Attorneys Ins. Mut. of Alabama, Inc. v. Smith, Blocker & Lowther, P.C.

• Decision Date: 02 August 1996
• Citation: 703 So.2d 866
• Parties: ATTORNEYS INSURANCE MUTUAL OF ALABAMA, INC. v. SMITH, BLOCKER & LOWTHER, P.C. SMITH, BLOCKER & LOWTHER, P.C. v. ATTORNEYS INSURANCE MUTUAL OF ALABAMA, INC. 1950420, 1950511.
• Court: Alabama Supreme Court

Page 866

703 So.2d 866

ATTORNEYS INSURANCE MUTUAL OF ALABAMA, INC. v. SMITH, BLOCKER & LOWTHER, P.C.

SMITH, BLOCKER & LOWTHER, P.C. v. ATTORNEYS INSURANCE MUTUAL OF ALABAMA, INC.

1950420, 1950511.

Supreme Court of Alabama.

Aug. 2, 1996.

Rehearing Dismissed July 3, 1997.

Michael L. Edwards and R. Bruce Barze, Jr., of Balch & Bingham, Birmingham, for appellant/cross appellee Attorneys Insurance Mutual of Alabama Inc.

Frank M. Bainbridge and Alfred F. Smith, Jr., of Bainbridge, Mims, Rogers & Smith, Birmingham, for appellee/cross appellant Smith, Blocker & Lowther, P.C.

Michael L. Edwards and R. Bruce Barze, Jr., of Balch & Bingham, Birmingham; and Broox G. Holmes of Armbrecht, Jackson, DeMouy, Crowe, Holmes & Reeves, Mobile, for appellant/cross appellee Attorneys Insurance Mutual of Alabama, Inc., on rehearing.

Frank M. Bainbridge and Alfred F. Smith, Jr., of Bainbridge, Mims, Rogers & Smith, Birmingham, for appellee/cross appellant Smith, Blocker & Lowther, P.C., on rehearing.

Bibb Allen and Rhonda Pitts Chambers of Rives & Peterson, P.C., Birmingham, for DPIC Companies, amicus curiae, on rehearing.

Elizabeth Golson McGlaughn for the firm of Inzer, Stivender, Haney & Johnson, P.A., Gadsden, amicus, on rehearing.

Patrick W. Richardson, amicus, of Bell Richardson, P.A., Huntsville, on rehearing.

Joseph C. Espy III of Melton, Espy, Williams & Hayes, P.C., Montgomery; and R. Joseph DeBriyn and Harry W.R. Chamberlain II of Musick, Peeler & Garrett, L.L.P., Los Angeles, CA, for amici National Ass'n of Bar-Related Insurance Companies, American Insurance Ass'n and Reliance National Insurance Company, on rehearing.

Joe C. Cassady, Sr. and R. Rainer Cotter III, of Cassady, Fuller & Marsh, Enterprise, amicus.

Ollie L. Blan, Jr., amicus, Birmingham, on rehearing.

George M. Higginbotham, amicus, Bessemer, on rehearing.

William J. Donald, Jr., amicus, of Donald, Randall, Donald & Tipton, Tuscaloosa, on rehearing.

James R. Knight, Stephen K. Griffith, S. Lynn Marie McKenzie, Jason P. Knight, and D. Todd McLeroy for the firm of Knight & Griffith, Cullman, amicus, on rehearing.

INGRAM, Justice.

Smith, Blocker & Lowther, P.C. ("Smith, Blocker"), sued Attorneys Insurance Mutual of Alabama, Inc. ("Attorneys Mutual"), its professional liability insurance carrier, seeking a judgment declaring that Attorneys Mutual had a duty to defend and indemnify it in regard to a malpractice claim. Smith, Blocker also sought damages, alleging that Attorneys Mutual had in bad faith refused to provide coverage under the policy. The trial court entered a summary judgment in favor of Smith, Blocker as to the question of the insurance coverage claim and in favor of Attorneys Mutual on the bad faith claim. Both parties appealed.

On a motion for summary judgment, the burden is initially on the movant to make a prima facie showing that there is no genuine issue of material fact (i.e., that there is no dispute as to any material fact) and that the movant is entitled to a judgment as a matter of law. Rule 56, Ala.R.Civ.P.; McClendon v. Mountain Top Indoor Flea Market, Inc., 601 So.2d 957 (Ala.1992); Elgin v. Alfa Corp., 598 So.2d 807 (Ala.1992). "The burden does not shift to the opposing party to establish a genuine issue of material fact until the moving party has made a prima facie showing that there is no such issue of material fact." McClendon, at 958; Elgin, at 810-11.

Rule 56 must be read in conjunction with the "substantial evidence rule," § 12-21-12, Ala. Code 1975, for actions filed after June 11, 1987. See Bass v. SouthTrust Bank of Baldwin County, 538 So.2d 794, 797-98 (Ala.1989). In order to defeat a defendant's properly supported motion for summary judgment, the plaintiff must present substantial evidence, i.e., "evidence of such weight and quality that fair-minded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." West v. Founders Life Assurance Co. of Florida, 547 So.2d 870, 871 (Ala.1989). On an appeal from a summary judgment, this Court reviews the record in a light most favorable to the nonmovant and resolves all reasonable doubts against the movant. Wilma Corp. v. Fleming Foods of Alabama, 613 So.2d 359 (Ala.1993).

W. Wheeler Smith, a partner in Smith, Blocker, was employed to form a Subchapter S corporation for B.R.E. Associates, Inc. ("BRE"), and to file the necessary documentation with the Internal Revenue Service. In December 1992, Smith formed the corporation, prepared the Subchapter S election, and secured the necessary signatures to obtain Subchapter S tax treatment for the corporation. However, he failed to file the Subchapter S election by March 15, 1993, as required by the Internal Revenue Service.

In October 1993, BRE made a demand upon Smith for $12,060 for additional income tax that was due because of his failure to file the Subchapter S election. On November 10, 1993, rather than reporting the claim to Attorneys Mutual, Smith, Blocker paid BRE directly for the additional income tax. Smith, Blocker believed that the matter had ended, but failed to obtain a release from BRE.

However, on September 26, 1994, some 10 months later, BRE made an additional demand upon Smith, based on his failure to properly file the Subchapter S election form, for $270,000; this claim was based upon BRE's discovery that it would also be liable for additional capital gains tax on the sale of real estate BRE was attempting to sell. The following day, Smith, Blocker notified Attorneys Mutual of BRE's claim and also informed it of the previous payment it had made to BRE. On December 16, 1994, after conducting an investigation into the claim, Attorneys Mutual denied coverage for the claim based upon Smith, Blocker's failure to give timely notice of the "omission" by Smith discovered by BRE in 1993. Attorneys Mutual contends that when BRE notified Smith, Blocker of the "omission" in 1993, Smith, Blocker was required to give notice. Therefore, because Smith, Blocker waited until BRE made an additional demand in 1994, Attorneys Mutual contends that Smith, Blocker failed to satisfy the condition precedent in the policy requiring Smith, Blocker to give timely notice of a claim.

The trial court disagreed, holding (1) that because the policy was a "claims made" policy rather than an "occurrence" policy, Smith, Blocker was allowed to pay the first claim at its own personal cost and (2) that Smith, Blocker gave prompt notice of the second claim. Therefore, the trial court held that Attorneys Mutual was required to defend and indemnify Smith, Blocker for BRE's second claim.

The Attorneys Mutual policy is a "claims made" policy; by such a carrier agrees to assume liability for any errors, including those made before the inception of the policy, as long as the claim is made during the policy period. On the other hand, an "occurrence" policy provides coverage for any acts or omissions that arise during the policy period, even though the claim is made after the policy has expired. Homestead Ins. Co. v. American Empire Surplus Lines Ins. Co., 44 Cal.App.4th 1297, 52 Cal.Rptr.2d 268 (1996).

In order to reduce exposure to an unpredictable and perhaps lengthy "tail" of lawsuits brought long after an "occurrence" policy period has ended, insurance carriers developed "claims made" policies. Such policies limit an insurer's risk by restricting coverage to the policy in effect when a claim is asserted against the insured, without regard to the timing of the damage or injury. This restriction allows the carrier to establish reserves despite inflation, upward-spiraling jury awards, or enlarged tort liability occurring after the policy period. "Claims made" policies permit insurers to predict more accurately both the limits of their exposure and the premium needed to accommodate the risk undertaken. Homestead, supra.

The hallmark of a "claims made" policy is that exposure for claims terminates with the expiration or termination of the policy, thereby providing certainty in gauging potential liability; this certainty in turn leads to more accurate calculation of reserves and premiums. "Claims made" policies benefit insureds by making coverage cheaper and more widely available. Homestead, supra.

Thus, a "claims made" policy limits coverage to claims made against the insured during the policy period. Coverage does not depend on when the "actual or alleged negligent act, error or omission" occurs. Instead, coverage depends on when the claim is made against the insured. Under a "claims made" policy, the insurer generally is responsible for loss resulting from claims made during the policy period, no matter when the liability-generating event took place. An "occurrence" policy may be triggered in one of several ways. The event that triggers a "claims made" policy, by contrast, is transmission of notice of the claim. Homestead, supra.

Attorneys Mutual relies on a portion of the policy appearing in the "limits of liability" section, which provides for multiple insureds, claims, and claimants:

"The inclusion herein of more than one insured or the making of claims or the bringing of suits by more than one person or organization shall not operate to increase the Company's limit of liability. Two or more...