District Court Predicts that Alabama Supreme Court Would Refuse to Extend Bad Faith to Reinsurance Disputes

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Carlton Fields

The United States District Court for the Middle District of Alabama recently predicted that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes if it was presented with the question. The district court therefore granted a reinsurer’s motion to dismiss several bad faith claims against it.

Alabama Municipal Insurance Corporation (“AMIC”) sued Munich Reinsurance America, Inc. for purportedly underpaying several reinsurance claims by approximately $1.9 million. AMIC asserted bad faith claims as part of its suit. Munich Re moved to dismiss those claims, arguing Alabama does not (or rather, would not) recognize bad faith in the context of reinsurance disputes.

The district court agreed. It therefore granted Munich Re’s motion to dismiss and denied a motion by AMIC to amend. In sum, the court noted that the Alabama Supreme Court has limited bad faith claims to insurance situations “that most resemble typical insurance contracts” (e.g., those in which the insured is a consumer or individual, etc.) The district court noted that the Alabama Supreme Court declined to extend the tort to a situation involving a dispute between a primary and excess insurer and that another United States district court had predicted “that the Alabama Supreme Court would not choose to extend the tort to suretyships.” The district court noted that the tort was designed to protect vulnerable insureds who have little negotiating power when signing insurance contracts and that the insurer-reinsurer dynamic is not such a situation.

The court therefore predicted that the Alabama Supreme Court would not recognize bad faith claims in the context of insurer-reinsurer disputes and dismissed those claims.

Alabama Municipal Ins. Corp. v. Munich Reinsurance Am., Inc., No. 2:20-cv-00300-MHT-JTA (Doc. No. March 16, 2021).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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