On Friday, September 27, in an opinion authored by Chief Justice Roy Moore, the Alabama Supreme Court issued a decision clarifying, and substantially impacting the law of abnormal bad faith. In State Farm Fire & Cas. Co. v. Brechbill, the plaintiff submitted an insurance claim to State Farm for wind damage to his home. State Farm retained a consultant who initially determined that the loss resulted not from windstorm but from wear and tear and/or faulty workmanship in construction. Plaintiff hired an engineer who disagreed with the insurer’s findings. After reinspection, State Farm added as a third ground for denial the policy’s earth movement exclusion. Plaintiff hired another engineering consultant who disagreed with State Farm’s conclusions. Upon review of that engineer’s opinions, State Farm’s consultant revised his observations to agree that windspeeds on the date of the claim were in excess of 60 mph.
Brechbill sued State Farm for breach of contract, “normal” bad faith, and “abnormal” bad faith failure to investigate. The trial court granted State Farm’s motion for summary judgment on the “normal” bad faith claim, finding that plaintiff could not prove that he was entitled to a directed verdict on the contract. The trial court denied summary judgment on the claim for “abnormal” bad faith, holding that plaintiff need not show that he was entitled to a preverdict judgment as a matter of law on the contract claim, and therefore finding that the claim survived summary judgment. The case was tried and the jury returned a verdict for the plaintiff.
On appeal, the Supreme Court stated the issue as follows: “whether the trial court, after finding that State Farm had a reasonably legitimate or arguable reason for refusing to pay Brechbill’s claim at the time of the August 7, 2008 denial, erroneously denied State Farm’s motion for a judgment as a matter of law on Brechbill’s claim of ‘abnormal’ bad faith failure to investigate.” State Farm argued that Brechbill’s claim for bad faith refusal to investigate could not proceed as a matter of law because the trial court found that State Farm had a legitimate reason for refusal to pay the claim at the time of denial. Plaintiff countered that a bad faith refusal to investigate claim can proceed even when evidence of bad faith refusal to pay is insufficient to survive judgment as a matter of law.
The Supreme Court held, first, that there is only one tort of bad faith refusal to pay an insurance claim in Alabama, not two separate torts, although there are two different options for proof. There are four elements of bad faith refusal to pay, representing the “normal” case, with a conditional fifth element (intentional failure to determine) representing the “abnormal” case. The court then held that, regardless whether the claim is for bad faith failure to pay or bad faith failure to investigate, proof of the third element – absence of a legitimate reason for denial – is always required. The court reiterated that 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. The court also reinvigorated its decision in Weaver v Allstate Insurance Co., 574 So. 2d 771, 774 (Ala. 1990), which had been weakened somewhat by decisions in recent years, citing with approval the Weaver holding that where the “insurer’s investigation established a legitimate or arguable reason for refusing to pay the insured’s claim, that is all that is required.” The court then explained that “[b]ecause the trial court’s ruling eliminated the third element of bad faith refusal to pay, Brechbill’s claim relying on the fifth element, i.e., that State Farm ‘intentionally failed to adequately investigate’ the claim, must fail. The existence of an insurer’s lawful basis for denying a claim is a sufficient condition for defeating a claim that relies upon the fifth element of the insurer’s intentional or reckless failure to investigate. The trial court’s summary judgment on the third element of bad faith established the law of the case and should have foreclosed further litigation of that claim.” Id. at *26-27.
Thus, the Supreme Court reversed the trial court’s judgment on the claim for refusal to investigate, holding that “a bad-faith-refusal-to-investigate claim cannot survive where the trial court has expressly found as a matter of law that the insurer had a reasonably legitimate or arguable reason for refusing to pay the claim at the time the claim was denied. Because State Farm repeatedly reviewed and reevaluated its own investigative facts as well as those provided by Brechbill, it is not liable for a tortuous failure to investigate.”
Interestingly, in a special concurrence, Justice Moore wrote further, describing in detail the history of confusion generated by Alabama’s judicially created tort of bad faith. He then stated his belief that the judicial creation of the tort was unconstitutional, and urged the Court to abolish the tort in an appropriate case, leaving to the legislature the right to determine whether a bad faith cause of action should exist.
Prepared by Sharon D. Stuart, Partner
