Opinion ID: 1469111
Heading Depth: 1
Heading Rank: 4

Heading: Standard of Proof for a Fairly Debatable Claim

Text: On appeal, this Court is called upon to determine whether every claim of insurer bad faith must be established by proof of a breach of the contract of insurance sufficient to warrant a directed verdict or judgment as a matter of law (JML), or whether there are certain instances of insurer misconduct that can be submitted to the jury even if an insured is not entitled to JML on the contract cla im. After carefully reviewing the case law from other jurisdictions, including states we looked to in deciding Bibeault and Bartlett, we are satisfied that certain claims of insurer bad faith are sustainable, notwithstanding the failure of plaintiff to establish entitlement to JML on the contract claim. Further, in situations in which the claim is fairly debatable, we are asked to determine whether liability may be imposed in situations in which the carrier intentionally or recklessly failed to properly investigate a claim, or failed to subject its investigation to an appropriate cognitive evaluation and review, or otherwise acted in an oppressive and unreasonable manner. We answer this question in the affirmative. Since the intentional tort of bad faith was first recognized in Fletcher v. Western National Life Insurance Co., 10 Cal.App.3d 376, 89 Cal.Rptr. 78 (1970), in which a California Court of Appeals declared that an insurer's bad faith withholding of payments due under an insurance policy was a breach of the implied-in-law duty of good faith and fair dealing owed to its insured, numerous jurisdictions have defined and redefined the nature of the tort and the level of proof needed to establish the claim. In recognition that mere negligence in failing to settle a claim against an insured may subject the carrier to payment in excess of the policy limits, but is not an actionable tort, courts typically have required a heightened standard of proof. In Bibeault, this Court held that [i]f a claim is `fairly debatable,' no liability in tort will arise. Bibeault, 417 A.2d at 319. We adopted the test set forth by the Supreme Court of Wisconsin that a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's kno wledge or reckless disregard of the lack of a reasonable basis for denying the claim, and that these elements may be inferred from evidence of a reckless disregard for the truth or a reckless indifference to facts or to proofs submitted by the insured. Id. (quoting Anderson, 271 N.W.2d at 376-77). This definition was expanded in Bartlett, to include the requirement that the plaintiff in a `bad faith refusal' case has the burden of proving: (a) an insurance contract between the parties and a breach thereof by the defendant;    (b) an intentional refusal to pay the insured's claim; (c) the absence of any reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason); (d) the insurer's actual knowledge or the absence of any legitimate or arguable reason; (e) 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. Bartlett, 538 A.2d at 1000 (quoting Dutton, 419 So.2d at 1361). As noted, in Bartlett, we adopted the directed verdict standard of proof, as approved by the Alabama Supreme Court in Dutton, 419 So.2d at 1362. Bartlett, 538 A.2d at 1002. This heightened standard of proof has become the sine qua non of a fairly debatable claim, and the terms fairly debatable and directed verdict on the contract claim are employed interchangeably. Notably, the Alabama Supreme Court has recognized the unfortunate circumstance that recovery for the tort of an insurer's bad faith failure to pay a claim, once thought to be a rarely applicable remedy,    appears now with great frequency. Employees' Benefit Association v. Grissett, 732 So.2d 968, 978 (Ala. 1998). Since its holding in Dutton, Alabama has responded accordingly. In response to the burgeoning number and types of insurer misconduct cases, the Alabama Supreme Court has adopted numerous exceptions to the directed verdict standard, such that a commentator has concluded that the exceptions have swallowed the rule. See Stephen D. Heninger & Nicholas W. Woodfield, A Practitioner's Guide to Alabama's Tort of Bad faith, 57 Ala. Law. 277, 281 (1996). The most important difference between Alabama's procedures and the presentation of bad faith claims in Rhode Island is that, unlike Rhode Island, the claims are not severed  the breach-of-contract claim and the bad faith claim are presented to the same jury at the same time. Hence, the directed verdict standard is more easily (although not universally) applied in the context of the same proceeding. [K]eenly aware of the fact that there were countervailing policy considerations that weighed in favor of an insured's right to have his claim properly evaluated and promptly paid by the insurer, the Alabama courts have restricted the directed verdict on the contract claim standard to `normal' or `ordinary' bad faith cases and articulated a different standard to be applied in certain unusual or extraordinary cases. National Insurance Association v. Sockwell, March 15, 2002 at 41. In Safeco Insurance Co. of America v. Sims, 435 So.2d 1219 (Ala.1983), the court held that the directed verdict on the contract claim test is not to be read as requiring, in every case and under all circumstances, that the tort claim be barred unless the trial court has literally granted plaintiff's motion for a directed verdict on the contract. Id. at 1224. Rather, the court described that test as an objective standard by which to measure the burden of proving that [the] defendant's denial of payment was without any reasonable basis either in fact or law; that is, proof that the insurer's defense to the contract claim is devoid of any triable issue of fact or reasonably arguable question of law. Id. at 1224-25. Thus, the directed verdict standard was held not to apply in cases in which the insurer intentionally or recklessly failed to properlyinvestigate the claim or to subject the results of the investigation to a cognitive evaluation and review. Thomas v. Principal Financial Group, 566 So.2d 735, 744 (Ala.1990). Moreover, when the question of insurer bad faith hinges on a disputed issue of fact, Safeco, 435 So.2d at 1224, or a disputed oral conversation between the insurer and its insured, Jones v. Alabama Farm Bureau Mutual Casualty Co., 507 So.2d 396, 400-01 (Ala. 1987), merely because the insurer withstands a directed verdict motion because an issue of fact exists, the plaintiff is not barred, as a matter of law, from pursuing the tort claim. Although the plaintiff's burden of proof in a bad faith action is great, it should not be insurmountable. Id. at 401. Further, when the allegedly disputed factual issues arise solely from the statements of the insurer, the directed verdict standard is not applicable; such a rule would frustrate the purpose of the bad faith action by allowing an insurer to avoid a bad faith claim by feigning ignorance of the claim or misrepresenting the content of oral or written communications. Id. As discussed, another well-recognized exception to the fairly debatable/directed verdict on the contract claim standard centers on the intentional or reckless failure on the part of an insurer to properly investigate the claim to determine the existence of a valid reason for denying payment, or the failure to submit the results of the investigation to a cognitive evaluation and review to determine whether there was a lawful basis for denying the claim. Thomas, 566 So.2d at 744 (citing Continental Assurance Co. v. Kountz, 461 So.2d 802 (Ala.1984)). Significantly, in Grissett, 732 So.2d at 976, the court held that the insurer in a normal case cannot use ambiguity in the contract as a basis for claiming a debatable reason not to pay the claim. Otherwise, an insurer would have the incentive to write ambiguous policies in order to create an absolute defense to a bad faith claim. Id. at 976-77. Finally, in Loyal American Life Insurance Co. v. Mattiace, 679 So.2d 229 (Ala.1996), the court determined that the question of bad faith is to be tested at the time of the denial. Recognizing that an insurer has a responsibility to marshal all the facts necessary for a fair and comprehensive investigation before it refuses to pay a claim, the court limited the insurer's attempts to establish a fairly debatable claim to the proof in its possession at the time the claim was denied. [T]he insurance company cannot later seek to justify its denial [of an insured's claim] by gathering information which it should have had in the first place. Aetna Life Insurance Co. v. Lavoie, 505 So.2d 1050, 1053 (Ala.1987). In addition to these judicial variants to the fairly debatable/directed verdict on the contract claim standard for establishing insurer bad faith, several jurisdictions have developed alternative approaches to first-party bad faith claims and have rejected the fairly debatable/directed verdict on the contract claim standard in its entirety. The Arizona Supreme Court has determined that the insurer's belief in the fair debatability of a claim is a question of fact for the jury. In Zilisch v. State Farm Mutual Automobile Insurance Co., 995 P.2d 276 (Ariz. 2000), the Arizona Supreme Court rejected the contention that an insurer's wrongful conduct is irrelevant in situations in which the claim is fairly debatable. While it is clear that an insurer may defend a fairly debatable claim, all that means is that it may not defend one that is not fairly debatable. But in defending a fairly debatable claim, an insurer must exercise reasonable care and good faith. Id. at 279. The Arizona Court recognized that an insurance contract provides more than security from financial loss  `the insured also is entitled to receive the additional security of knowing that [he or] she will be dealt with fairly and in good faith.' Id. at 280. Thus, in Arizona, the fact that the insurer has eventually performed the contract and paid the claim short of litigation, does not insulate it from bad faith tort liability. The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured's security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that. Id. Nor is a plaintiff required to establish that he or she is entitled to a JML on the breach-of-contract claim. The appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and whether there is proof that the insurer either knew or was conscious of the fact that its conduct was unreasonable. Id. The Supreme Court of Kentucky rejected the fairly debatable claim standard and held that the existence of jury issues on the contract claim does not defeat the bad faith claim, notwithstanding the right of the insurer to challenge a fairly debatable claim. Although matters involving investigation and payment of a claim may be `fairly debatable,' an insurer is not thereby relieved from its duty to comply with the mandates of [Kentucky law]. Farmland Mutual Insurance Co. v. Johnson, 36 S.W.3d 368, 375 (Ky.2000). An insurance company is obligated to investigate, negotiate, and attempt to settle the claim in a fair and reasonable manner and, although elements of a claim may be `fairly debatable,' an insurer must debate the matter fairly. Id. Further, following the lead of Arizona in Zilisch, the court held that whether a claim or the amount    is fairly debatable is a question of fact for the jury and    the fact of a disputed amount does not relieve the insurer of its duty to handle the claim fairly. The appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable. Id. (quoting Zilisch, 995 P.2d at 280). The State of Florida has also rejected the fairly debatable standard for determining the existence of insurer bad faith. Recognizing that the tort of bad faith refusal to pay a first-party claim, as opposed to a third-party claim, is purely a statutory remedy, the Supreme Court of Florida found the fairly debatable standard to be inappropriate and rejected it in its entirety. State Farm Mutual Automobile Insurance Co. v. Laforet, 658 So.2d 55, 62 (Fla. 1995). The court adopted a totality of the circumstances approach in evaluating both third-party and first-party bad faith claims. Id. at 63. Further, the court set forth several factors that should be taken into account in evaluating first-party bad faith actions, including: (1) the efforts or measures taken by the insurer to resolve the coverage dispute promptly or in such a way as to limit any potential prejudice to the insureds; (2) the substance of the coverage dispute or the weight of legal authority on the coverage issue; and (3) the insurer's diligence and thoroughness in investigating the facts specifically pertinent to coverage. [6] Id. Finally, the court concluded that the issue of bad faith is a question of fact for the jury. See John J. Jerue Truck Broker, Inc. v. Insurance Company of North America, 646 So.2d 780 (Fla.Dist.Ct.App.1994) (disputed issues of material fact relative to insurer bad faith are jury questions). Although the approach adopted by these jurisdictions is of more than passing interest, we are not persuaded, at this time, to abandon the rule that an insurer has the right to debate a claim that is fairly debatable. However, we are of the opinion that the directed verdict or JML on the contract claim is unworkable and we revisit our prior decisions in this regard. We decline tohold that a plaintiff, to litigate his or her bad faith claim, must establish entitlement to a JML on the breach-of-contract claim. Rather, we hold, consistent with § 9-1-33, that the questio n of whether or not an insurer has acted in bad faith in refusing to settle a claim shall be a question to be determined by the trier of fact. That is, bad faith is established when the proof demonstrates that the insurer denied coverage or refused payment without a reasonable basis in fact or law for the denial. We deem this rule to be of particular significance in this jurisdiction because claims of insurer bad faith are severed and tried separately from the breach of insurance contract claim, a procedure that provides the insurer with significant procedural protections, including nondisclosure of its file until the completion of the breach-of-contract action. [7] Insurers doing business in Rhode Island have an implied obligation to promptly and fully respond to their insured, to investigate a claim and to subject that claim to appropriate review. An insurer has a responsibility to assemble all the facts necessary for a fair and comprehensive investigation before it refuses to pay a claim and may not base a defense to bad faith on later acquired information. [T]he insurance company cannot later seek to justify its denial [of an insured's claim] by gathering information which it should have had in the first place. Lavoie, 505 So.2d at 1053. Accordingly, information acquired by an insurer subsequent to the denial of the claim is neither relevant nor admissible evidence in the bad faith action. Moreover, the insurer is limited to introducing evidence that it actually relied upon and communicated to the insured when it denied the claim, and may not seek to enhance its defense by pointing to extraneous facts or arguments that it did not communicate to the insured when it refused payment. [T]he decision of the insurance company to deny a claim under an insurance policy must be judged by what was before it at the time the decision was made. Insurance Company of North America v. Citizensbank of Thomasville, 491 So.2d 880, 883 (Ala.1986) (citing Federated Guaranty Life Insurance Co. v. Wilkins, 435 So.2d 10, 13 (Ala.1983)). As noted herein, evidence that Skaling had consumed several alcoholic beverages before he attempted to rescue Webber was acquired by Aetna well after it denied Skaling's claim. Although this information played no part in Aetna's denial of the claim, it was heavily relied upon by Aetna in support of its motion for summary judgment. Skaling's use of alcohol did not factor into the decision to deny coverage and may not be relied upon now to defend against allegations of bad faith. We note that in granting summary judgment, the hearing justice specifically pointed to Skaling's use of alcohol in finding that the claim was fairly debatable. We deem this to be error and hold that this evidence may not be relied upon by Aetna in defense of a claim of bad faith. Although we decline to abandon the fairly debatable standard and recognize that an insurer is entitled to debate a claim that is fairly debatable, we are not persuaded that an insurer is relieved of its obligations to deal with its insured cons istent with its implied in law obligations of good faith and fair dealing simply because the claim is fairly debatable. Accordingly, an intentional failure on the part of the insurer to determine whether there is a lawful basis to deny the claim, standing alone, is bad faith. This can be established by proof that the insurer either intentionally or recklessly failed to properly investigate the claim or to subject the results of the investigation to a cognitive evaluation and review. Thomas, 566 So.2d at 744 (citing Gulf Atlantic Life Ins urance Co. v. Barnes, 405 So.2d 916 (Ala.1981)). The insurer's failure to conduct an appropriate and timely investigation may subject the insurer to bad faith liability notwithstanding the merits of the claim. Although a fairly debatable claim is a necessary condition to avoid liability [for] bad faith, it is not always a sufficient condition. Zilisch, 995 P.2d at 280. Rather, we are satisfied that [t]he appropriate inquiry is whether there is sufficient evidence from which reasonable [minds] could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable. Id. Moreover, although a claim may be fairly debatable and the insurer may elect to engage in a debate, consistent with its obligations of good faith and fair dealing, an insurer is nonetheless obliged to engage in settlement discussions in an effort to relieve the insured from the burden and expense of litigation. When, as here, the damages were substantial and the claimant was permanently injured, we are satisfied that, in light of the amount of the policy limits at issue, and the strength of the claim, the insurer was not relieved of its obligation to make any settlement offers, even if the claim was fairly debatable. One of the tests of insurer good faith is whether the insurer was reasonable in both its investigation of the claim and in its settlement behavior. It is the policy of this state to encourage the settlement of controversies in lieu of litigation. See Rhode Island Insurers' Insolvency Fund v. Benoit, 723 A.2d 303, 308-309 (R.I.1999) (insurers are under an equivalent duty to participate in settlement negotiations for first-party claims and third-party claims). This policy has further statutory support. General Laws 1956, chapter 9.1 of title 27, the Unfair Claims Settlement Practices Act, mandates specific standards for the investigation and disposition of insurance claims. [8] Included in the definition of unfair claims practices are: (4) Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonable [ sic ] clear; (5) Compelling insureds, beneficiaries, or claimants to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them; (6) Refusing to pay claims without conducting a reasonable investigation. Section 27-9.1-4. We therefore are satisfied that in every case, an insurer must determine whether liability is reasonably clear by objective, measurable criteria, engage in settlement negotiations and attempt, in good faith, to resolve the claim so that its insured is relieved from the burden of instituting a suit to recover under the policy. Finally, we reiterate that not every refusal to pay amounts to insurer bad faith. A plaintiff must demonstrate an absence of a reasonable basis in law or fact for denying the claim or an intentional or reckless failure to properly investigate the claim and subject the result to cognitive evaluation. However, the obligations imposed on insurers doing business in Rhode Island have never changed  an insurance company has a `fiduciary obligation to act in the best interests of its insured,' and not its own pecuniary interest at all times. Bolton, 730 A.2d at 1081 (quoting Asermely, 728 A.2d at 464).