Opinion ID: 1782346
Heading Depth: 2
Heading Rank: 1

Heading: Bad-Faith Failure to Pay an Insurance Claim

Text: This Court in two recent cases has provided comprehensive discussions of the tort of bad-faith failure to pay an insurance claim. In Employees' Benefit Ass'n v. Grissett, 732 So.2d 968 (Ala.1998), we stated: [ National Security Fire & Casualty Co. v. Bowen, 417 So.2d 179 (Ala.1982),] set out these requirements for a plaintiff to prove a bad-faith failure to pay: `(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 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.' 417 So.2d at 183. Requirements (a) through (d) represent the `normal' case. Requirement (e) represents the `abnormal' case. The rule in `abnormal' cases dispensed with the predicate of a preverdict JML [judgment as a matter of law] for the plaintiff on the contract claim if the insurer had recklessly or intentionally failed to properly investigate a claim or to subject the results of its investigation to a cognitive evaluation. Blackburn v. Fidelity & Deposit Co. of Maryland, 667 So.2d 661 (Ala.1995); Thomas v. Principal Financial Group, 566 So.2d 735 (Ala.1990). A defendant's knowledge or reckless disregard of the fact that it had no legitimate or reasonable basis for denying a claim may be inferred and imputed to an insurer when it has shown a reckless indifference to facts or proof submitted by the insured. Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 924 (Ala.1981). So, a plaintiff has two methods by which to establish a bad-faith refusal to pay an insurance claim: he or she can prove the requirements necessary to establish a `normal' case, or, failing that, can prove that the insurer's failure to investigate at the time of the claim presentation procedure was intentionally or recklessly omissive. 732 So.2d at 976 (footnote omitted). In State Farm Fire & Casualty Co. v. Slade, 747 So.2d 293 (Ala.1999), we elaborated on the rule in the abnormal case: [W]e 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 case of 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 [ National Security Fire & Casualty Co. v.] Bowen, [417 So.2d 179 (Ala.1982)], 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. 747 So.2d at 318. In Singleton v. State Farm Fire & Casualty Co., 928 So.2d 280, 283 (Ala.2005), we reviewed the discussion in Slade of the previously recognized distinction between normal and abnormal bad-faith cases: In the `normal' bad-faith case, the plaintiff must show the absence of any reasonably legitimate or arguable reason for denial of a claim. [State Farm Fire & Cas. Co. v.] Slade, 747 So.2d [293] at 306 [(Ala.1999)]. In the `abnormal' case, bad faith can consist of: 1) intentional or reckless failure to investigate a claim, 2) intentional or reckless failure to properly subject a claim to a cognitive evaluation or review, 3) the manufacture of a debatable reason to deny a claim, or 4) reliance on an ambiguous portion of a policy as a lawful basis for denying a claim. 747 So.2d at 306-07. . . . `Bad faith . . . 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.' Slade, 747 So.2d at 303-04 (quoting Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 924 (Ala. 1981)). Thus, White and WhiteGroup have two available methods by which they can establish a bad-faith refusal to pay an insurance claim. They can prove the requirements necessary to establish a normal case, or they can prove that one or more of State Farm's actions consists of bad faith in an abnormal case. Moreover, in an abnormal case, State Farm cannot use ambiguity in the contract as a basis for claiming a legitimate or arguable reason for not paying the claim. Otherwise, an insurance company would have the incentive to write an ambiguous policy in order to create a defense to a bad-faith claim. White and Whitegroup argue that they can prove the requirements necessary to establish both a normal bad-faith case and an abnormal bad-faith case. As to the normal bad-faith claim, White and WhiteGroup argue that on March 20, 2001, State Farm paid a portion of their roof claim based on the estimate generated by State Farm's Xactimate computer program, rather than the full amount of the Quality Roofing proposal, thereby breaching the contract between WhiteGroup and State Farm. White and WhiteGroup argue that State Farm based its partial denial of the claim on an incomplete and inadequate estimate prepared by an adjuster who had left Birmingham during the process of adjusting the claim, failing to document any specifics of her conversation with White and failing to describe the damage to the roof. White and WhiteGroup also argue that State Farm failed to properly document its position that the EPDM roof was an upgrade and that State Farm therefore had no reasonably legitimate or arguable basis for failing to pay the entire roof-replacement claim. As to the abnormal bad-faith claim, White and WhiteGroup argue that State Farm failed to properly investigate the validity of their claim and failed to subject the results of any investigation it did conduct to a cognitive evaluation and review. White and WhiteGroup argue that, when Lingard left Birmingham, State Farm had only an inadequate computer estimate from an inexperienced adjuster who had made no attempt to reconcile the estimate with real life estimates, and that Roche, the supervisor who took over the claim after Lingard left, conducted no further investigation. It is undisputed that although a notation in the claims file indicates that Roche confirmed with the contractor that the new roof was an upgrade from the one being replaced, Roche did not document with whom he spoke or what the individual had said. Braswell testified in his deposition that the roof was not an upgrade and that he did not recall telling anyone from State Farm that it was an upgrade. State Farm argues that White and WhiteGroup did not present substantial evidence indicating that State Farm breached the contract because, it argues, its investigation demonstrated that the new EPDM roof and the old built-up roof were not of like kind and quality. Further, State Farm argues, it promptly reopened its investigation to consider new claim information submitted on WhiteGroup's behalf. [3] State Farm further argues that even if White and WhiteGroup can show that it breached the contract, they must prove not only a mere nonpayment of a claim, but also must prove that the nonpayment was in bad faithi.e., without any reasonable ground for dispute. If any one of its reasons for denying the claim is at least arguable, State Farm contends, then White and WhiteGroup cannot prove bad faith. Even if its investigation was not perfect, State Farm says, the presence of a built-up roof on the building at the time of the storm, the ready availability of the same type of replacement roof after the storm, and WhiteGroup's election nevertheless to install a rubber-membrane roof were legitimate and arguable reasons for State Farm to conclude that it owed White and WhiteGroup only the cost of a replacement built-up roof. Based on the present state of the record in this case, we conclude that material questions of fact exist that make a summary judgment on the bad-faith claim improper. White and his office manager, Ladd, testified that two different State Farm agents told them to repair the roof. White insists that Lingard not only authorized him to proceed with the repairs, but she also told him it would be a day before State Farm had the check processed for the claim. White says no one at State Farm ever told him that there was a question whether State Farm would pay the claim. John Hill, a State Farm manager, testified that if State Farm authorized the repairs, then it should have paid the entire $43,395 proposed by Quality Roofing. Other State Farm employees testified, however, that if Lingard had indeed authorized White to proceed with the repairs proposed by Quality Roofing, it would not have been necessary for her to have prepared an estimate, which she did. As to the question whether the EPDM roof was an upgrade, the evidence is also disputed. The sole basis for State Farm's argument that the roof was an upgrade is a notation in the claim file by Roche, Lingard's manager, that stated only that the Quality Roofing proposal of $43,395 was due to an upgrade and that that had been confirmed by the contractor. Braswell disputes the characterization of the rubber-membrane roof as an upgrade. Notably, the record contains no testimony from either Lingard nor Roche. The policy provides no assistance. Certainly the two roofs are different, but the term upgrade is not mentioned, much less defined, in the policy. The policy provides that State Farm will replace damaged property with property of like kind and quality. Whether the EPDM roof was of like kind and quality as compared to a built-up roof is a critical question that cannot be answered at this stage in these proceedings. At this point in the proceedings, we cannot determine whether the alleged bad faith in this case is of the normal or abnormal variety. Further proceedings are necessary before a fact-finder can determine whether State Farm breached its contract with WhiteGroup; if it did, whether that breach was in bad faith; and if it did not, whether one or more of its actions consisted of bad faith in an abnormal case. Moreover, we cannot determine whether White was guilty of bad faith. The testimony concerning when and whether he knew that Quality Roofing had revised its proposal from $43,395 to $39,950 is disputed. [4] Upon the present state of the record, we pretermit consideration at this time of whether Alabama should recognize contributory bad faith on the part of the insured as a defense to the tort of bad-faith failure to pay an insurance claim, and if we should recognize that defense, what effect it would have upon the tort of bad faith.