Opinion ID: 1808265
Heading Depth: 1
Heading Rank: 2

Heading: Category II ClaimsFiled December 5, 1979.

Text: A. Green Group Loans to GBW Industries, Inc., a corporation owned by the Green brothers, resulted in a $108,171.45 claimed loss, and in addition, overdrafts in the amount of $46,870.30 from January 5, 1978, to May 4, 1978, and overdrafts in the amount of $48,127.67 from May 5, 1978, to June 3, 1978. GBW Industries, Inc., filed for bankruptcy on May 5, 1978. B. Ott Group A loan guaranteed by the Small Business Administration resulted in a claimed loss of $93,662.57, and other loans to the Ott family resulted in claimed losses of $113,811.73. C. Automobile Loans Richard Hall and Billy Strickland, directors of Citizensbank, each owned an automobile dealership and each had an agreement with the Bank to finance the automobiles for his customers. The Bank claimed a loss of $77,231.42 on the Hall loans and $30,990.26 on the Strickland loans. INA never formally denied any of the claims, but the Bank filed this lawsuit on February 5, 1981, to avoid a 24-month contractual bar for bringing suit on the bond, and claimed a `de facto' denial. The complaint asked for $606,000 on the contract claim and $2,000,000 on the bad faith claim. At trial, the Bank introduced evidence of only $454,658.34 of contract claim losses. On June 15, 1984, a jury awarded the Bank $290,431.77 on the breach of contract count and $866,930.01 on the bad faith count. INA's motion for JNOV, or in the alternative for a new trial, was subsequently denied. INA paid the amount of the breach of contract judgment but initiated this appeal from the judgment against it for bad faith and the denial of its motion for JNOV or a new trial. To recover under a theory of bad faith in Alabama, a plaintiff has a heavy burden to prove each element of bad faith. National Savings Life Ins. Co. v. Dutton, 419 So.2d 1357, 1361 (Ala.1982). The elements which must be proved are as follows: `(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.' Mueller v. Hartford Ins. Co. of Alabama, 475 So.2d 554, 556 (Ala.1985), quoting National Security Fire and Cas. Co. v. Bowen, 417 So.2d 179, 183 (Ala.1982); Dutton, 419 So.2d at 1361. The test in Alabama for a finding of bad faith is recognized as a `two-tier' test. The first tier of the test `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.' Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 924 (Ala.1981). The second tier of the test involves an `intentional failure to determine whether or not there was any lawful basis for refusal,' or, in other words, `whether a claim was properly investigated and whether the results of the investigation were subjected to a cognitive evaluation and review.' Barnes, supra. In the case at bar, both tiers of the two-tier test are being forcefully argued. INA argues that the first tier of the test is not met because the jury awarded only a portion of the contract claim, and therefore that a debatable reason must have existed for the refusal of the entire amount being claimed. Furthermore, INA argues that the claims were properly investigated, INA having hired a C.P.A. to perform the investigation and the investigation having entailed over 400 hours of work and the compilation of a 17-volume report. On the other hand, the Bank argues that INA never had a lawful basis for refusing the claims. Specifically, the Bank points out that Branch was indicted on, and pleaded guilty to, charges of embezzlement based on the April 11, 1979, claims. Furthermore, the Bank argues that the investigation by INA was inadequate and was merely preparation for trial, and that the investigation was designed solely to support its own position. See Barnes, supra. As we have previously indicated, our careful review of a nine-volume record discloses that the contract losses claimed by the bank fall into two distinct categories: (1) the direct claims against Branch; and (2) the loans to the Green Group, the Ott Group, and to the automobile dealers, Richard Hall and Billy Strickland. For definitional purposes, the distinction between these two groups is borne out by the testimony of Lamar Street, the INA agent who supervised the handling of these claims. In response to a question in which he was asked to define the term `dishonest or fraudulent acts,' as used in INA's bond, he quoted from the insurer's manual: `Dishonesty within such a contract may be something short of criminality [citing cases]. The appeal is to the mores rather than to the statutes. Dishonesty, unlike embezzlement or larceny, is not a term of art. Even so, the measure of its meaning is not a standard of perfection, but an infirmity of purpose so opprobrious or furtive as to be fairly characterized as dishonest in the common speech of man. `.... `The word dishonest, when used in fidelity bonds, has been interpreted in many cases. It has been held that it is to be given a broad meaning and this includes an act manifestly unfair to the employer and palpably subjects him to the likelihood of a loss, one which indicates a reckless, willful, and wrong disregard for the interest of the employer, and wrongful acts which, although not criminal, nevertheless display significant lack of probity, integrity, or trustworthiness.' We recognize that our division of the Bank's claims into two categories is a partial rejection of the respective positions of each of the parties. On the one hand, the primary thrust of INA's defense to the Bank's bad faith claim, both during trial and on appeal, is its assertion of reasonably debatable grounds for denying the second category of claims. On the other hand, the Bank emphasizes, first at trial and again here, those Category I losses resulting from Branch's fraudulent conduct for which he was indicted and convicted, as the basis for its bad faith claim. This is not to say that INA failed to insist on a legal basis for denial of each of the Bank's claims, including those based on Branch's criminal conduct. Nor is it accurate to say that the Bank did not urge that each aspect of its contract claims forms a basis for its bad faith claim. But the fact remains that each party's strongest position consists of its opponent's weakest position. We find that the record validates the positions most strongly emphasized by the respective parties. Indeed, as the two separate holdings of this opinion reveal, INA is entitled to a reversal of the judgment with respect to those subjective losses included in Category IIits strongest position; and upon remand of this cause, the Bank is entitled to a new trial upon its bad faith claim based upon those objective losses included in Category Iits strongest position. [1]