Eleventh Circuit Finds Factual Disputes Regarding Whether Carrier's Investigation Was Improper and Constituted "Abnormal" Bad Faith Under Alabama Law

In Mutual Services Casualty Insurance Company v. Henderson, No. 03-13046 (May 5, 2004), the United States Court of Appeals for the Eleventh Circuit reviewed a "normal" bad faith failure to pay claim and an "abnormal" bad faith failure to investigate claim under Alabama law. The Eleventh Circuit upheld the District Court's summary judgment ruling on the "normal" bad faith claim; however, it found factual disputes and reversed the District Court's holding for the carrier on the "abnormal" bad faith claim.

In July 1999, the insureds were sued by their neighbors for equitable relief when they planned to open a poultry business. In June 2000, the neighbors amended their complaint to ask for actual damages. After the insureds reported the claim, they were advised on several occasions that the claim was not covered. The carrier filed a declaratory judgment action, and the insured asserted counterclaims for breach of contract and bad faith. The District Court granted summary judgment for the carrier on the bad faith claim. It allowed the breach of contract claim to proceed to trial, however, and the jury returned a verdict in favor of the insureds on that claim.

On appeal, the Eleventh Circuit analyzed whether the insured was liable for either "normal" bad faith or "abnormal" bad faith under Alabama law. For "normal" bad faith, the insured must prove: (1) breach of the insurance contract; (2) intentional refusal to pay the claim; (3) the absence of any reasonably legitimate or arguable reason for the refusal; and (4) actual knowledge of the absence of any legitimate or arguable reason. The Court of Appeals determined that there was evidence that would have allowed a reasonable jury to conclude that the underlying breach of contract claim was not covered, and that the carrier thus had a legitimate or arguable reason to refuse coverage. Based upon this conclusion, the Court of Appeals ruled that the District Court properly granted summary judgment for the carrier on the "normal" bad faith claim.

However, the Eleventh Circuit reversed the summary judgment with respect to the "abnormal" bad faith claim. Under Alabama law, to recover for "abnormal" bad faith, the insured must prove the insurer "intentionally or recklessly fail[ed] to conduct an adequate investigation of facts and submit those fact for a through review" before denying coverage. The court considered each letter in which a representative of the carrier denied coverage, in order to determine whether any one of them was sent without adequate investigation. With respect to certain of the letters, the appellate court found genuine issues of material fact as to whether the carrier "marshal[ed] all of the pertinent facts with regard to [the] insured's claim," before denying coverage. Therefore, in light of these issues concerning the adequacy of the carrier's investigation, the Eleventh Circuit remanded the case for further proceedings on the "abnormal" bad faith claim.