In an opinion released for publication on August 14th, 2014, one year after issuance, the Alabama Supreme Court unanimously held that the state has but one tort of bad faith, albeit with two separate methods of proof, and that both of those – bad faith refusal to pay and bad faith refusal to investigate – require the policyholder to show that the insurer had no “reasonably legitimate or arguable reason” for not paying. State Farm Fire & Cas. Co. v. Brechbill, 144 So.3d 248, 2013 Ala. LEXIS 126 (Ala., Sept. 27, 2013) also featured an unusual concurrence by Chief Justice Roy S. Moore in which the Chief Justice stated that he believed that the thirty-year-old judicially-adopted tort of bad faith was “an unconstitutional usurpation of legislative powers” that should be overruled by the court “in an appropriate case, . . . leaving to the legislative branch the right to determine policy questions” such as whether the state should have such a tort.
Shawn Brechbill was the owner of a home in Lacey Springs, Alabama that was damaged by a windstorm on January 29, 2008, and he sought to recover under a homeowner’s policy issued by State Farm Fire & Casualty Company. The insurer had the structure inspected and issued payment for roof repairs, but it concluded that the interior damage reported by the policyholder was attributable to long-term wear and tear and settling and defects during the original construction of the home. Brechbill disagreed, and the parties then spent two years exchanging dueling inspection reports; the insurer’s structural engineer ultimately issued four of those.
In January of 2010, the policyholder sued, alleging breach of contract, “normal” bad faith failure to pay, and “abnormal” bad faith failure to investigate. The insurer moved for summary judgment on the extracontractual counts, and the trial judge granted the carrier’s motion with respect to bad faith failure to pay but denied it with respect to bad faith failure to investigate. A jury then returned a verdict of $150,000 in compensatory damages and $150,000 on the “abnormal” bad faith failure to investigate claim. An appeal to the Alabama Supreme Court followed.
Last year the state’s highest court reversed and remanded, in an opinion that brought at least some measure of clarity to what Chief Justice Moore called “the confusion the tort of bad faith has created over the last 30 years for Alabama trial courts, for appellate courts, and for attorneys in general.” The majority opinion by the Chief Justice held that there was “only one tort of bad-faith refusal to pay a claim, not two ‘types’ of bad faith or two separate torts.” The court stated that the tort of bad faith had four essential elements: (1) an insurance contract between the parties; (2) an intentional refusal to pay the claim; (3) the absence of any reasonably legitimate or arguable reason for that refusal; and (4) actual knowledge of that absence by the carrier.
The “confusion” commenced shortly after Alabama adopted the tort in 1981 in Chavers v. National Sec. Fire & Cas. Co., 405 So.2d 1 (Ala. 1981), when courts began to distinguish between what came to be called “normal” and “abnormal” bad faith cases. The latter was an alternative method of establishing the tort by proving “that the insurer’s failure to investigate at the time of the claim presentation procedure was intentionally or recklessly omissive.” As Chief Justice Moore’s opinion explained, however:
Regardless of whether the claim is a bad-faith refusal to pay or a bad-faith refusal to investigate, the tort of bad faith requires proof of the third element, absence of legitimate reason for denial[.] . . . [I]f a lawful basis for denial actually exists, the insurer, as a matter of law, cannot be held liable in an action based upon the tort of bad faith.
When the trial court dismissed Brechbill’s claim for bad faith refusal to pay, it found that the policyholder had “created no genuine issue of material fact about whether or not State Farm had a reasonably legitimate or arguable reason for refusing the pay the claim” when it originally denied the claim in August of 2008. The Chief Justice held that that finding was fatal to the insured’s bad faith refusal to investigate claim as well.
[H]ere a debatable reason for State Farm’s denials existed at the time of the denials. . . . State Farm may or may not have perfectly investigated (or reinvestigated) Brechbill’s claim to his satisfaction, but perfection is not the standard here. . . . The facts before us do not rise to the level of bad faith, dishonesty, self-interest, or ill will inherent in bad-faith conduct. . . . “Bad faith . . . is not simply bad judgment or negligence. It imports a dishonest purpose and means a breach of known duty, i.e., good faith and fair dealing, through some motive of self-interest or ill will.” Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 924 (Ala. 1981). 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.
Interestingly, Chief Justice Moore then concurred specially in a lengthy opinion that no other member of the panel joined, stating that the Alabama Supreme Court’s “attempt in Barnes and Chavers to recognize a new tort was an unconstitutional usurpation of legislative powers” and that “[t]he legislature never enacted the tort of bad faith, and this Court had no power to do so.” In the Chief Justice’s opinion:
Although the legitimacy of the judicially created tort of bad-faith refusal to pay was not challenged in this case, I believe that this Court’s recognition of the tort as the law in Alabama was unconstitutional. I urge the Court to reexamine Chavers, to overrule it in an appropriate case, and to abolish this judicially legislated tort, leaving to the legislative branch the right to determine policy questions such as the intentional breach of an insurance contract by an insurance company.