When you buy an insurance policy, you are paying for protection and peace of mind in case of serious losses in the context of automobile accidents, illness, disasters, and other catastrophic events. Unfortunately, many insurers dispute payments for claims in order to save money and make a greater profit, thereby causing stress for policyholders. However, insurers owe their policyholders an implied covenant of good faith and fair dealing. They are required to treat policyholders fairly and in good faith.
When an insurer disputes or denies an insurance claim that is owed without having a reasonable basis for doing so, it acts in bad faith and breaches the implied covenant of good faith and fair dealing.
Like other states, Alabama recognizes a tort of insurance bad faith. A policyholder can bring a bad faith claim when an insurer wrongfully denies a claim against the policy. Specifically, a plaintiff must prove the existence of an insurance contract between the plaintiff and the defendant, the defendant’s breach of the contract, a refusal to pay a claim, a lack of any reasonable or arguable grounds for the refusal, and the insurer’s actual knowledge that there is no reasonable basis to deny the claim. There is a conditional fifth element that if the allegation related to the third element is an intentional failure, the plaintiff must prove the intentional failure to determine whether there is an arguable basis for the denial. In a normal bad faith case, a plaintiff must be able to get a directed verdict on a breach of contract claim before he or she can recover damages for bad faith.
An insurer may be able to defend itself on the grounds that there was a lawful basis for denial. As a matter of law, when there is a lawful basis for a denial, the insurer cannot be liable for bad faith.
In some cases, a plaintiff can proceed on a theory of abnormal bad faith. This theory is used when the fifth element of an intentional failure to determine whether there was an arguable basis for a denial is present. There are four types of abnormal bad faith cases: when an insurer recklessly or intentionally fails to investigate a plaintiff’s claims, when an insurer recklessly or intentionally fails to evaluate a plaintiff’s claim, when the insurer develops a debatable reason to deny the plaintiff’s claim, or when an insurer relies on ambiguous language in the policy it created as a basis for denial.
Abnormal bad faith cases often arise from disastrous situations involving huge losses, such as claims that arise from hurricanes. In those cases, there are numerous claims being made at the same time, and it is not uncommon for a particular claims investigation to be less thorough than it should be. However, an abnormal bad faith refusal to investigate claim cannot proceed if the trial court expressly finds as a matter of law that an insurer had a reasonably legitimate or arguable basis for refusing to pay a claim at the time of the denial.
For example, in State Farm Fire and Casualty Company v. Brechbill, the insurer received 300 claims in north Alabama for a windstorm. A homeowner plaintiff submitted a claim for payment based on wind damage. The Alabama Supreme Court found that, even if the insurer improperly omitted a few aspects of a complete investigation, the homeowner had to show more than negligence or bad judgment to prove abnormal bad faith.
Under Alabama law, both compensatory damages and punitive damages may be recovered in a bad faith action. To recover punitive damages, a plaintiff will need to prove intentional conduct and a dishonest purpose.
Our attorneys regularly pursue insurance bad faith claims for clients against insurance companies. If you believe your insurer wrongfully denied your insurance claim, you should consult an experienced Alabama consumer rights attorney. Call Jinks, Crow & Dickson at 888-297-9592 or contact us via our online form.
Other Blog Posts
Law of Defamation; October 15, 2015
Alabama Lemon Law Basics; September 18, 2015