“Sealed Container” Defense does not Apply to UCC Breach of Warranty Claims

Alabama appellate courts have long held that the “sealed container” defense applies to retailers and distributors sued on products liability claims under the Alabama Extended Manufacturer’s Liability Doctrine (AEMLD).  Pursuant to Atkins v. American Motor Corp., 335 So.2d 134 (Ala. 1976), a retailer or distributor may avoid liability under the AEMLD if it shows:

…that he is in the business of either distributing or processing for distribution finished products; he received a product already in a defective condition; he did not contribute to this defective condition; he had neither knowledge of the defective condition, nor an opportunity to inspect the product which was superior to the knowledge or opportunity of the consumer.

Plaintiffs, in two separate actions, sued defendants, alleging claims under the AEMLD and for breach of the Uniform Commercial Code (UCC) implied warranties of merchantability and fitness for a particular purpose, in an action involving injuries from their ingestion of diatary suppliments.  Defendants removed the cases to federal court, contending that the retailer, the only Alabama defendant, was fraudulently joined.

The federal court certified a question to the Alabama Supreme Court, inquiring whether the sealed container defense applied to the UCC warranty claims.  The Court provided a lengthy response, and in a 5-4 opinion, held that is was inapplicable to the UCC claims.  Sparks v. Total Body Essential Nutrition, Inc., No. 1071708.

The Court discussed the history of the UCC and its predecessor, the Uniform Sales Act.  In Bradford v. Moore Bros. Feed & Grocery, 268 Ala. 217, 105 So.2d 825 (1958), the Supreme Court held that the sealed container defense was applicable to claims brought under the Uniform Sales Act.  However, the Court recognized that that when the UCC was enacted, it did not specifically include any reference to the defense.  In holding that the defense did not apply to the UCC claims, the Court stated “we view this silence as an abrogation of the common-law defense, rather that permission to carry it forward,” and that the question was “a policy matter best left to the wisdom of the legislature.”

This opinion is troublesome for product liability defendants.  Often, claims under the AEMLD are joined with UCC warranty claims. Although the sealed container defense remains applicable to the AEMLD claim, the Sparks opinion clearly holds that it does not apply to the warranty claims, thus preventing summary judgment on those claims.  Moreover, the facts presents in Sparks are quite common. Frequently, the retailer will be the only local defendant, and its inclusion in the suit will destroy diversity, rendering the action nonremovable to federal court. Hopefully, the Alabama legislature will accept the invitation of the Court, and make the sealed container defense applicable to warranty claims under the UCC.

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

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.

Smith, Spires & Peddy Summer Newsletter

Our firm’s Summer Newsletter is out.  There’s some informative stuff in there, including a great article on the new Medicare reporting requirements,  one on insurer liability for hospital liens, and one on venue in Alabama, plus a breakdown on recent decisions by yours truly.  Enjoy!

Victims of Apartment Arson Allowed to Pursue Claims Against Builder, Owner

The Alabama Supreme Court recently considered a suit in which a fire at an apartment building, caused by arson, resulted in the death of one resident, and injuries to six others.  The residents sued the owner and builder of the complex, which had been constructed 22 years before the fire, alleging claims of negligence and wantonness.

The trial court entered summary judgment in favor of the owner and builder, holding that they had no duty to protect the residents from injuries caused by the criminal acts of a third party, and that the residents’ claims were barred by the 20-year rule of repose.

The Court, in Collins v Scenic Homes, Inc. __ S0.2d __ (Ala. June 30, 2009), reversed the entry of summary judgment.  Recognizing that in general, “absent special relationships or circumstances, a person has no duty to protect another from criminal acts of a third person,” Moye v. AG Gaston Motels, Inc., 499 So.2d 368 (Ala. 1986), the Court held that the general rule was inapplicable because the residents alleged that the defendants had a duty to construct and operate:

… a reasonably safe apartment building, equipped with appropriate exits and fire suppression safeguards designed to reduce the risk of injury as a result of fire, regardless of the origin of the fire. … Indeed, it is a forseeable risk that a fire at an apartment complex, however started, will cause harm to the inhabitants of the complex if the premises owner fails to provide adequate fire suppression safeguards and an adequate means of escape from the fire.

The Court distinguished the residents’ claims from previous cases decided under the general rule because in each of the previous cases, the plaintiff “alleged that the premises owner had a duty to prevent the intervening criminal act from occurring.”

The Court also held that the plaintiffs claims were not barred by the 20-year rule of repose, atating that a cause of action accrues “on the date the first legal injury occurs, but not necessarily from the date of the act causing the injury.”  Smith v. Medtronic, Inc.,  607 So.2d 156 (Ala. 1992).  In Collins, “the residents did not have a viable and cognizable claim against Scenic Homes until the fire occurred and the residents suffered injuries as a result.”

Non-custodial Minor Child not Covered by UM Policy

On June 26, the Alabama Supreme Court considered, in State Farm v. Brown, __So.2d__ (Ala. 2009), the question of whether a non-custodial minor child was entitled to underinsured motorist (UIM) benefits under her father’s insurance policy.  The plaintiff, an unmarried, unemancipated minor who attended high school and lived primarily with her mother, was injured in an automobile accident.

The Court analyzed the policy, which provided UIM coverage to the “relatives” of a named insured.  A “relative” is defined in the policy as:

A person related to you or your spouse by blood, marriage or adoption who lives primarily with you.  It includes your unmarried and unemancipated child away at school.

The plaintiff argued that the second sentence of the definition should be read separately from the first, and that:

…there is no need to first determine with whom an unmarried and unemancipated child who is away at school “lives primarily.” Rather, Rachel argues, in order to recover UIM benefits under Mr. Brown’s policy, she merely needs to be away from Mr. Brown’s home and enrolled in school.

The Court, noting that it had never addressed the second sentence of the definition, first held that the entire definition of “relative” was not ambiguous.

When analyzing an insurance policy, a court gives words in the policy their common, everyday meaning and interprets them as a reasonable person in the insured’s position would have understood them.  Western World Ins. Co. v. City of Tuscumbia, 612 So.2d 1159 (Ala.1992).  If, under this standard, they are reasonably certain in their meaning, they are not ambiguous as a matter of law and the rule of construction in favor of the insured does not apply.  Bituminous Cas. Corp. v. Harris, 372 So.2d 342 (Ala. Civ. App. 1979).  Only in cases of genuine ambiguity or inconsistency is it proper to resort to rules of construction.  Canal Ins. Co. v. Old Republic Ins. Co., 718 So.2d 8 (Ala. 1998).  A policy is not made ambiguous by the fact that the parties interpret the policy differently or disagree as to the meaning of a written provision in a contract.  Watkins v. USF&G, 656 So.2d 337 (Ala. 1994).  A court must not rewrite a policy so as to include or exclude coverage that was not intended.  Upton v. Mississippi Valley Title Ins. Co., 469 So.2d 548 (Ala. 1985).

As the definition was not ambiguous, the Court held that its “second sentence is obviously intended to expand on the first sentence and to indicate that a child who is away at school is not excluded from the term ‘relative’ in the policy by virtue of the language ‘lives primarily with you.'”  Finally, the Court held that the term “away at school” did not apply to “a child whose primary residence is not the policyholder’s residence and is attending a local high school,”  and that the plaintiff was not entitled to UIM benefits under her father’s policy.

Contributory Negligence Per Se

As most of my readers are aware, Alabama is a contributory negligence state. “Contributory negligence is  negligence on the part of the plaintiff that proximately contributed to the alleged injury.”  Alabama Pattern Jury Instructions 30.00.  In suits where contributory negligence is asserted as an affirmative defense, the jury is instructed that “if you are reasonably satisfied from the evidence that the plaintiff was guilty of contributory negligence, the plaintiff cannot recover for any simple negligence of the defendant.”  APJI 30.02.

In my experience, juries rarely use contributory negligence to bar a plaintiff from recovery, but more often apply a comparative negligence analysis, and will mitigate their verdict with the plaintiff’s own negligence.

Negligence, as well as contributory negligence, is almost always an issue of fact for the jury.  In occasional instances, however, the court is allowed to find that a plaintiff was guilty of contributory negligence as a matter of law, and take the issue from the jury.

The Alabama Supreme Court recently held that a builder’s reliance on its geotechnical engineer did not amount to contributory negligence as a matter of law, as the geotech, Qore, argued.  In Qore, Inc. v. Bradford Building Co., __ So.2d __ (Ala. June 12, 2009), the Court considered a foundation defect case in which Qore performed construction materials testing (CMT) for the builder, but failed to locate an area on the site, which had been a gasoline station, which contained gas tank pits.  The area was not properly backfilled and compacted, and as a result, the new building’s foundation cracked.

The builder, Bradford, sued Qore and obtained a judgment in the amount of $196,937.  On appeal, Qore argued that Bradford should have known that it had failed to locate the tank pits, and that Bradford’s constructive knowledge amounted to contributory negligence as a matter of law.

To establish contributory negligence as a matter of law, a defendant must demonstrate that the plaintiff put himself at risk of being injured and that the plaintiff had a conscious appreciation of that risk at the moment the incident occurred.  Hannah v. Gregg, Bland & Berry, Inc., 840 So.2d 839, 860-861 (Ala. 2002).

Qore argued that a Bradford employee had observed the improper work, and had testified that “in hindsight,” it had been a mistake to rely on Qore’s testing. The Court held that this evidence did not prove that as a matter of law, Bradford had consciously placed itself at risk of being harmed.

In  a few previous opinions, the Court has determined that a plaintiff was contributorily negligent as a matter of law.  In Serio v. Merrell, Inc., 941 So.2d 960 (Ala. 2006), the plaintiff stopped her vehicle at a “T” intersection.  Her direction of travel was controlled by a stop sign, and vehicles on the intersecting highway had the right-of-way.  After stopping, the plaintiff looked both ways and proceeded into the intersection, where her vehicle was struck by a gravel truck approaching from her left.  The gravel truck was traveling 60 mph in a 45 mph speed zone.

In affirming summary judgment for the defendant, the Court held:

While the question of contributory negligence is normally one for the jury, if the facts are such that all reasonable people would logically have to reach the conclusion that the plaintiff was contributorily negligent, then contributory negligence may be found as a matter of law.  Merrell made a prima facie showing that Serio was contributorily negligent, entitling it to summary judgment based on that defense, by establishing that she pulled into the path of the large oncoming truck when she could not have failed to see it if she had looked to her left before, or as, she moved forward into the intersection.  Her own testimony established that she consciously appreciated the danger posed by pulling onto a highway on which the vehicles traveling have the right-of-way, without first making sure that no vehicle was approaching too closely.  She admitted that there was no reason she could not have seen the tractor-trailer truck before she pulled out, given the prevailing conditions.  Serio at 964-965.

had observed CDG and Milam improperly backfilling the

tank pits and that Cahoon testified that, “in hindsight,” it

had been a mistake to trust CDG and Milam to properly compact

the soil in the tank pits and to rely on QORE to verify that

the soil in the tank pits had been suitably compacted.

Boxes in Aisle of Store “Open and Obvious”

On June 12, 2009, the Alabama Supreme Court held in favor of a retailer in a trip and fall suit.  In Dolgencorp, Inc. v. Taylor, ___ So.2d ___ (Ala. 2009), the Court considered an appeal in which an invitee at a Dollar General store tripped over unopened cases of merchandise in the store’s aisle.  The plaintiff testified at trial that she had not seen the cases, which were stacked approximately “knee or thigh high,”  but had noticed other cases of merchandise in the store on that occasion, and had maneuvered around them.  The plaintiff also presented testimony at trial from former employees of the store, suggesting that the store was “a wreck,” “a mess,” and “an accident waiting to happen.”  A jury found for the plaintiff, and awarded $260,000, including $175,000 in punitive damages.

In reversing the jury’s verdict, the Court held:

The owner of premises has no duty to warn an invitee of open and obvious defects in the premises which the invitee is aware of, or should be aware of, in the exercise of reasonable care.  Ex parte Mountain Top Indoor Flea Market, 669 So.2d 158, 161 (Ala. 1997).

In a standard premises-liability setting, we use an objective standard to assess whether a hazard is open and obvious.  The question is whether the danger should have been observed, not whether it was consciously appreciated.  In order for a defendant-invitor in a premises-liability case to win a summary judgment or judgment as a matter of law grounded on the absence of a duty on the invitor to eliminate open and obvious hazards or to warn the invitee of them, the record need not contain undisputed evidence that the plaintiff-invitee consciously appreciated the danger at the moment of the mishap.  While all ordinary risks present are asumed by the invitee, this recitation cannot mean that the invitor’s duty before a mishap is determined by the invitee’s subjective state of mind at the moment of the mishap.  Jones Food Co. v. Shipman, 981 So.2d 355, 362-63 (Ala. 2006).

The Court found that no evidence was presented that the cases were hidden, and held that the trial court should have granted the store’s motion for judgment as a matter of law.

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

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).

Chinese Drywall Coverage Litigation Working its Way Through Courts

The Insurance and Reinsurance Report has posted an informative update on the status of several pending lawsuits over coverage for Chinese drywall issues in both homeowner’s and CGL policies.  Having been involved in considerable EIFS litigation several years ago (with a few stragglers still around), I am paying attention to this to see how it compares.  Although I see some similarities, there are some marked differences as well.

First, both products obviously are componants that are incorporated into a structure, and arguably are intended to have the same useful life of the structure.  The Alabama Supreme Court has held that such componants are not “products” within the meaning of the Alabama Extended Manufacturers Liability Doctorine (AEMLD).  In Keck v Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), the Court held:

The owner of a house or of any building should reasonably expect that many components will have the same useful life as the house or building itself and will not need to be replaced over the life of the building. Such components include, by way of example, an exterior brick wall, a staircase, or a fireplace. There are also certain components of a house or a building the purchaser reasonably expects to wear out and to require replacement in the course of normal and ordinary usage, such as roof shingles, a dishwasher, a furnace, or a hot-water heater. Whether an item that is incorporated into real property may be considered a “product” for purposes of the AEMLD is determined by whether the item is a part of the structural integrity of the house or building that is reasonably expected to last for the useful life of the house or building. If it is, then the item cannot be considered a “product” for purposes of the AEMLD. However, if the item is attached or incorporated into real property and, yet its very function and nature clearly makes it an item that one would reasonably expect to repair or to replace during the useful life of the realty, the item may be considered a “product” for purposes of the AEMLD. For instance, although paint, when applied to the structure of a wall, becomes incorporated into the surface of the wall, paint is a structural improvement that does not have the same useful life as the wall itself or the building to which the wall is attached; one would expect to have to repaint a wall to maintain the quality of the first application. Therefore, paint would be considered a product for purposes of the AEMLD.

In Keck, the Court held that EIFS was intended to last for the useful life of the structure, and was not subject to the AEMLD.  Moreover, the Court held that it was not a “good” under the Uniform Commercial Code, and therefore was not subject to the rules concerning warranties of merchantability.  Arguably, drywall would meet the Keck test as well, and would therefore not be calssified as a “product” or a “good.”

It is also questionable whether a builder or installer would be held liable for negligence regarding the installation of chinese drywall.  In my opinion, this is the central difference between drywall and EIFS litigation.  In regard to EIFS, the negligence theories against builders and installers often revolved around agruments that the system was improperly installed, and that installation led to problems with moisture intrusion, termites, etc.  Conversely, it’s at least my understanding that the drywall issues concern the product itself, and not its installation.

There are some potential issues for building owners on this point, as generally, a builder is not liable for latent defects in building materials that are used and “he is not liable to the owner for the latent defect or liable for the amount of damage to the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27 (1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970).

The law is clear that a builder is not liable for latent defects in building materials that are

used and “he is not liable to the owner for the latent defect or liable for the amount of damage to

the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27

(1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970).

Unless a building owner is able to show that the builder or installer had knowledge of the problems associated with Chinese drywall, he or she may have problems with holding those entities accountable.

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

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).