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ALABAMA LAW ON INSURANCE BAD FAITH CLAIMS

Insurance Bad FaithAlabama Recognizes Insurance Bad Faith Claims Under Two Theories

Alabama courts recognize that there are two different methods of proof for proving insurance bad faith claims.  The basic concepts of insurance bad faith was recently revisited by the Alabama Supreme Court in State Farm Fire and Casualty Company v. Brechbill, ____ So.3d ___, 2013 WL 5394444, released on September 27, 2013.  In this case, the homeowner purchased a house in 2007.  At the time of the purchase, the homeowner and State Farm both inspected the house and did not see any damage to the structure of the house other than the normal wear and tear of an older home.

About a year later, the house fell victim to a violent windstorm.  During the windstorm the wind reached almost 60 miles per hour.  As a result, the house was racked and suffered structural damage resulting in cracked and buckling interior walls and roof damage.  The homeowner submitted a claim to State Farm.  State Farm owned up to the roof repairs.  However, instead of paying the claim for the damages to the walls of the house, State Farm hired an engineering firm to conduct an “inspection.”  Despite the fact that the engineering firm only conducted a visual inspection of the house, its report suggested that the damage was from wear and tear and long term settlement of the house.  Thereafter, despite having its prior report from the time the house was purchased, State Farm denied the claim.

The issue in this appeal illustrates the main issue in all bad faith claims against insurance companies; whether State Farm had a reasonably legitimate or arguable reason for refusing to pay the claim at the time of the denial.  Alabama has recognized a tort of “bad faith” since 1981, when the Supreme Court of Alabama  adopted the tort of bad faith in regard to the failure to pay an insurance claim.  The Court held:

An 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.  Chavers v. Nat. Sec. Fire & Casualty Co., 405 So.2d 1, (Ala.1981).
     In the Chavers case, the Alabama Supreme Court set out the following elements to a insurance bad faith claim.  1.) an insurance contract between the parties and a breach of the contract, 2.) an intentional refusal to pay the insured’s claim, 3.) the absence of any reasonably legitimate or arguable reason for that refusal, 4.)  the insurer’s actual knowledge of the absence of any legitimate or arguable reason.  This set of four elements have become known in the courts as proof of a “normal bad faith claim.”  Proving a normal insurance bad faith claim is one method of proving a bad faith case.
     Alabama courts have also recognized that there is a second method of proving an insurance bad faith claim.  This second method is commonly referred to as an “abnormal bad faith claim.”  An abnormal insurance bad faith claim occurs when the insurance company fails to properly or adequately investigate to determine whether there is any legitimate or arguable reason for denial, and instead, denies the claim from a standpoint of failing to investigate.
     Either method may be used to prove an insurance bad faith claim.  Bad faith claims are brought in addition to breach of contract claims.  Under the breach of contract claim, the insured sues the insurance company for failing to pay the claim.  Under a breach of contract theory, the insured may only recover the amount of money that they should have received from the insurance company for the claim, but no more.  Under a bad faith claim, the insurance company may be required to pay not only the amount of the claim, but punitive damages to punish it for its failure to pay a legitimate claim that was not reasonably debatable.
     Unfortunately for Alabama consumers, it is very difficult to prove an insurance bad faith claim.  This is true because Alabama Courts have consistently held 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.
     Frequently, where the insurance company has “gone through the motions” long enough and enough times, it can appear that they actually fulfilled their duties to investigate and formed a legitimate difference of opinion as to whether the claim should be paid.  An experience attorney can dig behind the facade and uncover evidence that shows that there was a failure to property investigate or that the decision to deny the claim was simply unsupported under a proper reading of the insurance contract.
     William Bradford handled insurance coverage issues on behalf of insurance companies for over seven years prior to restarting his own practice.  Now, Bradford uses his knowledge of insurance policies and insurance coverage to help Alabama consumers fight insurance companies for the payment of justified and legitimate claims where the insurance company fails to pay.  If you are facing a situation where you are getting the run around by an insurance company on your claim, or the insurance company simply has failed to investigate the claim or pay the claim, call Bradford Ladner LLP.  We would be happy to meet with you and review your situation to determine if we can help.  Call us today.