Kizziah v. Golden Rule Ins. Co.

• Court: Supreme Court of Alabama
• Citation: 536 So.2d 943
• Parties: Grady F. KIZZIAH v. GOLDEN RULE INSURANCE COMPANY. 87-1023.
• Decision Date: 23 November 1988

Page 943

536 So.2d 943 Grady F. KIZZIAH
v.
GOLDEN RULE INSURANCE COMPANY. 87-1023. Supreme Court of Alabama. Nov. 23, 1988.
Rehearing Denied Dec. 23, 1988.

Page 944

James P. Rea of Hogan, Smith, Alspaugh, Samples & Pratt, Birmingham, and Claire A. Black of Dishuck, Lacoste & Black, Tuscaloosa, for appellant.

Thomas R. Jones, Jr., of Rosen, Harwood, Cook & Sledge, Tuscaloosa, and Guy E. McGaughey, Jr., of McGaughey & McGaughey, Lawrenceville, Ill., for appellee.

HOUSTON, Justice.

On May 29, 1984, Kizziah applied to Golden Rule Insurance Company for individual major medical health insurance, which became effective on June 4, 1984.

The completed application submitted by Kizziah to Golden Rule had asked questions relating to pre-existing conditions. On this application, Kizziah answered "no" to question 12(a), (b), (c), and (e):

"12. Has any person in # 1 [Kizziah] had any indication, diagnosis, or treatment, within the last 10 years, of:

"(a) any disorder of the lungs or respiratory system, such as hay fever or other allergies, asthma, tuberculosis or emphysema?

"(b) any disorder of the heart or circulatory system, such as high blood pressure, heart attack, heart murmur, chest pain, irregular heartbeat, varicose veins or phlebitis?

"(c) any disorder of the digestive system, such as ulcer, gastritis, intestinal disorders, colitis, gall bladder, hemorrhoids, hernia, or disorder of the pancreas, liver or spleen?

"...

"(e) any disorder of the genito-urinary system, such as kidney disorder, kidney stones, cystitis, prostatitis, or bladder infections?"

On June 29, 1984, Kizziah signed an amendment verifying the information on the original application:

"The application of Grady F. Kizziah, dated May 29, 1984, is hereby amended as follows:

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"Grady F. Kizziah has had a complete recovery with no residual effects from a gunshot wound in 1978."

Based upon the personal and health history information provided on the application and the amendment to the application, and in consideration for a premium tendered, Golden Rule issued Kizziah a policy of individual major medical health insurance.

Subsequent to the issuance of the policy, Kizziah submitted his first major claim to Golden Rule for expenses incurred for hospitalization for and treatment of a large laceration in the area of his armpit, as well as for treatment of an abdominal bruit or murmur. ¹ As part of its routine while investigating these claims, Golden Rule requested past and present medical records from the medical facilities and the physicians involved. These medical records revealed a history of an abdominal bruit or murmur as early as 1981 and the existence of a "horseshoe kidney" as early as 1971 or 1972. The records also showed that, prior to applying for insurance, Kizziah was aware of these conditions but failed to follow the doctor's recommendation to have an arteriogram performed regarding the bruit or murmur. After reviewing the requested medical records, the underwriting department of Golden Rule determined that had this medical information been disclosed at the time of the original underwriting, it would have declined to accept the risk of insuring Kizziah. Golden Rule's staff attorney also acknowledged that the medical history provided by Kizziah was material to the risk assumed by Golden Rule and that no policy would have been issued if Kizziah had reported the correct medical information.

In a letter dated April 23, 1986, Golden Rule notified Kizziah that because of the material misstatements or active omissions made on his application and amendment, it was voiding his policy (setting it aside from the date of issue), refunding all premiums paid, and refusing payment for the expenses or claims submitted, due to the voidance of his policy.

Subsequently, Golden Rule sued for a declaratory judgment, asking the court to declare that the insurance contract with Kizziah was properly rescinded and that there was no coverage. Kizziah counterclaimed, alleging breach of contract, bad faith, fraud, and outrageous conduct on Golden Rule's part. Golden Rule then moved for summary judgment on all of Kizziah's counts. The trial court denied summary judgment on the breach of contract count, but granted summary judgment on the bad faith, fraud, and outrage counts.

This appeal concerns the summary judgment in favor of Golden Rule on Kizziah's claims for bad faith, fraud, and outrageous conduct. That order was made final pursuant to Rule 54(b), A.R.Civ.P.

Summary Judgment

Summary judgment is proper where there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Rule 56, A.R.Civ.P. All reasonable doubts concerning the existence of a genuine issue of fact must be resolved against the moving party. Autrey v. Blue Cross & Blue Shield of Alabama, 481 So.2d 345 (Ala.1985). This action was pending prior to June 11, 1987; therefore, Ala.Code 1975, § 12-21-12, as amended, does not apply and the applicable standard of review is the scintilla rule.

Bad Faith

This Court recognized the tort of bad faith in Chavers v. National Security Fire & Casualty Co., 405 So.2d 1 (Ala.1981), and adopted the standard of proof that an insured is required to meet in order to recover on a claim of bad faith:

"[A]n actionable tort arises for an insurer's intentional refusal to settle a direct claim where there is either '(1) no lawful basis for the refusal coupled with actual knowledge of that fact or (2) intentional

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failure to determine whether or not there was any lawful basis for such refusal.' " Id. at 7.

The Court took the position that every contract carries with it an implied-in-law duty of good faith and fair dealing, id. at 6; therefore, "bad faith" is the intentional failure by the insurer to perform this duty implied in law. Id. at 5.

In National Security Fire & Casualty Co. v. Bowen, 417 So.2d 179 (Ala.1982), the Court set out the elements of the tort of bad faith:

"(a) an insurance contract between the parties and a breach thereof by the defendant;

"(b) an intentional refusal to pay the insured's claim;

"(c) the absence of any reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason);

"(d) the insurer's actual knowledge of the absence of any legitimate or arguable reason;

"(e) if the intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer's intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.

"In short, plaintiff must...