Title: Mutual Assurance, Inc. v. William Joseph Schulte, M.D., and Pulmonary Associates of Mobile, P.A.

State: alabama

Issuer: Alabama Supreme Court

Document:

REL: 04/20/2007 - Mutual Assurance
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
____________________
1050092
____________________
Mutual Assurance, Inc.
v.
William Joseph Schulte, M.D., and Pulmonary Associates of
Mobile, P.A.
Appeal from Mobile Circuit Court 
(CV-96-2145)
STUART, Justice.
Dr. William Joseph Schulte and Pulmonary Associates of
Mobile, P.A., sued Mutual Assurance, Inc. ("MAI"), their
medical-malpractice insurance provider, alleging that MAI had
1050092
2
negligently or in bad faith refused to settle a malpractice
claim against them, which claim ultimately resulted in a
judgment exceeding the limits of their medical-malpractice
insurance policies and for which excess Dr. Schulte and
Pulmonary Associates were individually liable.  After the
trial court denied MAI's  motion for a summary judgment, MAI
petitioned this Court for permission to file an immediate
appeal pursuant to Rule 5, Ala. R. App. P.  We granted the
petition and now affirm the order of the trial court inasmuch
as it denied MAI's summary-judgment motion as to Dr. Schulte
and Pulmonary Associates' negligent-failure-to-settle claim.
We express no opinion as to that part of the trial court's
order denying MAI's summary-judgment motion as to the bad-
faith-failure-to-settle claim because our decision on the
negligent-failure-to-settle claim and the unique procedural
posture of this case renders a review of that claim
unnecessary.
I.
In April 1990, Woodrow Smith sued Dr. Schulte and
Pulmonary Associates, Dr. Schulte's medical group, alleging
that Dr. Schulte had committed malpractice while treating
1050092
Section 6-5-547 states, in relevant part:
1
"In any action commenced pursuant to Section 6-
5-391 or Section 6-5-410, against a health care
provider whether in contract or in tort based on a
breach of the standard of care the amount of any
judgment entered in favor of the plaintiff shall not
exceed the sum of $1,000,000.  Any verdict returned
in any such action which exceeds $1,000,000 shall be
reduced to $1,000,000 by the trial court or such
lesser sum as the trial court deems appropriate in
accordance with prevailing standards for reducing
3
Smith's wife, Annie Jo, and that she had died as a result of
that malpractice.  At the time of the alleged malpractice, Dr.
Schulte and Pulmonary Associates were each covered by medical-
malpractice insurance policies issued by MAI.  Each policy
provided up to $1,000,000 in coverage per incident; thus,
MAI's total exposure in regard to Smith's claim was $2,000,000
–– $1,000,000 on Dr. Schulte's policy and $1,000,000 on
Pulmonary Associates' policy.
According to Dr. Schulte and Pulmonary Associates, Smith
made multiple offers before trial to settle his claim for the
limits of the policies.  MAI, however, declined to settle.
MAI's decision not to settle the claim was premised, at least
in part, on § 6-5-547, Ala. Code 1975, which capped damages in
wrongful-death medical-malpractice cases at $1,000,000, plus
an additional amount adjusted annually for inflation.   In
1
1050092
excessive verdicts. ...  The maximum amount payable
under this section, $1,000,000, shall be adjusted on
April fifteenth of each year to reflect any increase
or decrease during the preceding calendar year in
the consumer price index of the United States
Department of Commerce."
4
that posture, the case thereafter proceeded to trial in March
1993.  
On April 6, 1993, the jury returned a verdict in favor of
Smith and against Dr. Schulte and Pulmonary Associates for
$4,500,000.  Dr. Schulte and Pulmonary Associates moved the
trial court to reduce the award, arguing both that it was
excessive and that it should be reduced in accordance with §
6-5-547.  Smith argued in response that § 6-5-547 violated the
Alabama Constitution and should therefore be declared invalid.
Following a hearing, the trial court ruled that the damages
award was not excessive, but it refused to declare § 6-5-547
unconstitutional.  Accordingly, it reduced the damages award
to $1,276,873 to comply with § 6-5-547.  Both parties then
appealed the trial court's judgment to this Court, which, in
Smith v. Schulte, 671 So. 2d 1334 (Ala. 1995), held that the
cap on damages in § 6-5-547 did in fact violate the Alabama
Constitution.  However, this Court held that the $4,500,000
1050092
5
verdict was excessive and remitted the damages award to
$2,500,000. 
MAI thereafter paid the $2,000,000 it was liable for
under its policies with Dr. Schulte and Pulmonary Associates
and loaned them an additional $1,150,000 to pay the remainder
of the judgment and the accumulated postjudgment interest.  In
June 1996, Dr. Schulte and Pulmonary Associates filed the
action underlying this appeal, claiming that MAI could have
settled the malpractice case with Smith within the limits of
their policies but had failed to do so, either negligently or
in bad faith; therefore, Dr. Schulte and Pulmonary Associates
argued, MAI was also liable for that part of the judgment that
exceeded the limits of their policies.
In July 2004, MAI moved the trial court for a summary
judgment, arguing that it could not be found to have
negligently or in bad faith failed to settle Smith's claim for
the $2,000,000 limit of their policies because, MAI said, its
decision not to settle was made in reliance upon what was at
that time a valid state law, § 6-5-547, which capped MAI's
liability for the malpractice incident at approximately $1.2
million.  Dr. Schulte and Pulmonary Associates opposed the
1050092
6
motion, arguing that a fact-finder should determine whether
MAI's reliance on § 6-5-547 was reasonable in light of the
fact that "in 1992-93, every reasonable lawyer and insurer
doing business in Alabama had to know and recognize that it
was highly likely that [§ 6-5-547] was unconstitutional."
This is so, Dr. Schulte and Pulmonary Associates claim,
because this Court had by that time already declared
unconstitutional other statutes that, like § 6-5-547, were
part of a package of tort-reform legislation enacted by the
Alabama Legislature in 1987.  See Armstrong v. Roger's Outdoor
Sports, 581 So. 2d 414 (Ala. 1991) (declaring § 6-11-23 and §
6-11-24(a) unconstitutional); Clark v. Container Corp. of
America, 589 So. 2d 184 (Ala. 1991) (declaring part of § 6-11-
1, 
and 
all 
of 
§ 
6-11-3, 
§ 
6-11-4, 
and 
§ 
6-11-5
unconstitutional); and Moore v. Mobile Infirmary Ass'n, 592
So. 
2d 
156 
(Ala. 
1991) 
(declaring 
 
§ 
6-5-544(b)
unconstitutional). 
In September 2005, the trial court denied MAI's motion
for 
a 
summary 
judgment. 
 
However, 
the 
trial 
court
simultaneously 
certified 
its 
order 
for 
interlocutory 
appellate
review pursuant to Rule 5(a), Ala. R. App. P.  MAI
1050092
7
subsequently petitioned this Court for permission to appeal,
and we granted the petition on August 2, 2006.
II.
"We apply the same standard of review [in reviewing
the grant or denial of a summary-judgment motion] as
the trial court applied. Specifically, we must
determine whether the movant has made a prima facie
showing that no genuine issue of material fact
exists and that the movant is entitled to a judgment
as a matter of law.  Rule 56(c), Ala. R. Civ. P.;
Blue Cross & Blue Shield of Alabama v. Hodurski, 899
So. 2d 949, 952-53 (Ala. 2004).  In making such a
determination, we must review the evidence in the
light most favorable to the nonmovant.  Wilson v.
Brown, 496 So. 2d 756, 758 (Ala. 1986).  Once the
movant makes a prima facie showing that there is no
genuine issue of material fact, the burden then
shifts to the nonmovant to produce 'substantial
evidence' as to the existence of a genuine issue of
material fact.  Bass v. SouthTrust Bank of Baldwin
County, 538 So. 2d 794, 797-98 (Ala. 1989); Ala.
Code 1975, § 12-21-12."
Dow v. Alabama Democratic Party, 897 So. 2d 1035, 1038-39
(Ala. 2004).
III.
Dr. Schulte and Pulmonary Associates have stated two
claims against MAI: one alleging negligent failure to settle
and one alleging bad-faith failure to settle.  In Waters v.
American Casualty Co. of Reading, Pa., 261 Ala. 252, 258, 73
So. 2d 524, 528 (1953), this Court confirmed that these are in
1050092
8
fact two distinct claims, stating that "there may be liability
under both rules and properly drawn counts based either on
negligence or bad faith should be held good, and separate
counts ...."  However, although the facts necessary to
establish these separate claims are usually closely related,
the claims do require different proof.  To succeed on a claim
alleging negligent failure to settle, a plaintiff must
establish that, considering all the circumstances, the insurer
in deciding not to settle the claim failed to exercise
reasonable or "ordinary care," that is, such care as a
reasonably prudent insurer would have exercised under the same
or similar circumstances.  Waters, 261 Ala. at 259, 73 So. 2d
at 529.  However, the inquiry relevant to a claim alleging bad
faith failure to settle is whether the insurer's failure to
settle had any "lawful basis," that is, whether the insurer
had any "'legitimate or arguable reason for failing to pay the
claim.'"  National Sec. Fire & Cas. Co. v. Bowen, 417 So. 2d
179, 183 (Ala. 1982) (quoting Gulf Atlantic Life Ins. Co. v.
Barnes, 405 So. 2d 916, 924 (Ala. 1981)). 
Despite this distinction, MAI's appellate brief makes no
differentiation between the plaintiffs' negligent-failure-to-
1050092
9
settle and bad-faith-failure-to-settle claims.  Instead, MAI
implicitly combines the claims and argues that summary
judgment was appropriate as to both claims because, it says,
MAI had a lawful basis for refusing to settle the underlying
medical-malpractice claim:
"MAI had a lawful basis (i.e., reliance on a
valid damages cap) for its refusal to settle.  That
is all that is required of an insurance carrier.  To
hold otherwise, would undermine the integrity of all
laws on which insurance carriers, as well as
citizens of the state of Alabama, can rely.  For
these reasons, MAI was entitled to summary judgment
on the negligence and bad-faith claims, and the
trial court erred in not granting [MAI's motion for
a] summary judgment."
(MAI's brief, p. 15.)  However, although the existence of a
lawful basis for MAI's refusal to settle would be a defense to
Dr. Schulte and Pulmonary Associates' bad-faith-failure-to-
settle claim, it is not a complete defense against their
negligent-failure-to-settle claim.  To defend against that
claim, MAI would still need to establish that a reasonably
prudent insurer would have relied upon that same lawful basis
to refuse to settle the claim.  
Nevertheless, although MAI does not specifically address
the  negligent-failure-to-settle claim, it does make the
general argument that an insurer's reliance on a validly
1050092
Dr. Schulte and Pulmonary Associates state in their brief
2
that our resolution of this issue will "terminate the action."
10
enacted statute should be presumed reasonable as a matter of
law.  We think that under the specific facts of this case the
determination of whether MAI's reliance on § 6-5-547 was
reasonable is a question that is better left to the trier of
fact.  MAI makes no other argument addressing Dr. Schulte and
Pulmonary 
Associates' 
negligent-failure-to-settle 
claim;
accordingly, the trial court's order is affirmed inasmuch as
it denied MAI's motion for a summary judgment as to that
claim.
Ordinarily, we would now consider MAI's argument that it
was entitled to a summary judgment on Dr. Schulte and
Pulmonary 
Associates' 
bad-faith-failure-to-settle 
claim.
However, the unique procedural posture of this case makes that
inquiry unnecessary.  The parties have agreed among themselves
that if MAI's argument –– that a party's reliance on a validly
enacted statute should be presumed reasonable as a matter of
law –– is not accepted by this Court, MAI will accept
responsibility for the $1,150,000 Dr. Schulte and Pulmonary
Associates paid in excess of their policy limits, and this
litigation will come to a close.   Accordingly, we need not
2
1050092
Thus, they are apparently willing to abandon their claims for
additional compensatory damages and/or punitive damages.
11
consider the bad-faith-failure-to-settle claim and whether
MAI's reliance on § 6-5-547 was nevertheless a "legitimate or
arguable reason" for failing to settle the underlying claim.
National Sec. Fire & Cas. Co. v. Bowen, 417 So. 2d at 183.
IV.
MAI moved for a summary judgment on Dr. Schulte and
Pulmonary Associates' negligent-failure-to-settle and bad-
faith-failure-to-settle claims, arguing that its decision not
to settle the underlying claim was made in reliance upon § 6-
5-547, which unambiguously capped MAI's liability on that
claim at a sum less than that at which settlement was offered.
Reliance upon a validly enacted statutory damages cap, MAI
argues, precludes a finding of negligence or bad faith.  The
trial court entered an order denying MAI's motion for a
summary judgment as to both of Dr. Schulte and Pulmonary
Associates' claims on the basis that the trier of fact should
determine whether MAI's reliance on § 6-5-547 was negligent or
in bad faith.  We now affirm that order as it relates to the
negligent-failure-to-settle claim.  Because of the agreement
between the parties, we need not consider MAI's argument as it
1050092
12
relates to the remaining bad-faith-failure-to-settle claim,
and the trial court's judgment is hereby affirmed.
AFFIRMED.
See, Smith, Bolin, and Parker, JJ., concur.
Cobb, C.J., and Lyons, Woodall, and Murdock, JJ., concur
in the result.
1050092
13
LYONS, Justice (concurring in the result).
The question before us is limited to "whether [MAI] had
an absolute right to rely on the damage[s] cap ... no matter
what other facts might or might not exist."  (Some emphasis
added.) I consider the reference to "other facts" to mean
facts other than the availability of the damages cap.  Under
this view, the strengths or weaknesses of the particular facts
associated with MAI's reliance are irrelevant to whether MAI
had an absolute right simply by reason of the presence of a
statute entitled only to a rebuttable presumption of
constitutionality.  If the question were posed in terms of
whether MAI had a right to a summary judgment upon Dr. Schulte
and Pulmonary Associates' failure to adduce facts sufficient
to create a jury question as to the presumption of
constitutionality, then the facts of this case would be
material.   
The main opinion recognizes the limited scope of the
issue by referring to MAI's "general argument that an
insurer's reliance on a validly enacted statute should be
presumed reasonable as a matter of law." ___ So. 2d at ___.
The main opinion than states: "We think that under the
1050092
14
specific facts of this case the determination of whether MAI's
reliance on § 6-5-547 was reasonable is a question that is
better left to the trier of fact." ___ So. 2d at ___. For the
reasons  previously noted, I cannot concur with a statement
recognizing  the materiality of the facts of this case under
the terms of the narrow issue before this Court.   
I therefore concur in the result. 
Cobb, C.J., concurs.
1050092
15
WOODALL, Justice (concurring in the result).
I concur in the result of the main opinion.  In granting
MAI permission to appeal, this Court agreed to review the
single issue identified in the trial court's Rule 5(a), Ala.
R. App. P., certification order, namely, the "narrow legal
issue [of] whether [MAI] had an absolute right to rely on the
damage[s] cap ... no matter what other facts might or might
not exist."  (Emphasis in original.) Consequently, in my
opinion, the resolution of the only issue presented is not
dependent upon the specific facts of this case. However, in
reviewing the issue, the main opinion properly rejects MAI's
"argument that an insurer's reliance on a validly enacted
statute should be presumed reasonable as a matter of law." ___
So. 2d at ___.  Indeed, "the issue is simply made here as in
all 
negligence 
cases 
whether, 
considering 
all 
the
circumstances, the insurer failed to exercise ordinary care
...."  Waters v. American Cas. Co. of Reading, Pa., 261 Ala.
252, 258-59, 73 So. 2d 524, 529 (1953)(emphasis added).  As
Dr. Schulte and Pulmonary Associates argue, "the existence of
the cap statute is just one factor, among many, for the jury
to consider in deciding whether MAI acted like a reasonably
1050092
16
prudent insurer."  Dr. Schulte and Pulmonary Associates'
brief, at 8.
In its Rule 5(a) certification order, the trial court
stated that "the parties have agreed ... that the ultimate
outcome of MAI's motion [for a summary judgment] will
terminate the litigation."  Consequently, I agree that the
Court need not consider the effect, if any, of the damages-cap
statute on Dr. Schulte and Pulmonary Associates' bad-faith-
failure-to-settle claim.
1050092
17
MURDOCK, Justice (concurring in the result).
Consistent with the special writings of Justice Lyons and
Justice Woodall, I note that the only question before this
Court in this Rule 5, Ala. R. App. P., permissive appeal is
the very narrow question whether the existence of a validly
enacted statute automatically precludes in every case any
further inquiry into whether an insurer has acted reasonably
in 
presuming the constitutionality of that 
statute 
and relying
thereon in its decision not to settle a claim against its
insured.  By stating that it does not, we will have stated all
that we need state in order to decide the question before us.
Because our review is properly limited to this question, and
because upon our decision of this question other issues will
become moot in light of the parties' agreement that, if we
decide this question in the negative, MAI will accept
responsibility for the $1,150,000 excess judgment and this
litigation will come to a close, the discussion of other
issues is dicta.  In this regard, I note that it is not
necessary for this Court to address the issues whether the
rebuttable presumption of the constitutionality of a validly
enacted statute that governs the courts in our consideration
1050092
18
of those statutes is available to an insurer and how that
presumption might bear on the determination in any given case
of whether the insurer acted reasonably or in good faith in
presuming the statute to be constitutional; the issue whether
in a case postured like the present one there is any
difference between whether an insurer has acted reasonably in
relying on the constitutionality of a statute and whether it
has acted in bad faith in relying thereon; and the issue
whether, 
because 
the 
more 
basic 
question 
of 
the
constitutionality of a statute is itself a question of law for
the court, rather than the finder of fact, the finer question
of the reasonableness of the insurer's reliance upon the
constitutionality of a statute, or upon the presumption of
such constitutionality, ought likewise to be considered a
question of law for the same court, albeit one to be decided
on a case-by-case basis.