Opinion ID: 1846468
Heading Depth: 3
Heading Rank: 2

Heading: The Law of Bad Faith

Text: 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).