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).

Alabama Supreme Court Will Not Follow Federal Maritime Punitive Damages Standard

June 3, 2009

Recently, the Alabama Supreme Court declined to follow a U.S. Supreme Court standard setting a ratio of punitive to compensatory damage at .65 to 1.  In Line v. Ventura, No. 1070736, ___ So.2d___ (Ala 2009), a legal malpractice action, the court held that in its recent holding in Exxon Shipping Co. v. Baker, 128 S. Ct. 2605 (2008), the U.S. Supreme court had limited the application of the ratio to maritime cases.  The Court expressly noted that it would continue to follow the ratio set out in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003), and BMW of North America v. Gore, 517 U.S. 559 (1996), which set forth a general ratio of 10 to 1 for punitive to compensatory damages.

Spoliation of Evidence in Construction Defect Claims

May 30, 2009

In defending construction defect claims, one must always consider the defense of spoliation of evidence.  Often, either before or after making such calims, plaintiffs will repair the alleged defective condition, destroying crucial evidence that must be analyzed by the defense.  The law requires that the plaintiff give notice to the defendant of anticipated repairs, providing him with an opportunity to inspect the alleged defcts.  When notice is not given, sanctions, including dismissal in some cases, are available.

The Alabama Supreme Court has held that when the subject of the lawsuit is destroyed without giving the defense an opportunity to inspect, and that inspection is necessary to the defense, the lawsuit must be dismissed. Capitol Chevrolet Inc. v. Smedley, 614 So.2d 439 (Ala. 1993); Cincinnati Ins. Co. v. Synergy Gas, Inc, 585 So.2d 822, 827 (Ala. 1991); Ex parte General Motors Corp, 769 So.2d 903 (Ala. 1989).

In Smedley, the Court reversed the trial court’s judgment and ordered that the case be dismissed based on spoliation. The Court recognized that without access to the evidence, to independently evaluate the cause of the fire, the defendants were left with no way to establish a defense. Acknowledging that dismissal was a severe sanction, the Court held that the dismissal of claims may be appropriate if a party destroys or disposes of evidence that it knows or should know is evidence that is important to possible or pending litigation.

The Court has identified five factors to be analyzed in deciding the appropriate remedy for spoliation of evidence: (1) the importance of the evidence destroyed; (2) the culpability of the defending party; (3) fundamental fairness, (4) alternative sources of information obtainable from the evidence destroyed, and (5) the possible effectiveness of other sanctions less severe than dismissal. Vesta Fire Ins. Corp. v. Milam & Co. Constr., Inc., 901 So.2d 84 (Ala. 2004).

In Story v. RAJ Properties, Inc., 909 So.2d 797 (Ala. 2005), the Court affirmed summary judgment in favor of a builder, EIFS installer, and EIFS manufacuturer where the plaintiff homeowner had removed the EIFS form the home, repaired the damaged sheathing, and reclad the home with brick.  The defendants were not notified, and their experts testified that they were unable to conduct any significant analysis of the EIFS material or the alleged damage by viewing photographs produced by the plaintiff.

In Flury v. Daimler Chrysler Corp., 427 F.3d 939 (11th Cir. 2005) the 11th Circuit Court of Appeals reversed a jury’s verdict against Daimler with instructions that the district court enter judgment for Daimler based on the spoliation of evidence doctrine. In doing so, the Court noted that the defendant had suffered extreme prejudice when it lost its opportunity to inspect the evidence; that the trial court had erred in leaving the issue of spoliation for the jury and that the “spoliation of critical evidence for whatever reason … may result in trial by ambush.”

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.

An Accident or an Indictment of the Industry?

May 26, 2009

Trucking accidents always present obstacles for the defense. The sheer physics involved often create situations involving serious injuries and fatalities. Couple the likely damages involved with the fact that there is a natural prejudice among the vast majority of the jury pool, and defending carriers and their drivers is frequently an uphill battle, to say the least.

With that said, it is without question that one of the major questions that absolutely must be addressed is that of collateral issues such as negligent entrustment and negligent supervision. Most of the lawsuits that I have defended contain these claims, in addition to simple negligence and wantonness claims against the driver and carrier.

The laws of evidence generally will prohibit the plaintiff from introducing evidence of past instances of negligent conduct committed by a defendant to show that he or she was negligent in the present lawsuit. However, if there is a viable claim that the owner of the vehicle negligently entrusted the truck to a driver, then the driver’s entire history can be admissible to prove that the owner should have known that the driver was incompetent, and therefore that the owner’s negligence in entrusting the truck to the driver was an additional cause of the accident.

Although such a claim theoretically does not create additional damages for plaintiffs, it can turn an otherwise straightforward accident into an indictment of the trucking industry, by allowing a plaintiff’s attorney to grandstand about the driver’s history, rather than the subject accident. It is therefore crucial that a driver’s history must be explored early in the litigation, and if possible, these issues must be addressed in a motion for summary judgment or for partial summary judgment.

Here in Alabama, the Supreme Court has made it clear that it is “essential that the plaintiff prove that the driver was incompetent, i.e., that he is likely because of his youth, inexperience or other wise to use [the vehicle] in a manner involving unreasonable risk of physical harm to himself and others.”  Reeves v. King, 534 So. 2d 1107, 1108 (Ala. 1988). In addition to proving that the driver was incompetent, the plaintiff must also prove that the owner knew (or that given the negative history, should have known) that he or she was incompetent. If the driver’s history is relatively good, then most judges will, understanding how evidence of prior violations and accidents will prejudice a jury, dismiss the collateral claims.

It should be noted that, at least in Alabama, a spotless history is not required.  In Pryor v. Brown & Root USA, Inc., 674 So. 2d 45 (Ala. 1995). The Supreme Court considered a situation in which a personal injury action was brought against an employer in connection with an accident occurring after its employee left work but was driving the employers vehicle. The Court found that the employee had been charged with DUI in another state, and had received two speeding tickets. In affirming summary judgment in favor of the employer on a claim of negligent entrustment, the Court found that the employee’s past driving record was not sufficient to support the claim.

Likewise, in Thedford v. Payne, 813 So. 2d 905 (Ala. Civ. App. 2001), the Court of Civil Appeals considered a case in which a passenger brought an action against the driver and his mother. In reversing the trial court’s judgment on the negligent entrustment claim, the Court held that evidence showing that the driver, who had only been driving for one year prior to the accident, and had been involved in a similar accident some three months prior to the subject accident, was not sufficient proof of negligent entrustment, and that the trial Court aired in submitting the plaintiff’s claims to the jury.

In the absence of these collateral issues, it is unlikely rhat evidence of past conduct will be admitted.  However, failing to appreciate the danger that these issues raise in the defense of trucking lawsuits can place the client at a definite disadventage.