S & W Properties, Inc. v. American Motorists Ins. Co.

• Decision Date: 26 May 1995
• Citation: 668 So.2d 529
• Court: Alabama Supreme Court
• Parties: S & W PROPERTIES, INC. v. AMERICAN MOTORISTS INSURANCE COMPANY. AMERICAN MOTORISTS INSURANCE COMPANY v. S & W PROPERTIES, INC. 1931227, 1931303.

Page 529

668 So.2d 529

S & W PROPERTIES, INC. v. AMERICAN MOTORISTS INSURANCE COMPANY.

AMERICAN MOTORISTS INSURANCE COMPANY v. S & W PROPERTIES, INC.

1931227, 1931303.

Supreme Court of Alabama.

May 26, 1995.

As Modified on Denial of Rehearing

Aug. 18, 1995.

James H. Richardson and Schuyler H. Richardson III, Huntsville, for appellant/cross appellee.

E. Cutter Hughes, Jr., Huntsville, Paul W. Burke, Atlanta, Georgia, for appellee/cross appellant.

MADDOX, Justice.

These appeals concern a dispute over the insurance coverage on an office building that burned in Huntsville, Alabama, in 1990. S & W Properties, Inc. (hereinafter "S & W"), the insured, appeals from a summary judgment entered in favor of the insurer, American Motorists Insurance Company (hereinafter "American Motorists"), on S & W's claims of bad faith and fraud. American Motorists cross-appeals from the judgment entered on a jury verdict in favor of S & W on S & W's breach of contract claim. We affirm as to both appeals.

S & W is a "subchapter S" corporation formed in 1989, by Jim Smith and Randy Wrigley, to purchase and develop real estate. The company purchased a parcel of 8.5 acres of land and two office buildings in Huntsville, at 7702 Governors Drive, for a total of $435,000, executing a first mortgage in favor of the original owner and a second mortgage in favor of First Alabama Bank. S & W insured the buildings and property through Blair Insurance, Inc., of Birmingham, under a policy issued by American Motorists, a division of Kemper National Insurance Companies. The policy provided for $350,000 in coverage (with an automatic 8% increase annually). The mortgagees were the loss payees under the policy. At the time of the purchase, the larger building on the property was vacant; S & W intended to lease the office space in that building to commercial tenants after it had been renovated and cleaned. This larger building was destroyed by fire on the night of October 14, 1990.

On January 23, 1991, S & W sued American Motorists, alleging breach of contract and a bad faith refusal to pay a first-party insurance claim; American Motorists denied S & W's claims, pleading the affirmative defenses of arson, concealment, and exclusion, based upon its characterization of the loss as vandalism occurring while the premises were vacant. S & W later amended its pleading in August 1991 to allege fraud in the sale of the policy and concealment in the handling of the claim.

American Motorists ultimately paid the claim to the mortgagees in April 1991; under the terms of the insurance contract, American Motorists was obligated to pay the mortgagees even if it denied the claim of the named insured. The face value of the coverage satisfied the first mortgage and part of the second; American Motorists later discovered that it had neglected to include in the payment the automatic 8% increase of coverage as stipulated by the insurance contract. When this error was discovered, the company paid the increase, along with all interest and attorney fees, to the second mortgagee in February 1992; this payment satisfied the second mortgage.

Before trial, American Motorists filed a motion for a partial summary judgment as to the claims of bad faith and fraud, asserting arson by one of S & W's partners, Randy Wrigley, as a defense. This motion was granted by the trial court on April 8, 1993. Trial on the contract claims commenced on January 21, 1994, and a jury ultimately awarded the plaintiffs $69,499.47, after allowing credit for the payments made by American Motorists to the mortgagees. In addition, American Motorists was ordered to release the mortgages on the S & W property; it had taken assignments of the mortgages after paying the claim. Both parties appealed.

The elements of a bad faith case were set out by this Court in National Sec. Fire & Cas. Co. v. Bowen, 417 So.2d 179 (Ala.1982):

"[T]he plaintiff in a 'bad faith refusal' case has the burden of proving:

"(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 ... 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 go beyond a mere showing of nonpayment and prove a bad faith nonpayment, a nonpayment without any reasonable ground for dispute. Or, stated differently, the plaintiff must show that the insurance company had no legal or factual defense to the insurance claim."

417 So.2d at 183. See also Chavers v. National Sec. Fire & Cas. Co., 405 So.2d 1 (Ala.1981).

In National Savings Life Insurance Co. v. Dutton, 419 So.2d 1357, 1362 (Ala.1982), this Court also stated the following:

"In Bowen, supra, we set out the elements of the tort and attempted to show the plaintiff's burden in these cases. It is a heavy burden. In the normal case in order for a plaintiff to make out a prima facie case of bad faith refusal to pay an insurance claim, the proof offered must show that the plaintiff is entitled to a directed verdict on the contract claim and, thus, entitled to recover on the contract claim as a matter of law. Ordinarily, if the evidence produced by either side creates a fact issue with regard to the validity of the claim and, thus, the legitimacy of the denial thereof, the tort claim must fail and should not be submitted to the jury."

On appeal, S & W contends that the summary judgment on its bad faith and fraud claims was unsupported by the record and was contrary to current Alabama law. It also asserts that the "directed verdict" standard is not the sole test for bad faith. While conceding that the evidence here in the bad faith claim "demonstrates a material dispute," S & W contends that either the claim should be governed by an "intentional failure to investigate" standard, or that this is an "exceptional" case involving circumstances suggesting dishonesty by American Motorists. After a careful study of the submitted materials, and applying the principles of law applicable to bad faith and fraud claims, we disagree with S & W's contentions. The law provides that "the plaintiff must show that the insurance company had no legal or factual defense to the insurance claim." National Sec. Fire & Cas. Co. v. Bowen, 417 So.2d at 183; National Savings Life Insurance Co. v. Dutton, 419 So.2d 1357, at 1361; see also Adams v. Auto-Owners Ins. Co., 655 So.2d 969 (Ala.1995).

In order to establish the affirmative defense of arson to a loss claim on a policy of insurance, the insurer has the burden of proof, and it must present evidence of 1) arson by someone, 2) motive on the part of the insured, and 3) evidence implicating the insured. Bush v. Alabama Farm Bureau Mut. Cas. Ins. Co., 576 So.2d 175 (Ala.1991), citing Great Southwest Fire Ins. Co. v. Stone, 402 So.2d 899, 900 (Ala.1981).

In support of its motion for summary judgment on the bad faith claim, American Motorists presented the following evidence to the trial court:

As evidence of arson by someone, American Motorists presented the findings of Don Dowling, a fire investigator, who spent three days investigating the site of the fire. Dowling's investigation led him to believe, based upon the pattern of the burning in the building, that the fire had started in the building's front hallway. (Another investigator, from the Arson Task Force for the City of Huntsville, reached the same conclusion.) The day before the fire, two workers had been assigned to clean up renovation debris and trash in the building, which included the contents of a janitorial closet that had been maintained by the previous tenants. The men were told to stack the refuse in the front hallway, to be carried away at a later date, because the truck regularly used to haul the trash away was in the shop being repaired. Dowling investigated the debris area for evidence of something that could have...