Malone v. Allstate Indemnity Co., No. 2:13–CV–00884–WMA, WL 2592352 (N.D. Al. Jun. 10, 2014)

The Northern District of Alabama finds that an insurer did not act in bad faith by denying coverage for damage caused by a house fire where investigators suspected arson, the insured made misrepresentations in bankruptcy filings, and the insurer received an uncontradicted coverage opinion from an attorney.

On March 28, 2011, Sherry Malone’s house suffered fired damage. Malone made a claim for the damage under her Allstate homeowner’s policy. Despite having lived in the home for over seven months, Malone had obtained the policy just days after receiving a job offer that required her to move to a different state and only a few weeks prior to the fire.

Allstate refused to pay the insurance benefits, and Malone sued for breach of contract and bad faith and/or wanton denial of insurance benefits. Allstate in turn sought summary judgment on both of those counts. When Malone failed to file a timely response to Allstate’s motion, thereby not disputing the material facts that Allstate set forth, the court granted judgment for Allstate on both counts.

The court explained that to prevail on a claim of bad faith denial of benefits in Alabama the plaintiff must show that the insurer either acted with intent to injure or had no legitimately debatable reason to deny the claim. In this case, the court said, Allstate had three debatable reasons to deny the claim: (1) evidence of arson; (2) evidence of a misrepresentation by Malone; and (3) the advice of counsel.

In Alabama, a prima facie case of arson requires evidence of “arson by someone,” “motive by the insured,” and “unex- plained surrounding circumstantial evidence implicating the insured.”  First, gasoline was found in the area where the fire originated and where no gasoline was normally stored, estab- lishing “arson by someone.”   Second, because Malone was suffering from financial difficulties and had filed for bankruptcy, recently obtained a new job for which she planned to move out of state, and purchased the insurance policy only weeks prior to the fire, there was sufficient evidence of “motive by the insured.” Finally, an informant had contacted Allstate claiming that Malone had told him that she intended to recoup the $60,000 policy limit by having a fire started in her basement.

Allstate also presented evidence that Malone misrepresented a material fact when making her claim. Malone claimed over $82,000 in personal property as of the date of the fire, despite having claimed that she owned only $1,132 worth of non-vehicle personal property in a bankruptcy filing made the year before.  The court explained that despite the fact that Malone may have received a moderate salary increase since the date of the bankruptcy filing, Allstate had legitimate grounds to doubt that she could have bought an additional $70,000- $80,000 worth of personal property during that time.  The court rejected Malone’s argument, made to an Allstate investigator, that she had failed to read the bankruptcy petition before it was filed and that it contained inaccurate information, finding that her failure to read or later amend the petition constituted sufficient circumstantial evidence that she misrepresented the amount of personal property she lost in the fire.

Finally, the court explained that relying on private counsel’s advice can bolster an insurer’s argument that it did not act in bad faith and that it had a debatable reason to deny benefits. Allstate relied on the advice of a private lawyer who had submitted a coverage opinion. Because there was no evidence on the record that contradicted the coverage opinion, the court found that Allstate was entitled to rely on the coverage opinion. This reliance on the informed advice of private counsel, according to the court, further showed a lack of bad faith.