Chavers v. National Sec. Fire & Cas. Co.

Citation405 So.2d 1
PartiesBill L. CHAVERS and Diana Z. Chavers v. NATIONAL SECURITY FIRE & CASUALTY CO. 79-280. . On Application for Rehearing
Decision Date02 October 1981
CourtSupreme Court of Alabama

Benjamin H. Kilborn, James H. Griggs, Frank Grey Redditt, Jr., of Kilborn & Redditt, Mobile, for appellants.

Alton R. Brown, Jr., Don O. White and E. J. Saad, of Brown, Hudgens, Richardson, Whitfield & Gillion, Mobile, for appellee.

Ira L. Burleson, Ralph B. Tate and Ollie L. Blan, Jr., of Spain, Gillon, Riley, Tate & Etheredge, Birmingham, for amici curiae Liberty Nat. Life Ins. Co. and Liberty Nat. Fire Ins. Co.

John W. Haley and Francis H. Hare, Jr., of Hare, Wynn, Newell & Newton, Birmingham, for amicus curiae Alabama Trial Lawyers Ass'n.

On Application for Rehearing


The opinion issued by this Court on April 10, 1981, is withdrawn and the following opinion is substituted in its place:

This is an appeal from an order and an entry of judgment in the Circuit Court of Mobile County, granting defendant, National Security Fire & Casualty Company, a judgment notwithstanding the verdict or a conditional new trial. We reverse the JNOV and affirm the judgment granting the new trial.

On November 17, 1975, a fire destroyed a building which was owned by plaintiffs, Mr. and Mrs. Bill Chavers, in Mobile. At the time, a night club was being operated on the premises by the Chaverses' tenant, Mrs. Augsten, who was also purchasing certain fixtures in the building from the Chaverses. Defendant, National Security, insured the fixtures in Mrs. Augsten's name with the Chaverses named as the beneficiaries of the standard mortgagee's loss payable clause. The insurance was acquired pursuant to the security agreement between Mrs. Augsten and the Chaverses which required Mrs. Augsten to insure the fixtures at an amount at least equal to the unpaid purchase price.

After investigations, both the fire marshal and the adjuster for National Security concluded that the cause of the fire was arson, but neither of their reports implicated Mrs. Augsten or the Chaverses. A pretrial deposition of an adjuster for another company insuring the same property indicated similar results. National Security's adjuster verified the coverage and assessed the loss at $15,409.64. The unpaid purchase price of the fixtures was $13,693.77, but defendant offered only $8,000.00 as settlement.

In early March of 1976 after defendant's continued refusal to respond to plaintiffs' demands for payment, plaintiffs filed suit. National Security based its refusal to pay on information received from Reed Eden, Mrs. Augsten's exboyfriend. Eden, who was on his way to the federal penitentiary, sought a reward for divulging information implicating Mrs. Augsten in the arson. In a recorded statement that was later submitted to a stress analysis test, Eden stated that Mrs. Augsten had told him that she and Chavers had discussed burning the building. The results of the stress test indicated that Eden was probably telling the truth. Other evidence, however, indicated that Mrs. Augsten's partner, Hazel Andress, had turned Eden in to the FBI, and that Eden had threatened to get even with her because of the tip. Although further investigation was recommended, none occurred. Both Mrs. Augsten and the Chaverses were in financial difficulty immediately prior to the fire.

The suit on the insurance claim resulted in a judgment for the Chaverses in the amount of $13,693.77, plus interest from the date of the fire. On April 1, 1977, the Chaverses filed suit against National Security alleging bad faith failure to settle the claim. National Security answered and the case went to trial. At the conclusion of plaintiff's case and again at the close of the entire case, National Security's motions for directed verdict were denied. Judgment was entered for the Chaverses on a jury verdict of $42,500.00. National Security then filed a motion for judgment notwithstanding the verdict or in the alternative for a new trial. The motion for judgment notwithstanding the verdict was granted together with a conditional new trial and judgment was entered for National Security. The Chaverses appeal.

Three issues are presented for review in this case. First, we must determine whether this jurisdiction recognizes a cause of action in tort for bad faith refusal of an insurer to pay its insured when a loss occurs within policy coverage. Second, if such a cause of action is recognized in Alabama, what is the requisite standard of proof? Finally, did the Chaverses prove a prima facie case?

In Childs v. Mississippi Valley Title Insurance Co., 359 So.2d 1146 (Ala.1978), we quoted with approval the following definition of the tort of bad faith:

Every contract contains an implied in law covenant of good faith and fair dealing; this covenant provides that neither party will interfere with the rights of the other to receive the benefits of the agreement. (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d 566, 574, 108 Cal.Rptr. 480, 510 P.2d 1032; Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658, 328 P.2d 198.) Breach of the covenant provides the injured party with a tort action for 'bad faith' notwithstanding that the acts complained of may also constitute a breach of contract. (Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173; Fletcher v. Western National Life Ins. Co., supra, 10 Cal.App.3d 376, 401, 89 Cal.Rptr. 78.) * * * " Jarchow v. Transamerica Title Insurance Co., 48 Cal.App.3d 917, 122 Cal.Rptr. 470 (1975).

However, as Justice Jones pointed out in his special concurrence in Vincent v. Blue Cross-Blue Shield of Alabama, 373 So.2d 1054 (Ala.1979), the term "covenant" is a misnomer because it connotes an action ex contractu as a remedy for breach rather than an action ex delicto. More appropriately, therefore, this requirement of good faith and fair dealing should be characterized as a duty implied by law. The duty, however, is not one of due care. Accordingly, bad faith is the intentional failure by the insurer to perform this duty implied in law. Waters v. American Casualty Co. of Reading, Pa., 261 Ala. 252, 73 So.2d 524 (1953).

In third party actions involving liability coverage, however, this Court has consistently allowed recovery against the insurer in situations where the insurer wrongfully refuses, either negligently or intentionally, to settle the third party claim within policy limits and where, as a result, the insured incurs a judgment against him in an amount in excess of the policy. Childs v. Mississippi Valley Title Insurance Co.; Waters v. American Casualty Co. of Reading, Pa. In the third party context, therefore, counts based upon either negligence or bad faith are actionable. Furthermore, both counts may be joined in a single action with recovery proceeding from either. This is not to say, however, that a test for bad faith includes a negligence standard of conduct. In this jurisdiction negligence is not an element of bad faith.

The law applicable to first party actions involving a direct claim by the insured is not so well settled. Although this Court has neither accepted nor rejected the tort of bad faith in first party actions, Lavoie v. Aetna Life and Casualty Co., 374 So.2d 310 (Ala.1979), we have indicated an increasing willingness to recognize such a cause of action given the appropriate circumstances. Vincent v. Blue Cross-Blue Shield of Alabama; Childs v. Mississippi Valley Title Insurance Co. This seemingly open attitude concerning the propriety of bad faith in the first party context, however, has not been without qualification as expressed below:

Vincent and Childs expressly recognize that the facts in a particular case may be such as to warrant recovery under the theory herein advanced. ... This is not to say, however, that this court will in fact recognize such a theory. It merely means that sufficient facts have not been presented in an actual case so as to genuinely pose the issue for our decision one way or the other.

Accordingly, it is the facts of an actual case which will breathe life into the legal theories now advanced....

Lavoie v. Aetna Life and Casualty Co.

While the status of the tort of bad faith in first party actions has never been decided by this Court, we have expressly rejected any cause of action based upon an insurer's negligence in handling direct claims. Calvert Fire Insurance Co. v. Green, 278 Ala. 673, 180 So.2d 269 (1965). Calvert Fire, a first party action, restricted the negligence cause of action made available by Waters, a third party action, to third party actions only. We reaffirm this position.

In Calvert Fire we stated the following rationale for the distinction between first party actions and third party actions:

...As to liability insurance, the company owes to the insured a duty independent of the contract not to injure him, and when, from its negligent failure or refusal to adjust a claim, or from fraud or other bad faith, he sustains damages other than damages covered by the insurance contract, then an action in tort would be appropriate. The contract here was to pay a loss covered under the policy. The insured is damaged by the failure to pay only in the sense that any creditor is damaged by the debtor's failure to pay a matured debt, but for this an action in tort will not lie since the remedy is on the contract. Its liability under ... the policy is to pay the amount of the loss in excess of the deductible amount....

Calvert Fire Insurance Co. v. Green, (quoting Leonard v. Fireman's Insurance Co. of Newark, N.J., 100 Ga.App. 434, 111 S.E.2d 773 (1959)).

Subsequent cases are evidence, however, that the seemingly broad public policy decision in Calvert Fire was not intended to be nearly so far reaching in its application as to contemplate an across-the-board rejection of any form of first party cause of action, whether it be founded on negligence or bad faith. There was no bad faith...

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