Alabama Policyholder’s Bad Faith Claim Barred Where Basis of Coverage Denial Was Debatable Under Alabama Law

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The U.S. District Court for the Northern District of Alabama, Southern Division, recently granted an insurer’s summary judgment with respect to a policyholder’s tort claim for the bad faith refusal to pay a claim, dismissing it as a matter of law. See Alabama Gas Corporation v. Travelers Casualty and Surety Company, et al., Case No. 2:10-CV-01840-IPJ, Document No. 214 (N.D. Ala., June 25, 2013). In Alabama Gas Corp., the coverage issue was whether a potentially responsible party (PRP) notice from the Environmental Protection Agency (EPA) constituted a “suit” under the liability policy so as to constitute a claim to trigger the insurer’s coverage obligations. See id. Even though 44 other states previously decided this particular coverage decision in favor of the policyholder (e.g., a PRP notice is a suit that triggers coverage), and the insurer here ultimately did not prevail on this issue of first impression under Alabama law (e.g., Alabama followed the majority position in its ruling on this coverage issue), the district court was clear – where a legitimate dispute exists as to coverage liability under Alabama law at the time of the coverage decision, a tort action for bad faith refusal to pay the contractual claim does not exist as a matter of law. See id. at p. 10 (citing Bowers v. State Farm Mut. Auto. Ins. Co., 460 So.2d 1288, 1290 (Ala. 1984)).

In Alabama Gas Corp., the policyholder, Alabama Gas Corporation (Alabama Gas or the policyholder) received a 2008 information request and pollution report from the EPA regarding its Huntsville, Ala., facility. The defendant insurers – various subsidiaries of Travelers Casualty and Surety Company (Travelers or the insurer) – took the position that a formal claim did not exist until “such a claim or lawsuit is received.” Id., p. 3 (quoting Doc. No. 130-22). In June 2009, the EPA sent Alabama Gas a formal PRP notice. The insurers, again, denied that the PRP notice was a suit under the relevant liability policies, and, therefore, the notice did not give rise to the insurer’s defense obligation.

Insurer Can Base Denial on Debatable Coverage Question

At the time of the insurer’s denial, the basis for denial – that the EPA’s PRP notice is not a suit sufficient to trigger coverage under a liability policy – had not been addressed by an Alabama court. In fact, it was not until this court, in this action, certified the question to the Alabama Supreme Court that there was an Alabama decision on this coverage issue.

In its initial certification of the coverage question to the Alabama Supreme Court, the district court recognized the policyholder’s argument that the majority opinion on this issue was that a PRP letter from the EPA was, indeed, a suit, as decided by 44 of the states that previously considered the issue. The court further acknowledged that, under Alabama law (like in most jurisdictions), when doubt exists as to whether coverage exists under an insurance contract, the language is interpreted to the benefit of the policyholder. Despite these and other grounds indicating that the Alabama Supreme Court would rule in favor of the policyholder on this issue, the district court noted that the parties agreed that the issue remained undecided under Alabama law, and, thus, certification was appropriate.

The district court certified the question to the Alabama Supreme Court, as follows: “[u]nder Alabama law, is a [PRP] letter from the [EPA] … sufficient to satisfy the ‘suit’ requirement under a liability policy for insurance?” Id. at 4. The Alabama Supreme Court answered this question in the affirmative, as had the other 44 states that considered the issue. Thus, the Alabama Supreme Court, in effect, invalidated the insurer’s grounds for denial. See id., at p. 4 (citing Travelers Casualty and Surety Company v. Alabama Gas Corporation, __ So.3d __, 2012 WL 6720790 (Ala. 2012)).

Even if a Debatable Coverage Question Is Resolved Against the Insurer, There Is Still No Bad Faith

On summary judgment, Alabama Gas argued that the insurer acted in bad faith as a matter of law, since the Alabama Supreme Court ultimately ruled that a PRP notice is a suit by which coverage is triggered, and, therefore, this coverage question was no longer debatable. Id. at 3-4. To the contrary, the insurer argued that the Alabama Supreme Court’s decision on the coverage question further confirmed that the coverage issue was “fairly debatable” under Alabama law at the time the insurer made its coverage determination, requiring the dismissal of the policyholder’s bad faith claim as a matter of law. Id. at 6. The district court agreed with the insurer and dismissed the bad faith cause of action.

In reaching its decision that under Alabama law the insurer had not engaged in bad faith conduct, the trial court held that the policyholder had to prove each of the following elements: (1) the insurance contract existed; (2) an intentional refusal to pay the claim; and (3) the absence of any lawful basis for refusal and the insurer’s knowledge of that fact; or the insurer’s intentional failure to determine whether there is any lawful basis for its refusal. Id. at 9 (citing Acceptance Ins. Co. v. Brown, 832 So.2d 1, 16 (Ala. 2001)). The district court emphasized that there is no recovery for the tort of a bad faith refusal to pay where a plaintiff’s evidence falls short of eliminating any arguable reason for denying payment. An arguable reason is one that is “open to dispute or question.” See id. (quoting Koch v. State Farm Fire & Cas. Co., 565 So.2d 226, 229 (Ala. 1990)). Where a claim is debatable under fact or law, the insurer is entitled to debate it. Id. (quoting Davis v. Cotton States Mutual Ins. Co., 604 So.2d 354, 358-59 (Ala. 1992) (internal quotes omitted)). “If any one reason for denial of coverage is at least ‘arguable,’ [a] court need not look any further, and a claim for bad faith refusal to pay will not lie.” Id., at 9-10 (quoting Weaver v. Allstate Ins. Co., 574 So.2d 771, 774 (Ala. 1990) (other internal citations omitted)).

In Conclusion

This decision is further indicative of a policyholder’s high burden of proof when asserting a tort claim of bad faith failure to pay under Alabama law – at least at the federal district court level. The court’s recent ruling demonstrates that an insurer is less likely to have bad faith exposure in Alabama when it denies a claim based on a coverage issue that was undecided under Alabama law at the time of the denial – despite the unfavorable treatment the coverage position has received in other (even many) jurisdictions; and despite where Alabama, itself, ultimately joins the majority position. It will be interesting to follow how future Alabama state court decisions handle the interpretation of Alabama law in light of this district court ruling.