Opinion ID: 1794820
Heading Depth: 1
Heading Rank: 2

Heading: The Lowman Suit

Text: Aetna argues that it had no duty to act under an enhanced obligation of good faith when it undertook to defend the Lowman suit under reservation of rights. We hold that no enhanced duty arose under the specific facts of that case. Therefore, we reverse and render judgment for Aetna with regard to the Lowman suit. In L & S Roofing Supply Co. v. St. Paul Fire & Marine Insurance Co., 521 So.2d 1298 (Ala.1987), this Court held that when an insurance company undertakes a defense pursuant to a reservation of rights, it does so under an enhanced obligation of good faith toward its insured in conducting such a defense. The duty was recognized in response to a question certified by the United States District Court for the Northern District of Alabama. In its petition for certification, the District Court included a statement of facts, which included the following: Although St. Paul has not refused to permit the participation of counsel retained by L & S Roofing, there is no dispute that St. Paul is demanding that the attorneys engaged by St. Paul on behalf of its insured retain control of the underlying litigation. Id. at 1300. (Emphasis added.) It was in that context that this Court recognized the enhanced obligation and set forth the criteria that the insurer must meet in order to fulfill its duty: ` This enhanced obligation is fulfilled by meeting specific criteria. First, the company must thoroughly investigate the cause of the insured's accident and the nature and severity of the plaintiff's injuries. Second, it must retain competent defense counsel for the insured. Both retained defense counsel and the insurer must understand that only the insured is the client. Third, the company has the responsibility for fully informing the insured not only of the reservation-of-rights defense itself, but of all developments relevant to his policy coverage and the progress of this lawsuit. Information regarding progress of the lawsuit includes disclosure of all settlement offers made by the company. Finally, an insurance company must refrain from engaging in any action which would demonstrate a greater concern for the insurer's monetary interest than for the insured's financial risk.' L & S Roofing, supra, at 1303, quoting Tank v. State Farm Fire & Cas. Co. 105 Wash.2d 381, 715 P.2d 1133, 1137 (1986). (Emphasis added in L & S Roofing. ) Those criteria necessarily assume that the insurer is controlling the investigation, the defense of the lawsuit, and settlement negotiations. This Court went on to hold that when those criteria have not been met in whole or in part ... the insured is entitled to retain defense counsel of its choice at the expense of the insurer. L & S Roofing, supra, at 1304. The enhanced obligation of good faith was considered in Shelby Steel Fabricators, Inc. v. United States Fidelity & Guaranty Insurance Co., 569 So.2d 309 (Ala.1990). U.S.F. & G. provided a defense to Shelby Steel under reservation of rights. In discussing the facts, this Court noted:  From March 1985 until July 1987, U.S.F. & G. had exclusive control over Shelby Steel's defense. Although U.S.F. & G. was kept abreast of the status of the lawsuit, Shelby Steel was never consulted in any way regarding its defense. Id. at 310. (Emphasis added.) This Court held that the insurer could not deny coverage pursuant to a reservation of rights where it had not fulfilled its enhanced obligation of good faith: [W]e are of the opinion that the insurer... must meet its `enhanced obligation of good faith' in order to deny coverage pursuant to a reservation of rights. This obligation includes ... keeping the insured apprised of the status of his case. Because Shelby Steel was not kept informed as to the status of its case between the initial notice of the reservation of rights ... and U.S.F. & G.'s denial of coverage 29 months later, we conclude that U.S.F. & G. has failed to meet its enhanced obligation to Shelby Steel and, therefore, that it must indemnify Shelby Steel for any liability in the underlying action. Id. at 312. The result in Shelby Steel was equitable. U.S.F. & G. was in a position of authority when it extended a defense to Shelby Steel under reservation of rights, gaining exclusive control over Shelby Steel's defense. Shelby Steel agreed to accept that defense and relied upon U.S.F. & G. to protect Shelby Steel's interests. However, because U.S.F. & G. did not keep Shelby Steel advised as to the status of the lawsuit, U.S.F. & G. was estopped to deny coverage. MBI and Mitchell accepted defense of the Lowman suit under reservation of rights, but never relinquished control of the lawsuit, including settlement negotiations, to Aetna. Under such circumstances, we hold that Aetna did not have an enhanced obligation of good faith to its insureds. MBI received a draft complaint from Lowman and others in April, 1995. Aetna was not notified of that claim. The Lowman suit was filed against MBI on August 20, 1995. Mitchell did not notify Aetna of the service of the suit; instead, he hired four law firms to defend the company at its own expense. Mitchell acknowledges that he was the decision-maker for MBI. Under his authority, MBI's defense team was committed to a strategy of settlement. It is undisputed that they were deeply engaged in settlement negotiations with the plaintiffs and the United States Department of Justice when Aetna was finally notified of the Lowman suit in late December, 1995. Aetna agreed to defend the Lowman suit under reservation of rights. MBI accepted the defense and also accepted Aetna's retention of Peter Sintz as counsel for MBI. However, MBI and its privately retained counsel refused to allow Aetna to assume a position of authority or to become actively involved in the defense of the Lowman suit. MBI's counsel instructed Sintz that he was not to enter an appearance in the case and was not to reveal his involvement to the opposing parties. By those instructions, Sintz was prevented from pursuing any discovery, and Aetna was prevented from pursuing any independent investigation concerning liability or damages. Mitchell continued to pursue his settlement strategy through MBI's privately retained defense team. Neither Aetna nor Sintz was allowed to participate in the negotiations which led to a settlement only one month after Aetna had agreed to defend under reservation of rights. While the negotiations were underway, MBI did not respond to Aetna's request for information. MBI controlled all aspects of the Lowman suitinvestigation, litigation and negotiation. Aetna and the competent defense counsel which it retained for MBI were not allowed to participate in any way. Therefore, Aetna had no duty to act under an enhanced obligation of good faith. The trial court erred in reaching a contrary conclusion of law.