Requirements for Bad Faith in Alabama

Tort of Bad Faith Different from Wanton and Negligent Conduct

When a claim is not paid as the insured desires a suit will be invariably filed against the insurer seeking both contract and tort damages. When an insurer is sued by its insured, since the invention of the trot of bad faith in the 1950’s, the suit is never limited to contract damages but always includes tort damages to make it possible to profit from the suit.

In Camp Winnataska, Inc., a/k/a Camp Winnataska v. National Casualty Company, United States District Court, N.D. Alabama, 2016 WL 2894093, Case No.: 4:15-CV-01024-KOB (05/18/2016) the USDC, Northern District of Alabama was asked by  National Casualty Company to dismiss Plaintiff Camp Winnataska’s claims against it for wanton and negligent bad faith as alleged in parts of its Amended Complaint.

FACTS

Plaintiff Camp Winnataska owns and operates a camp in St. Clair County, Alabama. The camp facilities include a gymnasium for which National Casualty Company provided commercial property insurance coverage. On May 14, 2014 – within the policy’s coverage period – the roof of the gymnasium collapsed. Camp Winnataska filed a claim with National Casualty Company, asking it to pay for the damage to the collapsed roof and to pay for the demolition and reconstruction of the remainder of the gymnasium. National Casualty Company paid Camp Winnataska for the damage to the roof, but denied coverage as to the remainder of the gym. Camp Winnataska alleges that this denial was a breach of contract and was done in bad faith..

DISCUSSION

National Casualty Company argues that the court should dismiss Counts IV and V of Camp Winnataska’s Amended Complaint because Alabama does not recognize causes of action for negligent or wanton handling of insurance claims. [Kervin v. Southern Guar. Ins. Co., 667 So. 2d 704, 706.]

If Camp Winnataska had merely alleged that National Casualty Company negligently, wantonly, or incompetently handled its insurance claims, then Camp Winnataska would not have stated viable causes of action. However, Camp Winnataska has alleged more than mere negligence or wantonness; Camp Winnataska has stated viable claims for bad faith.

Under Alabama law, an actionable tort arises for an insurer’s intentional refusal to settle a direct claim where there is either (1) no lawful basis for the refusal coupled with actual knowledge of the fact or (2) intentional failure to determine whether or not there was any lawful basis for such refusal.  Within this singular tort of bad faith, two methods of proof exist: “normal” bad faith, also known as bad faith refusal to pay, and “abnormal” bad faith, known as bad faith refusal to investigate.

To state a claim for “normal” bad faith, a party must allege: (1) a breach of the insurance contract; (2) an intentional refusal to pay the insured’s claim; (3) the absence of any reasonably legitimate or arguable reason for that refusal; and (4) the insurer’s actual knowledge of the absence of any legitimate or arguable reason.

Camp Winnataska has sufficiently pled a claim for “normal” bad faith denial of its insurance claim in Count IV of its Amended Complaint by alleging that National Casualty Company acted in bad faith when it denied Camp Winnataska’s claim for the costs and expenses necessary to demolish and reconstruct the gymnasium. Specifically, Camp Winnataska alleges (1) that National Casualty Company breached the insurance contract by refusing to pay its claim; (2) that National Casualty Company intentionally refused to pay Camp Winnataska’s claim; (3) that National Casualty had no legitimate basis for refusing to pay; and (4) that National Casualty Company had actual knowledge of the absence of a legitimate reason.

To state a claim for “abnormal” bad faith, a party must allege, in addition to the first four elements, that the insurer intentionally failed to determine whether there was a legitimate or arguable reason to refuse to pay the claim. If the intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer’s intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.

Camp Winnataska has also sufficiently pled a claim for “abnormal” bad faith in Count V of its Amended Complaint. In Count V, Camp Winnataska alleges that National Casualty Company intentionally failed to determine whether any lawful basis existed for its refusal to honor Plaintiff’s claim. Further, Camp Winnataska alleges that National Casualty Company was incompetent in the way that the claim was investigated and that National Casualty Company failed to conduct any analysis of Camp Winnataska’s claim.

Because Camp Winnataska has stated cognizable claims for bad faith refusal to pay and bad faith refusal to investigate in Counts IV-V of its Amended Complaint, the court will denied National Casualty Company’s Motion to Dismiss as to these Counts.

The court, therefore, found that Camp Winnataska has stated viable claims for bad faith refusal to pay and bad faith refusal to investigate in Counts VI and V of its Amended Complaint. Accordingly, the court denied National Casualty Company’s Motion as to these Counts.

ZALMA  OPINION

This is a pleading decision rather than one based on evidence. The court found that the allegations of the complaint were sufficient to all the plaintiff to attempt to prove that National Casualty’s claim handling was either normal or abnormal bad faith when it paid part of the claim made by the plaintiff but refused to pay their entire claim. Evidence at trial will show whether coverage existed for the loss and if the decision to partially deny the claim was fairly debatable or the result of a genuine dispute.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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