Insurance companies often hire experts to assist with claims. If the experts are wrong, is that bad faith?
Mr. Charlie was a yacht out of Alabama insured with Atlantic Specialty Insurance Company. A fire occurred on board, completely damaging the boat and its contents. The insurance company filed a declaratory judgment action with the court since it believed it did not have to cover the loss. Mr. Charlie Adventures asserted counterclaims for breach of contract and bad faith.
The insurance company’s experts concluded that the fire started in the engine compartment due to the seawater intake screen for the starboard strainer being restricted by marine growth. They denied the claim because of a policy exclusion for losses due to "marine life" and for failure to maintain the yacht. Mr. Charlie sought to exclude the alleged experts’ testimony, arguing that the methodology used to determine the cause of the fire was unreliable.1 The trial court agreed. Since the insurance company’s experts were excluded, the insurer had no evidence to prove the exclusion applied and Mr. Charlie was awarded summary judgment on the breach of contract claim.
Next the trial court considered the claim of bad faith. In Alabama, there are two types of bad faith claims: normal and abnormal.2 In a normal case, a plaintiff must show that a contract was breached, the insurance company intentionally refused to pay, there is no legitimate reason for the refusal and the insurer’s actual knowledge of any legitimate reason.3 In an abnormal case, the first three elements must be proven plus the insurer’s intentional failure to determine whether there was a legitimate reason to refuse to pay a claim.4 "To defeat a bad faith claim, the defendant does not have to show that its reason for denial was correct, only that it was arguable."5
The trial court initially found there was no bad faith because the insurance company could not have known that the experts were wrong. Mr. Charlie moved for the court to reconsider its ruling. This is an extraordinary remedy; Rule 60(b)(1) allows a court to reconsider and correct its own errors for mistake or excusable neglect. A party cannot assert new arguments unless there has been a fundamental change in the law and cannot argue new authority that was readily available when the ruling was made.
Mr. Charlie argued both normal and abnormal bad faith existed and cited several cases in requesting that the court reverse its ruling on the bad faith claim. However, the trial court found that the experts had the background and experience to give expert opinions on the cause and origin of the fire and that the insurance company could not have known not to rely on their opinions. "Whether an insurance company is justified in denying a claim under a policy must be judged by what was before it at the time the decision is made."6 Bad faith can exist "where the insurer intentionally or recklessly fails to properly investigate whether a claim is covered."7 Negligent failure to investigate is not enough, it must also be intentional or reckless.8 If an insurer intentionally fails to determine whether there was a lawful basis for denial, that can support a bad faith claim.9
Mr. Charlie appealed the trial court ruling and the appellate court agreed that it was a triable issue whether there was an arguable reason to deny the claim. The ruling for the insurance company on the bad faith claim was reversed.10 This is similar to an earlier case where an insurance company relied upon an inexperienced adjuster who recommended an engineer be hired but the company failed to do so.11 The appellate court found that a reasonable jury could find that the insurance company should have known that the experts’ reports were unreliable and therefore no arguable basis existed for denying the claim.
The arguable or fairly debatable standard for denying claims exists in several states, not just in Alabama. Insurance companies use it to assert that even if they are wrong in denying a claim, there is no bad faith. Every case must be looked at closely and reviewed to evaluate whether a reasonable jury might be persuaded by this argument. But for now, please enjoy the song Mr. Charlie, by the Grateful Dead.
1 More specifically, the experts’ reports were excluded because certain key numbers were reversed, certain information relied upon came from witnesses who were not necessarily qualified to provide information, unreliable/inaccurate information was presented, the experts reached a conclusion first and then attempted to support it and additional inspections were recommended but not done, among others.
2 Emps.’ Benefit Ass’n v. Grissett, 732 So.2d 968, 976 (Ala. 1998).
5 Liberty Nat. Life Ins. Co. V. Allen, 699 So.2d 138, 143 (Ala. 1997).
6 Nat. Sav. Life Ins. Co. V. Dutton, 419 So.2d 1357, 1362 (Ala. 1982).
7 Lord v. Allstate Ins. Co., 2014 WL 4686441 at *10 (N.D.Ala. Sept. 17, 2014).
9 Intercontinental Life Ins. V. Lindblom, 571 So.2d 1092, 1098 (Ala. 1990).
10 Atlantic Spec. Ins. Co. v. Mr. Charlie Adventures, LLC, Docket No. 1:13-cv-00458 (11th Cir., February 29, 2016).
11 Lord v. Allstate Ins. Co., 47 F. Supp. 3d 1288, 1308-09 (N.D.Ala. 2014).