• Federal Court in Alabama Holds Insurer Not Liable for Bad Faith for Contesting Coverage Given Unsettled Law
  • July 22, 2013 | Author: George B. Hall
  • Law Firm: Phelps Dunbar LLP - Houston Office
  • A federal district court in Alabama has held that insurers should not be held liable for bad faith for contesting their duty to defend administrative claims and regulatory enforcement actions resulting from historical environmental pollution. Alabama Gas Corp. v. Travelers Cas. and Surety Co., 2013 WL 3242743 (N.D. Ala. June 25, 2013).

    The insured operated a manufactured gas plant for decades in the mid-1900s. Years later, the U.S. Environmental Protection Agency sent an information request letter, a pollution report and a formal Potentially Responsible Person (“PRP”) letter to the insured. The insured forwarded this information to its liability insurers that had issued policies during several years of the plant’s operation. The insurers advised that no coverage was available because there was no “suit.” In the ensuing coverage litigation, the district court certified to the Alabama Supreme Court the question of whether a PRP letter satisfies the “suit” requirement of the policies. The question was answered in the affirmative. Travelers Cas. and Surety Co. v. Alabama Gas Corp., 2012 WL 6720790 (Ala. 2012). See, January 2013 issue of Insurance Law Report. The parties filed cross-motions for partial summary judgment on the insured’s bad faith claim.

    The district court granted the insurers’ motion, holding that the insurers could not be found in bad faith for contesting a “fairly debatable” issue of undecided law. It noted that the issue had been certified for resolution by the Alabama Supreme Court due to the dearth of decisional law addressing this question. Therefore, it concluded, there was a legitimate dispute as to liability and, as a matter of law, the insurers did not act in bad faith in contesting liability on that basis.