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.


Non-custodial Minor Child not Covered by UM Policy

June 28, 2009

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.

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.


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

June 11, 2009

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

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).

Sotomayor’s History Includes Decisions Favoring Insurers

May 28, 2009

Much has been written about Second Circuit Judge and Supreme Court nominee Sonia Sotomayor and her judicial history, most of which seeks to provide some insight into her future rulings on abortion, gun control, and other constitutional issues.  Philildelphia lawyer Randy Maniloff, however, has taken the time to research her past decisions as they relate to coverage issues, and finds that “her decisions have overwhelmingly been in favor of insurers.”  Read about it in Randy’s newsletter.

Insured Not “Legally Entitled to Recover” UM Benefits

May 21, 2009

The Alabama Supreme Court recently held that an insured was barred from maintianing a claim for uninsured/underinsured motorist benefits because she had not proven that she was “legally entitled to recover damages” from the underinsured motorist.  In Kendall v. United Services Automobile Association, ___So.2d___ (Ala. 2009), the plaintiff’s vehicle was struck by a vehicle operated by Angelia Mercer, an employee of the Elmore County District Attorney’s office, who was acting within the line and scope of her duty at the time of the accident.

The plaintiff filed suit against the County and her UIM carrier, USAA, alleging injuries which were undisputedly greater that $100,000.00.  The County, pursuant to Alabama law, is subject to a cap in the amount of “$100,000.00 for bodily injury or death for one person in any single occurrence.”  Code of Alabama, 1975, §11-93-2.  The County settled the claim in that amount, and the plaintiff proceeded against USAA for her UIM limits of $75,000.00.

The Alabama UM/UIM statute provides for the payment of benefits to insureds under motor vehicle liability policies “for the protection of persons insured thereunder who are legally entitled to recover damages from owners or operators of uninsured motor vehicles because of bodily injury, sickness or disease, including death, resulting therefrom….”  Code of Alabama, 1975, §32-7-23(a).

In affirming summary judgment for the carrier, the Court held that because of the $100,000.00 cap, the plaintiff was not “legally entitled to recover” any amount in excesss of that amount from the county, and therefore that USAA was not liable under the policy.