What Is The Time for Responding to a Defense Tender?
The insurer has 15 days to acknowledge the receipt of a claim notice and must provide all necessary assistance including claims forms and instruction. Ala. Admin. Code r. 482-1-125.06.
Unless otherwise specified in policy, an insurer must accept or deny a claim within 30 days of receipt of proof of loss. Ala. Admin. Code r. 482-1-125.07. If more time is needed to determine whether insurer will accept or deny the claim, the insurer has 30 days of its receipt of proof of loss to inform the insured of that fact and every 45 days thereafter if still more time is needed. Ala. Admin. Code r. 482-1-125.07
Does Reserving Rights Create a Conflict of Interest?
A reservation of rights letter raising issues that may be determinative of tort liability create a conflict of interest between the insurer and the insured. Some examples of when a conflict of interest arises out of a reservation of rights include a reservation of rights based on: Intentional Negligence, Universal Underwriters Ins. Co. v. East Central Ala. Ford-Mercury, Inc., 574 So.2d 716 (Ala. 1990); Punitive Damages, Aetna Casualty & Surety Co. v. Mitchell Bros., Inc., 814 So.2d 191 (Ala. 2001); and Arising Out Of, Auto-Owners Ins. Co. v. American Central Ins. Co., 739 So.2d 1078 (Ala. 1999).
Does a Reservation of Rights Create Additional Duties?
A reservation of rights letter creates an enhanced obligation of good faith on the part of the insurer to: (1) thoroughly investigate the cause of an accident as well as the nature and severity of the plaintiff’s injuries; (2) retain competent defense counsel for the insured; (3) ensure that retained defense counsel understands that only the insured is the client; (4) be responsible for fully informing the insured on the reservation of rights defense and all developments relevant to the policy coverage and the progress of the lawsuit including disclosure of all settlement offers made by the insurer; and (5) refrain from engaging in any action that would demonstrate a greater concern for its own monetary interest than for the insured’s financial risk. Shelby Steel Fabricators, Inc. v. United States Fidelity & Guaranty Ins. Co., 569 So.2d 309, 312 (Ala. 1990) (quoting L&S Roofing Supply. Co. v. St. Paul Fire & Marine Ins. Co., 521 So.2d 1298, 1303 (Ala. 1988)).
What Must Be Done If A Conflict of Interest Exists?
Alabama does not require the insurer pay for separate independent counsel simply because a potential conflict of interest exists between the insurer and insured. However, because potential conflicts of interest exist in an ROR defense, the insurer has an enhanced duty of good faith (see above). Twin City Fire Ins. Co. v. Colonial Life & Acc. Ins. Co., 839 So.2d 614 (Ala. 2002).
Who Is Responsible for Fees of Independent Counsel?
Not applicable, see above.
What Are Independent Counsel’s Obligations?
Insurer has obligation to keep insured fully informed of status of litigation.
What Settlement Duties Exist?
Insured must be kept apprised of all settlement offers made by insurer.
What Actions May Result in a Claim for Bad Faith?
Alabama recognizes the tort of bad faith regarding insurance coverage determinations. The elements necessary for a plaintiff to establish a bad-faith are: (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. Security Fire & Casualty Co. v. Bowen, 417 So. 2d 179, 183 (Ala.1982).
Are Attorney’s Fees Recoverable in Insurer-Insured Dispute?
No case law or statute specifically allowing the award of attorney’s fees to insured in a bad faith case.
Are Punitive Damages Recoverable in Insurer-Insured Dispute?
An insurer’s violation of the duty of good faith and fair dealing is tortuous in nature, punitive damages, as well as compensatory damages, are recoverable in a proper case. Gulf Atlantic Life Ins. Co. v. Barnes, 405 So. 2d 916 (Ala. 1981). In such case, the plaintiff must suffer, at least, nominal damage and demonstrate that the acts complained of were committed with malice, willfulness, or wanton and reckless disregard. Id.
Alternative Coverage Options
The insurer may decline coverage and pursue a declaratory judgment action against its insured. Smith v. North River Ins. Co., 360 So.2d 313 (Ala. 1978).
The insurer may offer to defend the matter through the policyholder’s selected counsel and avoid any increased duty of good faith to the insured. See, L&S Roofing Supply, supra. This option may exercised in conjunction with the filing of a declaratory judgment action in order to avoid a potential claim for bad faith.
In this jurisdiction, the insurer may seek to intervene in the underlying litigation and seek a bifurcated trial separating the coverage issues from the underlying substantive issues. See, Farmers Ins. Exch. v. Raine, 905 So.2d 832 (Ala. App. 2004)
Relevant Statutes
Declaratory Judgment – Ala. Code § 6-6-222.
“Courts, of record, within their respective jurisdictions, shall have power to declare, rights, status, and other legal relations whether or not further relief is or could be claimed. No action or proceeding shall be open to objection on the ground that a declaratory judgment is requested. The declaration may be either affirmative or negative in form and effect, and such declarations shall have the force and effect of a final judgment.” Ala. Code § 6-6-22.
Insurance Trade Practice Law – Ala. Code § 27-12-24.
No insurer shall, without just cause, refuse to pay or settle claims arising under coverages provided by its policies in this state and with such frequency as to indicate a general business practice in this state, which general business practice is evidenced by (1) a substantial increase in the number of complaints against the insurer received by the insurance department; (2) a substantial increase in the number of lawsuits against the insurer or its insureds by claimants; and (3) other relevant evidence. Ala. Code § 27-12-24.
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