Case Title: Federated Mutual Insurance Company and Jim Howell v. Melvin ( 272 ) Arthur Vaughn

Citation: 

Docket Number: 1041867

State: alabama

Court: Alabama Supreme Court

Date: 2007-01-05T00:00:00Z

Document:
REL:01/05/2007FederatedMutualInsurancev.MelvinVaughn
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334)
242-4621), of any typographical or other errors, in order that corrections may be made
before the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
 OCTOBER TERM, 2006-2007
_________________________
1041867
_________________________
Federated Mutual Insurance Company, Inc., and Jim Howell
v.
Melvin Arthur Vaughn
_________________________
1050611
_________________________
Melvin Arthur Vaughn
v.
Federated Mutual Insurance Company, Inc., and Jim Howell
Appeals from Jefferson Circuit Court
(CV-04-2597)
1041867, 1050611
2
NABERS, Chief Justice.
These appeals involve the construction of an automobile
insurance policy.  They present the question whether the sole
named insured was entitled to reject uninsured-motorist
coverage with respect to some, but not all, additional
insureds.  We hold that it was.  
I.  Facts and procedural history
Melvin Arthur Vaughn was an employee of Farmers Tractor
Company, Inc. ("Farmers").  On April 25, 2002, Vaughn was
driving a vehicle owned by Farmers and covered by an
automobile insurance policy issued by Federated Mutual
Insurance Company, Inc., when he collided with a vehicle
driven by Ellen Chapman.  Vaughn, who was injured in the
accident, claims that Chapman is responsible for his injuries.
Vaughn filed a workers' compensation claim with Farmers, which
has been settled.  He also filed a claim with Federated for
uninsured/underinsured-motorist ("UM") benefits, based on his
assertion that he was legally entitled to damages from Chapman
in excess of the limit of her liability insurance.  
Under its policy with Federated, Farmers maintained UM
coverage for its directors, officers, partners, owners, and
1041867, 1050611
Vaughn's 
complaint 
also 
included 
claims 
alleging
1
misrepresentation, negligence, and wantonness.  The trial
court entered a summary judgment for the defendants as to
those claims, and Vaughn has abandoned them.   
3
family members who qualified as insureds.  However, it had
expressly rejected UM coverage for "any other person who
qualifies as an insured."  As an employee, Vaughn qualified as
an insured, but he was not included in any of the categories
for which Farmers maintained UM coverage.  Federated denied
Vaughn's claim for UM benefits on that basis.
On April 27, 2004, Vaughn sued Federated and one of its
agents, Jim Howell, in the Jefferson Circuit Court.  His
complaint alleged, in relevant part,  breach of the insurance
contract and bad-faith failure to investigate an insurance
claim.   The defendants moved for a summary judgment, and on
1
August 23, 2005, the trial court granted the motion with
respect to the bad-faith claim.  The trial court certified the
judgment as final pursuant to Rule 54(b), Ala. R. Civ. P., and
Vaughn appeals (case no. 1050611).
The trial court denied the defendants' motion for a
summary judgment on the breach-of-contract claim, finding that
Farmers' partial rejection of UM coverage was void.  The trial
court certified its order denying the summary-judgment motion
1041867, 1050611
4
for permissive appeal pursuant to Rule 5, Ala. R. App. P.,
stating that the controlling question of law was whether the
policy provisions governing UM coverage were "void and
unenforceable, as they violated the purpose and scope of the
Alabama Uninsured Motorist Act ...."  This Court granted
permission to appeal (case no. 1041867).
II. Analysis
A.  Farmers' partial rejection of UM benefits
Section 32-7-23, Ala. Code 1975, provides:
"No automobile liability or motor vehicle liability
policy 
insuring 
against 
loss 
resulting 
from
liability imposed by law for bodily injury or death
suffered by any person arising out of the ownership,
maintenance or use of a motor vehicle shall be
delivered or issued for delivery in this state with
respect 
to 
any 
motor 
vehicle 
registered 
or
principally garaged in this state unless coverage is
provided therein or supplemental thereto ... for the
protection of persons insured thereunder who are
legally entitled to recover damages from owners or
operators of uninsured motor vehicles ... provided,
that the named insured shall have the right to
reject such coverage ...."
(Emphasis added.)  
This language establishes the general rule that a motor-
vehicle policy must provide UM coverage "for the protection of
persons insured thereunder," but also provides an exception to
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5
the rule –- i.e., the named insured has the right "to reject
such coverage."
Vaughn admits that this language gives Farmers the right
to reject UM coverage altogether, but he argues that Farmers
could not maintain UM coverage with respect to some additional
insureds but reject it with respect to others.  According to
Vaughn:
"[O]nce the decision is made to include uninsured
motorist coverage in the automobile policy, it must
include all persons insured under the liability
provisions of said policy in the class of insureds
for uninsured motorist coverage purposes."
(Vaughn's brief in case no. 1041867 at 29.)  Because Federated
agreed to extend liability coverage to employees such as
Vaughn, he says, it must extend UM coverage to those same
employees if it elected to provide that coverage to other
additional insureds. 
There is language in Alabama caselaw that appears to
support Vaughn's argument.  In State Farm Automobile Insurance
Co. v. Reaves, 292 Ala. 218, 223, 292 So. 2d 95, 99 (1974),
the Court stated that "once an automobile liability policy is
issued extending coverage to a certain class of insureds under
such a clause, uninsured motorist coverage must be offered to
1041867, 1050611
The uninsured-motorist statute in effect when Reaves was
2
decided, § 74(62a), Title 36, Code of Alabama of 1940, was
materially identical to § 32-7-23, Ala. Code 1975.
6
cover the same class of insureds."  The Court quoted this
statement with approval in Billups v. Alabama Farm Bureau
Mutual Casualty Insurance Co., 352 So. 2d 1097 (Ala. 1977). 
The policy at issue in Reaves expressly provided
liability coverage for a number of people other than the named
insured.  The named insured did not reject UM coverage, but
the policy was silent as to whether UM coverage had been
extended to the additional insureds.  When one of the
additional insureds was in an accident involving an uninsured
motorist, the insurer argued that the uninsured-motorist
statute required UM coverage only for the named insured and
not for any additional insureds.   The Court rejected that
2
argument, noting that the statute required that coverage be
extended (absent a rejection) to "persons insured [under the
policy]," 292 Ala. at 223, 292 So. 2d at 99, and not merely to
the named insured.  Significantly, however, Reaves did not
require the insurer to provide UM coverage, but only to
"offer" it.  The additional insureds were
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7
"the 'persons insured thereunder' in the subject
policy, within the provisions of § 74(62a)[, Code of
Ala. 1940,] and as such were required to be given
uninsured motorist coverage, absent a rejection of
such coverage by the 'named insured.'"
292 Ala. at 223, 292 So. 2d at 99 (emphasis added); accord
Hollowave v. Nationwide Mut. Ins. Co., 376 So. 2d 690, 694
(Ala. 1979)("§ 32-7-23, absent rejection by the named insured,
mandates uninsured motorist coverage for the protection of
persons insured under a motor vehicle liability policy"). 
In Billups, a policy provided liability coverage for the
named insured and for anyone using the covered vehicle "with
the express or implied permission of the named insured," as
required by statute.  352 So. 2d at 1101.  The named insured
did not reject UM coverage with respect to any additional
insureds, but the insurer inserted a provision into the policy
that limited the scope of UM coverage to those using the
vehicle with the express permission of the named insured.  
Billups was a passenger in the covered vehicle when it
collided with a vehicle driven by an uninsured motorist.  The
driver of the covered vehicle did not have the express
permission of the named insured to use the vehicle.  The trial
court entered  a judgment as a matter of law in favor of the
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8
insurer, enforcing the policy provision that required express
permission.  On appeal from that judgment, this Court held
that the insurer could not unilaterally restrict UM coverage
to those who used the covered vehicle with express permission,
and it remanded the case to the trial court to determine
whether the driver had the implied permission of the named
insured to use the vehicle.  Again, the case dealt with an
attempt by the insurer to restrict the scope of UM coverage
required by the statute, not the named insured's right to
reject such coverage.
Reaves and Billups stand for the proposition that if the
named insured does not reject UM coverage, the insurer must
provide UM coverage not only to the named insured, but also to
any additional insureds.  However, neither case restricted the
named insured's right to knowingly reject UM coverage with
respect to additional insureds.  
These cases, when viewed on their facts, contain no
holding to support Vaughn's argument that a named insured's
decision to accept UM coverage for some additional insureds
prevents it from rejecting UM coverage with respect to other
additional insureds.  However, there is also a dearth of
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9
caselaw to support Federated's position that a named insured
may partially reject UM coverage.  The question is, therefore,
one of first impression involving statutory interpretation and
freedom of contract.
Section 32-7-23 gave Farmers the right "to reject [UM]
coverage," and it does not qualify or restrict that right.
Vaughn asks this Court to read the statute to grant Farmers
"the right to totally reject such coverage, but not to
partially reject it."  The language of § 32-7-23 does not
support, let alone require, this interpretation; because the
greater typically includes the lesser, the right to reject
totally UM coverage implies the right to reject it partially.
In fact, Vaughn's central argument for grafting such a
restriction onto § 32-7-23 is that the "purpose" of the
statute is to maximize the number of persons who can recover
UM benefits; he also argues that courts are free to "strike
down any policy provisions crafted by insurance companies that
[they] deem to be contrary to or derisive of" that purpose.
(Vaughn's brief in case no. 1041867 at 24-25.)  This is a
public-policy argument.  We have made clear that, in the
context of an insurance contract,
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10
"'"'if there is one thing which more than another
public policy requires it is that men of full age
and competent understanding shall have the utmost
liberty of contracting, and that their contracts,
when entered into freely and voluntarily, shall be
enforced by courts of justice.'"'"
Ex parte Life Ins. Co. of Georgia, 810 So. 2d 744, 751 (Ala.
2001)(quoting Sutton v. Epperson, 631 So. 2d 832, 835 (Ala.
1993), quoting in turn other cases).  Nothing in the text of
§ 32-7-23 prevented Farmers from rejecting UM coverage for
Vaughn while accepting UM coverage for other insureds.  This
Court may not interfere with Farmers' freedom of contract on
a public-policy consideration based on what Vaughn claims to
be the "purpose" of the statute. 
 
Farmers was entitled to reject UM coverage for employees
such as Vaughn, notwithstanding that it maintained UM coverage
for others.  Federated did not breach the insurance contract
by refusing to pay Vaughn's claim on that basis.  We therefore
reverse the trial court's order denying the defendants' motion
for a summary judgment as to the contract claim and render a
judgment in favor of the defendants as to that claim.
B. Bad-faith failure to investigate
To recover for bad-faith failure to investigate an
insurance claim, the insured must show that the insurer
1041867, 1050611
11
breached the insurance contract when it refused to pay the
insured's claim.  State Farm Fire & Cas. Co. v. Slade, 747 So.
2d 293, 318 (Ala. 1999).  As discussed above, Federated did
not breach the insurance contract by refusing to pay Vaughn's
claim for UM benefits.  The defendants were thus entitled to
a judgment as a matter of law on Vaughn's bad-faith claim, and
the trial court correctly entered a summary judgment for them
as to that claim.
1041867 –- REVERSED AND JUDGMENT RENDERED.
1050611 –- AFFIRMED.
See, Lyons, Harwood, Woodall, Stuart, Smith, Bolin, and
Parker, JJ., concur.