Opinion ID: 1846468
Heading Depth: 2
Heading Rank: 1

Heading: Did Sockwell Prove a Prima Facie Case of Bad Faith?

Text: National contends that it was entitled to a judgment as a matter of law on Sockwell's bad-faith claims on two separate grounds. First, National asserts that, in order to recover, Sockwell must have been entitled to benefits at the time her claim was allegedly improperly evaluated and denied. National alleges that, at the time its claims adjuster denied Sockwell's claim for UIM benefits, Sockwell was not yet entitled to any benefits under her insurance policies because she had not yet settled with another carrier. Therefore, National contends, Sockwell had no cause of action for bad faith, even if its evaluation and denial of her claim were improper. National also contends that it was entitled to a judgment as a matter of law because, it argues, Sockwell failed to prove that it acted with a bad-faith intent. National asserts that although its claims adjuster acted negligently, negligence does not give rise to a claim for bad faith.
This Court has addressed the proper standard of review to be applied in reviewing a trial court's ruling on a motion for a judgment as a matter of law: When reviewing a ruling on a motion for [a judgment as a matter of law], this Court uses the same standard the trial court used initially in granting or denying the [judgment as a matter of law]. Palm Harbor Homes, Inc. v. Crawford, 689 So.2d 3 (Ala.1997). Regarding questions of fact, the ultimate question is whether the nonmovant has presented sufficient evidence to allow the case or issue to be submitted to the jury for a factual resolution. Carter v. Henderson, 598 So.2d 1350 (Ala.1992). The nonmovant must present substantial evidence to withstand a motion for [a judgment as a matter of law]. See § 12-21-12, Ala. Code 1975; West v. Founders Life Assurance Co. of Florida, 547 So.2d 870, 871 (Ala.1989). A reviewing court must determine whether the party who bears the burden of proof has produced substantial evidence creating a factual dispute requiring resolution by the jury. Carter, 598 So.2d at 1353. In reviewing a ruling on a motion for [a judgment as a matter of law], this Court views the evidence in the light most favorable to the nonmovant and entertains such reasonable inferences as the jury would have been free to draw. Id. Regarding a question of law, however, this Court indulges no presumption of correctness as to the trial court's ruling. Ricwil, Inc. v. S.L. Pappas & Co., 599 So.2d 1126 (Ala.1992). State Farm Fire & Cas. Co. v. Slade, 747 So.2d 293, 302-03 (Ala.1999); Employees' Benefit Ass'n v. Grissett, 732 So.2d 968, 974-75 (Ala.1998).
We begin by quoting extensively from State Farm Fire & Casualty Co. v. Slade, supra, in which this Court traced the development of the tort of bad faith in Alabama: In Thomas v. Principal Financial Group, 566 So.2d 735 (Ala.1990), Justice Houston (with three Justices concurring and three concurring in the result) provided this Court with a road map to guide us through the vagaries of the tort of bad faith. First, Justice Houston noted that this Court had recognized the tort of bad-faith failure to pay a first-party claim in Chavers v. National Security Fire & Casualty Co., 405 So.2d 1 (Ala.1981). Thomas, 566 So.2d at 740. In Chavers, this Court held: `[A]n 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 that fact or (2) intentional failure to determine whether or not there was any lawful basis for such refusal.' 405 So.2d at 7. Justice Houston then recognized that `[t]he Chavers test was refined and clarified in Gulf Atlantic Ins. Co. v. Barnes, 405 So.2d 916 (Ala.1981).' Thomas, 566 So.2d at 741. In Barnes, Justice Beatty, writing for the court, stated: `The first tier of the test promulgated by Mr. Justice Embry and adopted by this Court in Chavers establishes that the tort of bad faith refusal to honor a direct claim arises when there exists no lawful basis for the refusal coupled with actual knowledge of that fact. No lawful basis, as expressed in that opinion, means that the insurer lacks a legitimate or arguable reason for failing to pay the claim. That is, when the claim is not fairly debatable, refusal to pay will be bad faith and, under appropriate facts, give rise to an action for tortious refusal to honor 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. Coupled with actual knowledge of that fact implies conscious doing of wrong. Bad faith, then, is not simply bad judgment or negligence. It imports a dishonest purpose and means a breach of known duty, i.e., good faith and fair dealing, through some motive of self-interest or ill will. `The second tier of the test is an elaboration on the first. The trier of fact, by finding, on the part of the insurer, an intentional failure to determine whether or not there was any lawful basis for refusal, may use that fact as an element of proof that no lawful basis for refusal ever existed. The relevant question before the trier of fact would be whether a claim was properly investigated and whether the results of the investigation were subjected to a cognitive evaluation and review. Implicit in that test is the conclusion that the knowledge or reckless disregard of the lack of a legitimate or reasonable basis may be inferred and imputed to an insurance company when there is a reckless indifference to facts or to proof submitted by the insured. Of course, if a lawful basis for denial actually exists, the insurer, as a matter of law, cannot be held liable in an action based upon the tort of bad faith. Otherwise, the insurer's knowledge of the non-existence of any debatable reasons for refusal would be a question for the finder of fact, i.e., the jury.' 405 So.2d at 924. Justice Houston also acknowledged that in National Security Fire & Casualty Co. v. Bowen, 417 So.2d 179, this Court established the elements of a bad-faith claim. Thomas, supra, 566 So.2d at 742. In Bowen, this Court stated: `[T]he 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 of the absence of any legitimate or arguable reason; `(e) if 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. `In short, plaintiff must go beyond a mere showing of nonpayment and prove a bad faith nonpayment, a nonpayment without any reasonable ground for dispute. Or, stated differently, the plaintiff must show that the insurance company had no legal or factual defense to the insurance claim.' 417 So.2d at 183 (emphasis in original). Justice Houston then pointed out the following developments in the law of the tort of bad faith: `Following the decisions in Chavers, Barnes, and Bowen, this Court established what is now known as the directed verdict on the contract claim standard in bad faith cases. See Burkett v. Burkett, 542 So.2d 1215, 1218 (Ala.1989). Writing for the Court in National Savings Life Ins. Co. v. Dutton, 419 So.2d 1357, 1362 (Ala. 1982), Justice Shores stated: `As noted by both sides in this case, the tort of bad faith refusal to pay a valid insurance claim is in the embryonic stage, and the Court has not had occasion to address every issue that might arise in these cases. In [ National Security Fire & Cas. Co. v. Bowen ], we set out the elements of the tort and attempted to show the plaintiff's burden in these cases. It is a heavy burden. In the normal case in order for a plaintiff to make out a prima facie case of bad faith refusal to pay an insurance claim, the proof offered must show that the plaintiff is entitled to a directed verdict on the contract claim and, thus, entitled to recover on the contract claim as a matter of law. Ordinarily, if the evidence produced by either side creates a fact issue with regard to the validity of the claim and, thus, the legitimacy of the denial thereof, the tort claim must fail and should not be submitted to the jury. `The Dutton Court's characterization of a plaintiff's burden of proof as a heavy one was no doubt prompted by the Court's previous recognition in Chavers of the necessity for allowing insurers a broad range of freedom to thoroughly evaluate claims and to decline payment in nonmeritorious cases. However, keenly 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 Dutton Court, in articulating the standard to be applied in normal or ordinary bad-faith cases, allowed for a different standard to be applied in certain unusual or extraordinary cases. Justice Jones, concurring specially in Dutton, elaborated on the majority's opinion: `I concur completely with the opinion and write separately to elaborate on one point. The opinion correctly prefaces the `directed verdict on the contract claim' standard with the words `In the normal case'; and the phrase `if the evidence produced ... creates a fact issue ...' is preceded by the word `Ordinarily.' These are significant qualifications. Certainly, extreme cases will arise in which a fact issue will present a jury question on that claim. This is not the case before us; and, absent such circumstances, the `directed verdict on the contract claim' is the applicable standard for testing the tort of bad faith claim. `Later, Justice Jones, in his opinion concurring specially in Safeco Insurance Co. of America v. Sims, 435 So.2d 1219, 1224 (Ala.1983), wrote: `This `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. Indeed, the words ` entitled to a directed verdict' so indicate. Rather, this test is intended as an objective standard by which to measure plaintiff's compliance with his burden of proving that defendant's denial of payment was without any reasonable basis either in fact or law; i.e., that defendant's defense to the contract claim is devoid of any triable issue of fact or reasonably arguable question of law. `Exceptions to the `directed verdict' rule will undoubtedly arise. Take the case where the insurer insists that its refusal of payment was grounded solely on a particular entry in a hospital record, and plaintiff denies the very existence of such an entry. Merely because the insurer may be able to withstand a directed verdict motionthe existence vel non of the record entry itself being an issue of factwould not, as a matter of law, bar the plaintiff's tort claim. This extreme example is to be distinguished from the more normal situation in which the factual dispute centers around the reasonable, but conflicting, inferences that may be drawn from a hospital record entry. If the entry in fact exists and one of the reasonable inferences of fact which may be drawn therefrom supports a legal basis for denial of the claim, Plaintiff would not be entitled to a directed verdict on the contract claim; thus, the claimant would be barred from proceeding with his tort of bad faith claim, even though the issue of fact may be resolved adversely to the insurer and the contract benefits awarded to the insured. `Because of its potential relevance, one additional exception to the `directed verdict' test is suggested: Take the case of the insurer whose refusal of payment is based solely upon a legal position with respect to the controlling principles of law and its application to the undisputed facts giving rise to the claim. While the insurer, under the guise of asserting a legitimate defense, could not be heard to take issue with clear, well settled, elementary principles of contract law, certainly the rule of reasonableness dictates a field of operation for a denial of benefits based upon arguable legal grounds which are fairly debatable, even though the trial judge may correctly reject such arguments and direct a verdict for the insured. `Thus, as we have seen, Dutton's use of the terms `In the normal case,' and `Ordinarily' allows for exceptions to the `entitled to a directed verdict' test. In the first example, the insured may proceed with his bad faith claim even though he was not entitled to a directed verdict; and in the second example, the insurer would be entitled to a judgment on the tort claim even though the insured was entitled to a directed verdict on the contract claim. Certainly these rare exceptions will not be difficult to recognize, nor will the general rule, because of rare exceptions, be difficult to apply. (Emphasis in original).'  Thomas, supra, 566 So.2d at 742-44. Later in the Thomas opinion, Justice Houston went on to cite examples of what the Court had, at that time, deemed `unusual or extraordinary cases.' These examples included cases in which the evidence showed that the insurer `intentionally or recklessly failed to properly investigate the claim or to subject the results of the investigation to a cognitive evaluation and review.' 566 So.2d at 744. See, e.g., Aetna Life Ins. Co. v. Lavoie, 505 So.2d 1050 (Ala.1987); Continental Assurance Co. v. Kountz, 461 So.2d 802 (Ala.1984). Other examples included cases in which the insurer `created' a factual issue that could have defeated the insured's tort claim under the `directed-verdict-on-the-contract-claim' standard. See, e.g., United American Ins. Co. v. Brumley, 542 So.2d 1231 (Ala.1989); Jones v. Alabama Farm Bureau Mut. Cas. Co., 507 So.2d 396 (Ala.1986). After Thomas, another `unusual or extraordinary' case arose. In Blackburn v. Fidelity & Deposit Co., 667 So.2d 661, 669 (Ala.1995), this Court recognized that the `directed-verdict-on-the-contract-claim' standard did not apply when an insurer, in an attempt to defeat the insured's preverdict motion for a [judgment as a matter of law], relied on its own `subjective belief that a portion of its insurance contract preclude[d] coverage.' The Court stated that the exception was necessary to prevent insurers from relying on ambiguous portions of a policy as an absolute defense to a claim of bad faith. Id.; see also Loyal Am. Life Ins. Co. v. Mattiace, 679 So.2d 229, 237-38 (Ala.1996), cert. denied, 519 U.S. 949, 117 S.Ct. 361, 136 L.Ed.2d 252 (1996); Employees' Benefit Ass'n v. Grissett, 732 So.2d 968 (Ala.1998). The `unusual or extraordinary' case was then referred to as the `abnormal' bad-faith case and the `directed-verdict-on-the-contract-claim' case was called the `normal' bad-faith case. See Mattiace, supra, 679 So.2d at 241 (Maddox, J., dissenting); State Farm Fire & Cas. Co. v. Crumpton, 708 So.2d 136 (Ala.1997) (Houston, J., dissenting); Grissett, supra, 732 So.2d at 976. Thus, a plaintiff must establish that his or her claim is either the normal case or the abnormal case of bad faith. To this date, the abnormal cases have been limited to those instances in which the plaintiff produced substantial evidence showing that the insurer (1) intentionally or recklessly failed to investigate the plaintiff's claim; (2) intentionally or recklessly failed to properly subject the plaintiff's claim to a cognitive evaluation or review; (3) created its own debatable reason for denying the plaintiff's claim; or (4) relied on an ambiguous portion of the policy as a lawful basis to deny the plaintiff's claim. State Farm Fire & Cas. Co. v. Slade, 747 So.2d at 303-07 (some citations omitted). Further, in Aetna Life Insurance Co. v. Lavoie, 505 So.2d 1050, 1052-53 (Ala.1987), we recognized that it was an insurer's responsibility to marshal all of the pertinent facts with regard to its insured's claim before it refused to pay. In that case, we stated: `[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.' Considering the fact that the decision to deny [the claim in this case] was made without the benefit of `critical' sections of the medical file, the jury could find that the claim was not `properly investigated,' and that there was a `reckless indifference to facts or to proof.' ... . . . . The question of whether the bad faith is to be tested at the time of the first denial, or at the time of subsequent denials, is of no consequence in this case, because the deficiency in the [claims file] continued through the first three successive denials. Once the bad faith has occurred, once the duty to use good faith in considering insurance claims has been breached, the insurance company cannot later seek to justify its denial by gathering information which it should have had in the first place.... Thus, the jury could have found that Aetna exhibited reckless indifference to the facts or to the proof submitted by the Lavoies on their claim, thereby satisfying the `actual knowledge' element of the testand it is evident, from their verdict, that they did. Facts certainly exist which support the jury's conclusion. 505 So.2d at 1053 (citations omitted). See also Blackburn v. Fidelity & Deposit Co., 667 So.2d 661, 672 (Ala.1995) (recognizing that actions occurring after an insurer has denied coverage does not insulate the insurer from bad-faith liability and does not determine whether the insurer is liable for bad faith).
We begin our analysis of whether the bad-faith claims were properly submitted to the jury by noting that this case involves allegations against National of both normal and abnormal bad faith; we conclude that the jury could have properly found National liable under either type or both types of bad faith. Consequently, we conclude that Sockwell's claims of bad faith were properly presented to the jury. We now address National's argument that the trial court improperly submitted the bad-faith claims to the jury because, it argues, Sockwell failed to establish the prima facie elements of her bad-faith claims. National contends that, because Sockwell's claim for UIM benefits had not ripened at the time National denied her claim, she cannot establish that she was entitled to benefits; thus, it argues, there can be no bad faith resulting from that denial. We reject this argument for two reasons. First, National did not deny Sockwell's claim because her claim for UIM benefits had not yet ripened. National never even inquired as to whether Sockwell had settled her claims with the other insurance carriers involved. We note that it is the insurer's duty to marshal all of the facts pertinent to its denialbefore denying the claimif the insurer wishes to rely upon those facts as a defense to a claim of bad faith. See Aetna Life Ins. Co. v. Lavoie, 505 So.2d at 1053 (Once the bad faith has occurred, once the duty to use good faith in considering insurance claims has been breached, the insurance company cannot later seek to justify its denial by gathering information which it should have had in the first place.); see also Blackburn v. Fidelity & Deposit Co., 667 So.2d at 672. More significantly, National does not and cannot allege on appeal that a proper investigation and evaluation of Sockwell's claim would have revealed that coverage was not due under the policy; in fact, the record reveals just the opposite National, through Kathy West, admitted at trial that the medical records and other documentation submitted to its claims adjuster, before the September 1998 denial, established that Sockwell's claim was due to be paid. Additionally, West admitted that, after this lawsuit was filed, National paid Sockwell the UIM limits available under her insurance policies. Thus, we conclude that, under the facts of this case, the breach-of-contract element required for a bad-faith claim was satisfied. We also note that the case was submitted to the jury only on the bad-faith claims; the jury did not hear Sockwell's breach-of-contract claim. In the case of State Farm Fire & Casualty Co. v. Slade, supra, this was a point of some distinction: Therefore, we reject the Slades' argument that in the abnormal bad-faith case in which the insurer fails to properly investigate the insured's claim contractual liability is not a prerequisite to bad-faith liability, and the Slades' argument that the tort of bad faith provides a cause of action that is separate and independent of an insurance contract. In so doing, we make it clear that in order to recover under a theory of an abnormal bad-faith failure to investigate an insurance claim, the insured must show (1) that the insurer failed to properly investigate the claim or to subject the results of the investigation to a cognitive evaluation and review and (2) that the insurer breached the contract for insurance coverage with the insured when it refused to pay the insured's claim. This is nothing new. Under the elements established in Bowen, supra, the plaintiff has always had to prove that the insurer breached the insurance contract. Practically, the effect is that in order to prove a bad-faith-failure-to-investigate claim, the insured must prove that a proper investigation would have revealed that the insured's loss was covered under the terms of the contract. This result preserves the link between contractual liability and bad-faith liability required by Chavers, supra, and Dutton, supra. Slade, 747 So.2d at 318 (footnote omitted). However, in a footnote to the above-quoted language, the Slade Court noted: We note that this holding has no effect on those cases in which an insured sues the insurer for bad-faith denial of an insurance claim but does not sue for breach of contract and the case proceeds to the jury on a claim of bad faith alone. See Livingston v. Auto Owners Ins. Co., 582 So.2d 1038 (Ala.1991); Jones v. Alabama Farm Bureau Mut. Cas. Co., 507 So.2d 396 (Ala.1986); Aetna Life Ins. Co. v. Lavoie, [505 So.2d 1050 (Ala. 1987)], supra. 747 So.2d at 318 n. 7. Thus, even if we accepted National's argument, which we do not, we would still conclude that Sockwell's abnormal bad-faith claim was properly presented to the jury. Accordingly, we reject National's claim that Sockwell's bad-faith claims must fail because she had yet to exhaust the other coverages available to her at the time National improperly denied her claim for UIM benefits. We also reject National's argument that it was entitled to a postverdict judgment as a matter of law because, it argues, Sockwell failed to establish that National acted with bad-faith intent. We conclude that the jury heard ample evidence upon which it could have found that National acted in bad faith. First, we note that the record contains conflicting evidence regarding the date National decided to deny Sockwell's claim. Although the denial letter made the basis of this action was not formally issued until September 1998, Sockwell presented evidence indicating that the decision to deny the claim was made as early as May 18, 1998, while National was purportedly still investigating Sockwell's claim. The jury could have inferred National's intentional bad faith from this evidence. Additionally, it is undisputed that, even though National knew the UIM provision and the workers' compensation limit-of-liability provision were void under Alabama law, it took no action to delete those provisions from its standard policy and still had not done so at the time Sockwell's claim went to trial. The jury could have construed National's failure to update its policy as further evidence of bad faith. Second, even if the workers' compensation limit-of-liability provision contained in the National policy had not been void under Alabama law and the adjuster had been able to properly apply that provision to Sockwell's claim, the adjuster never even attempted to apply the provision as written. As Kathy West admitted at trial, before the issuance of the September 1998 denial letter, National's claims file contained documentation establishing that Sockwell had suffered all of the elements of loss sustainable in an automobile accident. However, National's adjuster never even attempted to discern which of those elements of loss were not covered under Alabama workers' compensation law and, thus, which of those elements would be compensable under the National policy. The jury could have construed this as evidence indicating that the adjuster either intentionally or recklessly disregarded the facts and proof submitted by Sockwell in support of her claim. Whether to accept National's self-serving statement that its adjusterone with 24 years of experience in adjusting workers' compensation and automobile claimssimply made a mistake in failing to pay Sockwell's claim and in failing to properly evaluate Sockwell's claim presented a question of fact for the jury. See Employees' Benefit Ass'n v. Grissett, 732 So.2d 968, 977 (Ala.1998). Based upon this evidence, we conclude that the trial court properly presented the bad-faith claims to the jury. For these reasons, we reject National's argument that Sockwell failed to establish the prima facie elements of her bad-faith claims. The trial court properly denied National's preverdict and postverdict motions for a judgment as a matter of law.