Opinion ID: 471407
Heading Depth: 2
Heading Rank: 2

Heading: Bad Faith Refusal to Provide Coverage

Text: 15 The district court struck Lampliter's claim that Liberty had exhibited bad faith by refusing to defend Lampliter in the Hickman and Bass suits. The court applied Chavers v. National Security Fire & Casualty Co., 405 So.2d 1, 7 (Ala.1981), which held that an insurer's bad faith refusal to settle a claim is made out where (1) the insurer actually knows there is no lawful basis for refusing to settle a claim, or (2) the insurer intentionally fails to determine whether there is a lawful basis for refusal. See generally, Comment, Reviewing the Practicality of Alabama's Tort of Bad Faith, 16 Cum.L.Rev. 329 (1986). The district court determined that because the written Liberty contract clearly did not provide coverage, there was a lawful basis for refusal. 16 Lampliter argues that Liberty failed to properly investigate whether it had a legal basis to deny coverage. Specifically, Lampliter contends that Liberty, in denying coverage, recklessly ignored Sharples' sworn statements that he had intended to sell Lampliter liquor liability coverage. Moreover, Lampliter claims that Liberty further evidenced its bad faith by eventually settling Hickman and Bass parents' claims. 17 Initially, we note that the burden in a bad faith denial of coverage claim is squarely upon the insured to show that the insurance company had no legal or factual defense to the insurance claim. National Security Fire & Casualty Co. v. Vintson, 454 So.2d 942, 944 (Ala.1984). Because we have determined that the policy, on its face, excluded liquor liability coverage, it necessarily follows that Liberty had plausible arguments for denying coverage and Lampliter's bad faith claim must fail. Indeed, this case is similar to Vintson in which the Alabama Supreme Court denied a bad faith claim. As in Vintson, Lampliter contends that it relied on the oral misrepresentations of an insurance agent regarding the scope of the coverage it purchased. The Vintson plaintiff was allegedly misled as to the effective date of coverage, whereas Lampliter argues it was misled as to coverage for specific liability. In both cases, however, the clear language of the agreements contradicts the alleged oral representations. Accordingly, as in Vintson, the contradiction between the written terms and alleged parol representations provides a debatable question as to the scope of coverage sufficient to defeat allegations of bad faith. See id. at 945. 18 Lampliter's focus on Sharples' statements to Liberty is misplaced. All that is required is a reasonable basis for denying coverage. Sharples' statements that he thought Lampliter was covered are immaterial unless Liberty recklessly ignored these claims by failing to investigate them. Lampliter relies on Aetna Life Insurance Co. v. Lavoie, 470 So.2d 1060 (Ala.1984), but does little more than quote Lavoie for three pages in its brief and assert that its case is on all fours with Lavoie because in both instances the insurer continued to investigate its obligations in order to create a factual dispute over coverage. See id. at 1072. We note that the Lavoie decision, vacated in --- U.S. ---, 106 S.Ct. 1580, 89 L.Ed.2d 823 (1986), is a nullity. Moreover, even if Lavoie were good law, the present case is very different. In Lavoie, the insurer recklessly ignored medical records it normally would have relied on to assess the validity of a claim and intentionally deceived its insureds as to its investigation. Lavoie, 470 So.2d at 1067-70. The Alabama Supreme Court emphasized that the bad faith denial of coverage must be evaluated on the circumstances that existed at the time coverage was denied and cautioned that an insurer may not defeat a bad faith claim by manufacturing a plausible basis for its actions after it has denied coverage. Id. at 1071-72. Here, Liberty is accused of continuing its investigation regarding coverage although an ex-employee who had not sold the policy at issue swore he thought Lampliter was covered. Thus Lampliter argues that Liberty's investigation of its claim was nothing more than an attempt to create a plausible basis for denying coverage. Under these circumstances, however, Liberty's actions were not taken in bad faith; indeed Liberty would have been reckless had it relied solely on Sharples' initial impressions. 19 Finally, Lampliter's argument that Liberty demonstrated its bad faith by eventually settling the Hickman and Bass suits is wholly improper. Well established case law and the Federal Rules of Evidence prohibit the introduction of settlements or settlement negotiations into evidence to prove liability. Fed.R.Evid. 408; see Dallis v. Aetna Life Insurance Co., 768 F.2d 1303 (11th Cir.1985). Lampliter attempts to do exactly what Fed.R.Evid. 408 proscribes by arguing that the settlement indicates that Liberty realized it was liable for the claims upon which Lampliter asserted coverage. Even if it were not against public policy to consider a settlement offer as evidence of liability, an eventual settlement does not indicate that an initial denial of coverage was in bad faith. Again, Lampliter has simply missed the point: bad faith is made out by the total absence of reasonable grounds to deny coverage. An eventual settlement has nothing to do with whether there were reasonable grounds to deny coverage initially. 20