In Alabama, every contract contains an implied covenant of good faith and fair dealing. Chavers v. National Sec. Fire & Casualty Co., 405 So. 2d 1 (1981). However, only insurance contracts give rise to a duty imposed by law on which a tort claim for bad faith performance can be based. This duty does not extend to general contract law. Grant v. Butler, 590 So. 2d 254 (1991), Standard Plan, Inc. v. Tucker, 582 So. 2d 1024 (1991). The nucleus of Alabama’s bad faith standard is that when an insurance carrier has a debatable reason for denying a claim, there is no bad faith failure to pay as a matter of law. Weaver v. Allstate Ins. Co., 574 So. 2d 771 (1990), and Gilbert v. Congress Life Ins. Co., 646 So. 2d 592 (1994).
Elements of a Bad Faith Claim
The essential elements of a bad faith claim in Alabama were established in the case of National Security Fire & Casualty Co. v. Bowen, 405 So. 2d 1 (1981):
- An insurance contract between the parties and a breach by the defendant.
- An intentional refusal to pay the insured’s claim.
- The absence of any reasonable, legitimate, or arguable reason for the refusal.
- The insurer’s actual knowledge of the absence of any legitimate or arguable reason.
- 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.
State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (1999).
“Normal” Bad Faith and “Abnormal” Bad Faith
As set forth above, a “normal” bad-faith case requires the plaintiff to demonstrate the absence of any reasonably legitimate or arguable reason for the denial of a claim. This means that the insurer had no legal or factual defense to the insurance claim. The “abnormal” bad-faith case involves one or more of the following: (1) intentional or reckless failure to investigate a claim, (2) intentional or reckless failure to properly subject a claim to a cognitive evaluation or review, (3) the manufacture of a debatable reason to deny a claim, or (4) reliance on an ambiguous portion of a policy as a lawful basis for denying a claim White v. State Farm Fire & Cas. Co., 953 So. 2d 340 (2006), Singleton v. State Farm Fire & Cas. Co., 928 So. 2d 280 (2005), and State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (1999).
Unlike normal bad-faith cases, abnormal bad-faith cases do not require the plaintiff to be entitled to directed verdict on the underlying contract claim State Farm Fire & Cas. Co. v. Brechbill, 144 So. 3d 248 (2013), State Farm Mut. Auto. Ins. Co. v. Smith, 956 So. 2d 1164 (2006).
Defenses to Bad Faith
The first and foremost defense to a bad faith claim is a determination that there is no breach of contract by the insurer. Breach of an insurance contract is an element of bad faith. Ex parte Alfa Mut. Ins. Co., 799 So. 2d 957, 962 (Ala. 2001). “The very first element of a bad-faith claim is that there must be a breach of an insurance contract between the parties.” Crook v. Allstate Indem. Co., 314 So. 3d 1188, 1198 (2020). In Pontius v. State Farm, 915 So.2d 557, 564 (Ala. 2005), the Alabama Supreme Court held there can be no breach of an insurance contract providing underinsured motorist coverage “until the insureds prove that they are legally entitled to recover.” Ex parte State Farm Mut. Auto Ins. Co., 893 So. 2d 1111, 1115 (Ala. 2004).
Even if there is a breach, an insurer can still assert the presence of a debatable reason for denying the claim. If the insurer can demonstrate a legitimate and arguable reason for the denial, then a bad faith claim cannot succeed as a matter of law State Farm Fire & Cas. Co. v. Brechbill, 144 So. 3d 248 (2013), National Sec. Fire & Casualty Co. v. Bowen, 417 So. 2d 179 (1981). The burden remains with the plaintiff to prove both a breach and the absence of a debatable reason for a denial.
There are a number of policy defenses available to insurers that are generally determined by terms and exclusions written into the coverage. They include late reporting and failure to cooperate. In addition, fraud, and fraud in the application are often used as defenses. Thomas v. Safeway Insurance Company of Alabama, Inc., 244 So. 3d 965 (2017).
The Directed Verdict Standard
The directed verdict standard for a bad faith claim means that the plaintiff must show that they are entitled to a directed verdict on the contract claim. If the evidence produced by either side on the contract claim creates a fact issue, the tort claim for bad faith must fail and should not be submitted to the jury. State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (1999), Gonzalez v. Blue Cross/Blue Shield, 689 So. 2d 812 (1997), Gilbert v. Congress Life Ins. Co., 646 So. 2d 592 (1994). The directed verdict standard does not necessarily apply to abnormal bad-faith theories.
Ambiguities in Insurance Contracts
Terms that are defined in a policy are given that definition when applied to the facts of a claim. When a term is not defined within the policy, courts interpret it according to its common, everyday meaning as understood by a person of ordinary intelligence. Alfa Mut. Ins. Co. v. Warren, 373 So. 3d 1080 (2022).
In Alabama, ambiguities in an insurance contract are construed liberally in favor of the insured. This principle is well-established in Alabama case law, where courts have consistently held that any ambiguities in an insurance policy must be resolved in favor of the insured to provide maximum coverage. Additionally, exceptions to coverage within an insurance policy are interpreted as narrowly as possible to benefit the insured. Altiere v. Blue Cross & Blue Shield, 551 So. 2d 290 (1989), Cannon v. State Farm Mut. Auto. Ins. Co., 590 So. 2d 191 (1991), Nationwide Mut. Ins. Co. v. Thomas, 103 So. 3d 795 (2012).
Insurance contracts are governed by general contract rules and should be enforced as written if clear and unambiguous. Ambiguities should not be created by strained or twisted reasoning.
The fact that the parties interpret the insurance policy differently does not make the insurance policy ambiguous. Tate v. Allstate Ins. Co., 692 So. 2d 822 (Ala. 1997). While ambiguities or uncertainties in an insurance policy should be resolved against the insurer, ambiguities are not to be inserted by strained or twisted reasoning. Kelley v. Royal Globe Ins. Co., 349 So. 2d 561 (Ala. 1977). Where the parties disagree on whether the language in an insurance contract is ambiguous, a court should construe [the] language according to the meaning that a person of ordinary intelligence would reasonably give it. Western World Ins. Co. v. City of Tuscumbia, 612 So. 2d 1159 (Ala. 1992).
Jay v. United Servs. Auto. Ass’n, 343 So. 3d 18, 21 (2021).
Damages Available for Breach of Contract
In Alabama, the primary measure of damages for breach of contract is to return the injured party to the position they would have been in had the contract been fully performed. This includes compensatory damages, which can be general (direct) or consequential (indirect). Files v. Schaible, 445 So. 2d 257 (1984), Aldridge v. Dolbeer, 567 So. 2d 1267 (1990), Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098 (1985).
General damages are those that naturally and proximately result from the breach and are typically foreseeable at the time the contract was made. Consequential damages, on the other hand, are those that result from special circumstances beyond the contract itself, provided this was within the contemplation of the parties at the time the contract was made. Aldridge v. Dolbeer, 567 So. 2d 1267 (1990), Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098 (1985), Smalley Transp. Co. v. Bay Dray, Inc., 612 So. 2d 1182 (1992).
Damages for mental anguish are generally not recoverable in breach-of-contract actions. Bowers v. Wal-Mart Stores, Inc., 827 So. 2d 63 (2001). However, that is not the case for cases involving breach of a homeowners insurance contract. In Independent Fire Ins. Co. v. Lunsford, 621 So. 2d 977 (1993), the Alabama Supreme Court affirmed a judgment awarding damages for mental anguish based on a breach of a contract of homeowners insurance:
[A] plaintiff may recover damages for mental anguish if the jury is satisfied “that the contractual duties imposed by this contract are so coupled with matters of mental solicitude as to the duty that is owed, that a breach of that duty will necessarily or reasonably result in mental anguish.” The Lunsfords maintained the insurance policy for more than four years by paying the premiums when due. After discovering the damage to the awning, they properly notified the Elmer Tallant Agency, which then notified Independent. After an inspection of the damaged awning, an Independent agent notified the Lunsfords that the claim would be denied.
Independent Fire Ins. Co. v. Lunsford, 621 So. 2d 977, 979 (1993)
Damages Available for Bad Faith
The Alabama law relating to damages that may be awarded in a bad faith case is fully discussed in Gulf Atlantic Life Insurance Co. v. Barnes, 405 So. 2d 916 (1981):
Because the violation of the duty of good faith and fair dealing is tortious in nature, punitive damages as well as compensatory damages are recoverable in the proper case. A distinction must be drawn, however, between that conduct which gives rise to tort liability in the first instance and conduct that justifies imposition of punitive damages…
Alabama allows recovery of punitive damages when the plaintiff shows that he suffered, at least, nominal damage and that the acts complained of were committed with malice, willfulness, or wanton and reckless disregard of the rights of others… Thus, for punitive damages to be awarded in Alabama, a defendant must not only intentionally have breached his duty of good faith, but in addition must have committed acts of the nature described above. Recoverable damages may include mental distress and economic loss… {T]he amount of damages is left largely to the discretion of the jury; however, this discretion is not absolute. The court may set aside or reduce a verdict which it believes is not merely overly generous, but so excessive that it demonstrates “bias, passion, prejudice, corruption or other improper motive or cause.” Airheart v. Green, 267 Ala. 689, 693, 104 So. 2d 687, 690 (1958).
1 Alabama Liability Insurance Handbook § 14.03 (quoting Gulf Atlantic Life Ins. Co. v. Barnes, 405 So. 2d 916, 925.
Conclusion
Alabama law on bad faith claims is well-defined and centers on the insurer’s intentional refusal to pay a claim without any legitimate or arguable reason. The duty of good faith and fair dealing is implied in insurance contracts, and the presence of a debatable reason for claim denial is a strong defense for insurers. Understanding these elements and defenses is crucial for insurers navigating bad faith claims in Alabama.
Jim Pattillo is a member of Christian Small, LLP’s Product Liability Practice Group. He is leading litigation counsel for insurance, product, and commercial clients and is based in the firm’s Birmingham, Alabama office. Mr. Pattillo represents numerous product manufacturers including software companies, medical device and life science companies, commercial product manufacturers, and numerous other US based manufacturers and distributors. Mr. Pattillo focuses exclusively on litigation and trial work. He has a twenty-year trial record in the courtroom that is extensive and successful including numerous seven and eight figure exposures with results routinely exceeding client expectations.
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