mere delay in the payment does not rise to the level of bad faith if there is bona fide dispute on the issues of damages.

5. If the uninsured motorist carrier refuses to settle with its insured, its refusal to settle must be reasonable.

These general rules were set out by the Supreme Court so that an insured will receive the benefits of the bargain. At the same time, the insurer’s right to refuse a claim will be protected. The bottom line is that adjusters should always diligently and fairly investigate all facts available to them and fully diligently and fairly investigate all those facts with regard to whether or not there is a debatable issue on either liability or damages.

If the claim is being denied not on a issue of liability or damages, but rather on a policy provision, the same general rules should apply in making that determination. Lastly, the Supreme Court has held that advice of counsel is clear evidence of a good faith effort on the part of the insurer. Davis v. Cotton States, 604 So.2d 354 (Ala. 1992).

 


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