Insurance Coverage Archives | Jeremy W. Richter

Does an Insurer Have a Duty to Defend Fraud and Misrepresentation Claims?

May 22, 2018

Sometimes business and people make misrepresentations to their clients or during the course of a transaction. You buy a car that you were told hadn’t had any prior problems, only to determine that it has flood damage. A business owner sells his company and remembers to disclose all his assets so he can get top dollar, but fails to mention all his debts and liabilities. When these businesses have insurance, there is sometimes an exclusion carved out of the policy that disallows the insurer from defending or indemnifying its insured for intentional acts, like are alleged in fraud and misrepresentation claims.

Exclusions for fraud and misrepresentation claims

In Alabama insurer’s have a broad duty to defend their insureds against claims. Because the decision on whether to provide a defense must be made at a preliminary stage in proceedings, Alabama holds that an insurer’s duty to defend is broader than its duty to indemnify. See Armstrong, 479 So.2d at 1168; Lawler Machine & Foundry Co. v. Pacific Indem. Ins. Co., 383 So.2d 156, 157 (Ala.1980). The insurer’s duty to defend at this preliminary stage “must be determined primarily from the allegations of the complaint.” See Armstrong, 479 So.2d at 1167; Ladner, 347 So.2d at 102. “If the allegations accuse the insured of actions for which the insurance company provides protection, the insurance company is obligated to defend the insured.” American States Ins. Co. v. Cooper, 518 So.2d 708, 709 (Ala.1987).

If an exclusion is going to apply that enables the insurer to disclaim its duty to defend, the exclusion language must clearly and unambiguously apply to the claim in question. In order to invoke an exclusion in denying a defense, the insurer bears the burden of pointing to allegations of the complaint or other available evidence by which the claim was clearly excludable. See Armstrong, 479 So.2d at 1168. If the insurer fails to establish the claim should be excluded from coverage, the insurer bears a duty to defend even if subsequent developments indicate circumstances that would render the claim excludable. See Id. at 1168–69.

Where a “policy exclusion unambiguously excludes from coverage all intentional acts give rise to liability regardless of whether the insured subjective intended the resulting damages or injuries,” and “the provision clearly excludes claims flowing from dishonest, fraudulent, intentional and criminal acts,” the policy exclusion defeats coverage for all liability resulting from the insured’s intentional acts. Universal Underwriters Ins. Co. v. Stokes Chevrolet, Inc., 990 F.2d 598, 604 (11th Cir. 1993) (citing St. Paul Fire & Marine Ins. Co. v. Molton, Allen & Williams Corp., 592 So. 2d 199 (Ala. 1991). So an insurer is not required to defend insured on the counts of a suit that alleged intentional fraud or misrepresentation where the policy contains exclusions specifically stating that the insurer would not cover damages assessed against insured that resulted from fraudulent acts, intentional fraud, wantonness, or intentional wrongdoing. St. Paul Fire & Marine Ins. Co. v. Molton, Allen & Williams Corp., 592 So. 2d 199 (Ala. 1991)

A duty to defend other claims and non-intentional acts

Even where an insurance policy excludes from coverage the “intentional acts” of its insured, the insurer has an obligation under the policy to defend claims that do not allege intentional acts, including but not limited to suppression of a material fact, which is not necessarily an intentional tort for the purposes of triggering a duty to defend. Townsend Ford, Inc. v. Auto-Owners Ins. Co., 656 So. 2d 360, 363 (Ala. 1995). So there may still be coverage available against some claims made against an insured, even when an insurer does not have to defend its insured against fraud and misrepresentation claims that are alleged against it.

However, things can get tricky regarding coverage when there are claims of innocent misrepresentation and reckless misrepresentation (as opposed to claims of intentional fraud or misrepresentation), in which “an allegedly injured person alleges an ‘occurrence’ with damages not ‘expected or intended from the standpoint of the insured,’” and the insurer may owe a duty to defend its insured against such claims. Tanner v. State Farm Fire & Cas. Co., 874 So. 2d 1058, 1065 (Ala. 2003); see also Universal Underwriters Ins. Co. v. Youngblood, 549 So.2d 76 (Ala. 1989) (holding, “The negligence claims and the innocent or reckless aspects of the misrepresentation claims present a sufficient basis to support the trial court’s declaration of a duty to defend.”); American States Ins. Co. v. Cooper, 518 So.2d 708 (Ala.1987) (holding that insurer was obligated to defend a and indemnify against claimants’ misrepresentation claims).

Of course, there is no blanket analysis for claims of intentional acts, like fraud and misrepresentation claims, so each coverage analysis must be conducted on the facts of particular claims and by applying the language of the applicable policy.

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Is a Person Responsible for Misrepresentations on a Life Insurance Application?

Dec 18, 2017

A Not Uncommon Scenario in Obtaining Life Insurance

A person wants to obtain a life insurance policy and goes to an insurance agent’s office. The person and the insurance agent discuss his needs and complete the application. The application is a computerized form, so the insurance agent types in responses or clicks buttons as they discuss the various questions on the life insurance application. Once they’ve gone through everything, the insurance agents prints off the application and hands it to the potential insured. He either glances over it and doesn’t read it at all and signs his name.

Sometime later, the insured dies. The beneficiary to the policy notifies the life insurance company of the insured’s death and sends a copy of the death certificate, which identifies the cause of death. It turns out the insured died of some chronic health condition (i.e., COPD or a congenital heart defect) he failed to disclose on his application. The life insurance company then refuses to pay out the life insurance proceeds.

What’s the Issue?

The issue that then arises is whether the insured is responsible for the misrepresentations that were made on the application, even though someone else filled it out and the insured may or may not have read it afterward. The answer: probably. And the insurance company is probably within its right to refuse to pay out the proceeds of the policy.

Why Is the Insurance Company Allowed to Refuse to Pay out Proceeds When There’s Been a Misrepresentation Made on the Application?

Alabama law is clear that “a party capable of reading and understanding English given the opportunity to review an insurance application cannot avoid the legal consequences of signing that document, indicating his or her assent to its terms, on the basis that he or she did not read it.” Nance v. Southerland, 19 So.3d 612, 619 (Ala. Civ. App. 2010) (emphasis added); see also Mitchell Nissan, Inc. v. Foster, 775 So.2d 138, 140 (Ala. 2000) (citations omitted.) In Locklear Dodge City, Inc. v. Kimbrell, the Alabama Supreme Court explained the rationale behind this principle:

[I]t is understandable that [the plaintiff] might choose not to read the contract before signing it. She took a risk. However, [the plaintiff] should not be excused from her contractual responsibilities because she took that risk. To hold otherwise would tum the concept of “sanctity of contract” upside down. Allowing parties to avoid their contractual obligations by merely claiming that they did not read a contract would encourage irresponsibility. Those responsible enough to read their contracts would be bound to their terms, while those reckless enough not to read their contracts could avoid their terms; in addition to avoiding the contract terms, the party who did not read the contract could file a legal action against the other party for suppressing something that was stated clearly in the contract. This is too perverse a result to contemplate.

Locklear, 703 So.2d 303, 306 (Ala. 1997). Furthermore, a person who signs an application for insurance acknowledging the truth of the matters asserted in the application cannot avoid the consequences of the answers submitted in the application. See, e.g., Nationwide Mutual Fire Ins. Co. v. Pabon, 903 So. 2d 759 (Ala. 2004); American Heritage Life Ins. Co. v. Blackmon, 7 So.3d 1028 (Ala. Civ. App. 2008); Safeway Ins. Co. of Alabama, Inc. v. Taylor, 758 So.2d 523 (Ala. 1999); Syx v. Midfield Volkswagen, Inc., 518 So.2d 94 (Ala. 1987). Specifically, the Court stated in Nationwide Mutual Fire Ins. Co. v. Pabon, 903 So.2d 759 (Ala. 2004): “Because [the plaintiff] was given the opportunity to review the answers on the insurance application before she signed it, we … conclude that [the plaintiff] is bound by the answers on the insurance application.” Id. at 767 (emphasis added).

What Does the Insurance Company Have to Show in Order to Rescind the Policy?

In order to rescind the policy, the insurance company must show two things: First, the insurance company is attempting to rescind the policy within the two-year contestability period. Under Alabama law, a life insurance policy only becomes incontestable “after it has been in force during the lifetime of the insured for a period of two years from its date of issue.” Ala. Code (1975) § 27-15-4. Where there is no ambiguity as to the date of issue of the policy, the effective date of issue is interpreted to be as described in the policy. See c.f. Travelers Ins. Co. v. Summers, 686 F.2d 1311 (11th Cir. 1983).

Second, the insurance company must show the misrepresentations made by the insured were material to the risk, and the insurance company would not have issued the policy or would have done so with higher premiums if it had known of the risk: “[M]isrepresentations, omissions, or concealment of facts may prevent a recovery under an insurance policy if they are fraudulent, material to the acceptance of the material risk, or the insurer either would not have issued the policy at all, or would have required higher premiums if the true facts had been revealed.” Clark v. Ala. Farm Bureau Mut. Cas. Ins. Co., 465 So.2d 1135, 1138 (Ala. 1984); see also Ala. Code § 27-14-7(a); Liberty Nat’l Life Ins. Co. v. Hale, 230 So.2d 526 (Ala. 1969); National Life & Acc. Ins. Co. v. Mixon, 282 So.2d 308, 312 (Ala. 1973).

In short, if a material misrepresentation is made on an insurance application, even if the applicant didn’t read the application before signing it, the insurance company will likely be within its rights to rescind the policy or refuse to pay out the benefits if it discovers the misrepresentation within the appropriate timeframe.

Photo by Flazingo Photos.

When Is an Indemnity Action Time-Barred under the AMLA?

Oct 9, 2017

McNamara v. Benchmark Ins. Co.: An indemnity action that arises from an underlying claim of medical malpractice is time-barred if commenced more than four years after the medical injury is incurred, pursuant to Alabama Code (1975) § 6-5-482.

Facts of the Matter

In December 2009, Ricky Avant’s doctor prescribed him to take Tobramycin for two weeks. Southern Medical was assigned to fill the prescription but discovered that Medicare would not pay for Tobramycin. At Southern Medical’s suggestion, Avant’s prescription was changed to gentamicin, which Avant was to take for only one week (rather than two). Avant’s doctor relayed the new order to the pharmacist Joseph McNamara at Southern Medical who incorrectly recorded and filled the gentamicin prescription. Avant received gentamicin for two weeks. In January 2010, Avant was hospitalized for severe gentamicin toxicity and other related conditions.

Procedural History

In October 2011, Avant sued Southern Medical for medical malpractice. Benchmark Insurance Company provided Southern Medical with a defense for the claims made by Avant. Eventually, Avant and Southern Medical reached a settlement agreement, which Benchmark paid. Then in February 14, Benchmark (as subrogee of Southern Medical) sued McNamara, attempting to recover the settlement funds it had paid out to Avant.

Benchmark alleged that Avant’s claims against Southern Medical were “predicated upon the alleged malfeasance, actions and/or omissions and active negligence of” McNamara and that “all monies paid for [the] settlement were expressly for any and all allegations of liability arising out of vicarious liability and/or respondeat superior.” Benchmark therefore sought declaratory judgment that McNamara was “legally responsible for any and all damages incurred by Benchmark for his malpractice and for damages awarded and/or settlements paid [to Avant].”

Benchmark and McNamara both filed motions for summary judgment. The trial court in Shelby County denied McNamara’s motion and granted Benchmark’s, entering an award of $465,000. McNamara appealed. McNamara v. Benchmark Ins. Co. [Ms. 1151314 Sep. 8, 2017], ___ So.3d ___ (Ala. 2017).

Appellate Issues: Legislative Intent behind Alabama Code § 6-5-482

McNamara argued on appeal that Benchmark’s indemnity action was time-barred under Alabama Code (1975) § 6-5-482 (part of the Alabama Medical Liability Act), which requires generally that actions against healthcare providers be commenced within two years after the act, omission, or failure being complained of. But more specifically, § 6-5-482 provides that “in no event may the action be commenced more than four years after such act.” McNamara’s alleged actions that gave rise to Avant’s claim occurred in December 2009. Benchmark did not initiate its indemnity action against McNamara until February 2014, more than four years later.

Benchmark contended that the AMLA does not apply to all actions against healthcare providers. But in each of the cases cited by Benchmark[1], the claims against the medical providers did not derive from the provision of medical treatment. Benchmark argued that its suit against McNamara was based on an indemnity right arising from the principal/agent relationship between Southern Medical and McNamara, and that it was not a medical-malpractice case seeking redress for medical injury.

McNamara responded that although Benchmark’s indemnity action was not technically seeking recovery for a medical injury, it is undisputed that the indemnity action is predicated on Avant’s efforts to recover for a medical injury. McNamara directed the court’s attention to Alabama Code (1975) § 6-5-482(b), which specifically references Alabama Code (1975) § 6-2-6 (the statute governing the computations of the limitations period typically application to principal/agent indemnity action), and states, “notwithstanding any provisions of such sections, no action shall be commenced more than four years after the act, omission, or failure complained of.”

Therefore, in reading the plain language of the statute, the legislative intent is clear that “actions in which a principal seeks indemnification for liability arising from the medical malpractice of its agent are subject to the time-bar provisions of § 6-5-482” (“[N]o action shall be commenced more than four years after the act, omission, or failure complained of.”). Applying that interpretation to the facts at bar, Benchmark’s indemnity action against McNamara was time-barred by the provisions of § 6-5-482

[1] Thomasson v. Diethelm, 457 So.2d 397 (Ala. 1984); George H. Lanier Memorial Hospital v. ANdrews, 901 So.2d 714 (Ala. 2004); Taylor v. Smith, 982 So.2d 887 (Ala. 2004); Ex parte Addiction & Mental Health Services, Inc., 948 So.2d 533 (Ala. 2006).

Photo by Jamie.

[Appearance] “Insurance Coverage Litigation” Seminar

Aug 25, 2017

I enjoyed the opportunity today to speak to the group attending the “Insurance Coverage Litigation” seminar in Birmingham. Like my previous two speaking opportunities at NBI events, this group was engaged and inquisitive, which is always nice at CLEs. The topics I covered were “Recent Insurance Coverage Decisions in Alabama” and” Creatively Framing Your Coverage Position.”

In December I’m scheduled two speak at another NBI seminar called, “Truck Accident Litigation from A to Z.” The topics I’ll be presenting are “Using FMCSRs and Other Trucking Laws/Regs to Support Your Case” and “Investigation, Authentication and Admissibility of Truck Accident Evidence.” I will be in Mobile (Dec. 19) and Birmingham (Dec. 21).

What Is an Insured’s Duty to Give Timely Notice of a Claim?

Jul 17, 2017

Once an insured is aware of the existence of a claim, she has a reasonable time to put the insurer on notice of the claim, and if she fails to do so, any potential coverage may be extinguished. Compliance with the notice requirements in an insurance policy is a condition precedent to recovery [or defense.[1] An insured’s failure to give notice “within a reasonable time with such conditions precedent in an insurance policy requiring the insureds to give notice of an accident or occurrence releases the insurer from obligations imposed by the insurance contract.”[2] Alabama courts have interpreted the term as soon as practicable to mean that “notice must be given within a reasonable time in view of the facts and circumstances of the case.”[3]

Only two factors are to be considered in determining the reasonableness of a delay in giving notice to the insurer: (1) the length of the delay and (2) the reasons for the delay.[4] Whether notice of the occurrence or claim was given to the insurer within a reasonable time rests on the reasonableness of the delay, meaning that failure to provide notice can result in a preclusion of coverage even if the delay resulted in no prejudice to the insurer.[5] Where an insured fails to show a reasonable excuse or the existence of circumstances that would justify a protracted delay, a court should, as a matter of law, hold that there has been a breach of the condition as to notice.[6]

There is broad discretion for what constitutes a reasonable delay. In Smith Const. & Dev., LLC, the court held that a four month delay in providing notice is not unreasonable as a matter of law.[7] The Alabama Supreme Court, in Pharr v. Continental Cas. Co., found that where an insured waited eight months before providing notice, without offering any excuse for doing so, it had unreasonably delayed and breached the contract.[8] In Southern Guaranty Insurance Company v. Thomas, the Alabama Supreme Court held that a delay was unreasonable as a matter of law where the insured delayed six months in giving notice to the insured and offered no reasonable excuse for the delay.[9] However, in United States Fidelity and Guaranty Company v. Bonitz Insulation Company of Alabama, the insured delayed more than four years in giving notice of an occurrence to the insurer, but the Supreme Court of Alabama found the delay was not unreasonable.[10] Generally, the questions of reasonableness is one to be resolved by the trier of fact.[11]

[1] Empl’rs Mut. Cas. Co. v. Smith Const. & Dev., LLC, 949 F.Supp.2d 1159, 1169 (N.D.Ala.2013) (citing Pharr v. Cont’l Cas. Co., 429 So.2d 1018, 1019 (Ala.1983)).

[2] Reeves v. State Farm Fire & Cas. Co., 539 So.2d 252, 254 (Ala.1989).

[3] Haston v. Transamerica Ins. Servs., 662 So.2d 1138, 1141 (Ala.1995) (quoting Pharr v. Continental Cas. Co., 429 So.2d 1018, 1019 (Ala.1983)).

[4] United States Fid. & Guar. Co. v. Baldwin County Home Builders Ass’n, 770 So.2d 72, 75 (Ala.2000).

[5] Id.; see also Auto Owners Ins. Co. v. Guardian Builders Inc., No. 5:11-CV-04096-VEH, 2014 WL 1233964, at *8 (N.D. Ala. Mar. 25, 2014); State Farm Fire & Cas. Co. v. GHW, 56 F.Supp.3d 1210, 1222 (N.D. Ala. 2014); Travelers Indem. Co. of Connecticut v. Miller, 86 So.3d 338, 342 (Ala. 2011); Nationwide Mut. Fire Ins. Co. v. Estate of Files, 10 So.3d 533, 535 (Ala. 2008).

[6] See Id.

[7] Smith Const. & Dev., LLC, 949 F.Supp.2d 1159.

[8] Pharr, 429 So.2d at 1019.

[9] Thomas, 334 So.2d 879, 882-3 (Ala.1976).

[10] Bonitz Insulation Company of Alabama, 424 So.2d 569 (Ala.1982).

[11] Shaffer v. Regions Fin. Corp., 29 So. 3d 872, 882 (Ala. 2009); see also Gunter v. Beasley, 414 So.2d 41, 44 (Ala. 1982) (holding that the reasonableness of the amount of an expense allowance granted to a former lieutenant governor was a question for the trier of fact). See Mutual Assurance, Inc. v. Schulte, 970 So.2d 292, 296 (Ala. 2007) (holding that the reasonableness of a liability insurer’s reliance on a validly enacted statute that capped damages for medical malpractice but that was later ruled unconstitutional was “a question that is better left to the trier of fact” in the insureds’ action alleging negligent failure to settle); United States Fidelity & Guar. Co. v. Baldwin County Home Builders Ass’n, 770 So.2d 72, 75 (Ala. 2000) (holding that if conflicting inferences can be drawn from the evidence, the question of the reasonableness of an insured’s delay in giving notice to the insurer of a claim is to be submitted to the trier of fact); Shriners Hosps. for Crippled Children v. Robbins, 450 So.2d 798, 802 (Ala. 1984) (holding that the reasonableness of the trustees’ delay in turning over trust assets to the trust beneficiary was a question of fact to be resolved by the trier of fact); Parker v. King, 402 So.2d 877, 879 (Ala. 1981) (citing approvingly the general rule followed by the federal courts that disapproves of summary judgments in negligence cases because of the necessity that the trier of fact pass upon the reasonableness of the conduct at issue); White v. Drivas, 954 So.2d 1119, 1124 (Ala.Civ.App. 2006) (holding that the reasonableness of a mobile-home owner’s refusal to return personal property unless the owner of the personal property paid for expenses incurred is a question for the trier of the fact); and Jimoco, Inc. v. Smith, 777 So.2d 716, 718 (Ala.Civ.App. 2000) (holding that, under the workers’ compensation act, the determination of the reasonableness of an employer’s request for an examination by the employer’s physician, and thus of the reasonableness of any refusal of the employee to submit to an examination, is a question for the trier of fact).

Without Express Permission to Drive a Vehicle, There May Be No Coverage

Jun 26, 2017

Warren Grimes and Johanna Grimes v. Alfa Mutual Ins. Co.: Where there is not an omnibus or other clause requiring it in an automobile liability policy, neither Alabama law nor public policy require an insurer to provide coverage for the driver of a motor vehicle who did have not the express permission of the owner or drivers covered by the policy.

Facts and Procedural History

In May 2010, Teresa Boop added liability and UM/UIM coverage on a truck to her auto policy with Alfa. Boop also added her minor son as a driver under the policy, and as the primary driver of the truck. Later in May 2010, Amy Arrington was operating the truck when she collided with a vehicle owned and occupied by the Grimeses, both of whom suffered bodily injuries arising from the accident. The Grimeses had insurance with Liberty Mutual.

In April 2012, Liberty Mutual sued Arrington, seeking recovery for damages to the Grimeses’ vehicle. In May 2012, the Grimeses sued Arrington (negligence and wantonness) and Boop (negligent entrustment), seeking damages for bodily injuries. Arrington filed answers and argued that she was insured under Boop’s insurance policy with Alfa, and Alfa should provide her a defense in both lawsuits.

The Declaratory Judgment Action

In October 2012, Alfa filed a declaratory judgment complaint seeking a determination from the court that the Alfa policy did not require it to defend or indemnify Arrington as to the lawsuits by either Liberty Mutual or the Grimeses. In February 2014, Liberty Mutual filed a partial summary judgment motion, arguing that Alfa was required to extend coverage to drivers of insured autos who have implied permission from the insured to operate the vehicle, pursuant to the Alabama Motor Vehicle Safety Responsibility Act (“MVSRA”) and the Alabama Mandatory Liability Insurance Act (“MLIA”). The trial court denied the motion.

At trial for the declaratory judgment action, the court found in favor of Alfa, holding that (1) the MVSRA was inapplicable, and (2) Boop’s policy with Alfa only provided coverage to users having express permission to operated the vehicle. It determined that Arrington did not have the express permission of either Boop or her son to use the truck. Therefore, Alfa had no contractual or legal obligation to defend or indemnify Arrington related to either the suits brought by the Grimeses or Liberty Mutual. The Grimeses appealed. Warren Grimes and Johanna Grimes v. Alfa Mutual Ins. Co. [Ms. 1150041 Jan. 27, 2017], ___ So.3d ___ (Ala. 2017).

Applicability of the MVSRA and MLIA

The Grimeses argued on appeal that Alabama Code § 32-7-22 (part of the MVSRA) requires the liability policy issued by Alfa to provide coverage for individuals operating insured vehicles with either express or implied permission of the insured. They contend that Billups v. Alabama Farm Bureau Mut. Cas. Ins. Co. stands for the premises that an insured’s liability insurance policy must insure the named insured and any other person who is using the vehicle with the insured’s express or implied permission.[1] Ultimately, the Alabama Supreme Court determined that the MVSRA was not applicable to the facts of this case.

The Grimeses argue the MLIA also requires such coverage. Alfa contends that certain types of policies, including the one in question, do not require coverage to be extended to users of an insured vehicle whose permission is only implied. And Alfa argued that the MLIA precludes a requirement that a liability policy provide coverage to a driver with only implied permission to use a vehicle.

Express or Implied Permission

There is a long line of cases in which the Alabama Supreme Court has held that liability policies extend coverage only to drivers who have the named insured’s express permission to operate the insured vehicle.[2] But the case at hand differs from those cases in that none of the other cases determined the issue of whether Alabama law requires a liability insurance policy to provide coverage for users with either express or implied permission.

While the MLIA requires that motor vehicle in Alabama be covered by liability insurance of not less than $25,000 for bodily injury to one person, the statute does not expressly direct that coverage under that policy must provide coverage for drivers operating the vehicle with the express or implied permission of the insured. Therefore, whether such coverage exists is to be determined by the language of the policy. The law does not require personal auto policies to have an omnibus clause.[3] The purpose of omnibus clauses is to protect the public against damage resulting from accidents arising from the negligent use of automobile; this goal is achieved through omnibus clauses by including persons operating the vehicle with the express or implied permission of the named insured, therefore protecting accident victims by including permissive users.

There is no requirement by the MLIA on the insurer that it provide coverage for someone operating a vehicle with the express or implied permission of the insured. The MLIA requires only and specifically that owners and operators of automobiles have minimum liability insurance.[4]

A Public Policy Question

The Alabama Supreme Court considered in this case whether public policy in Alabama requires coverage for drivers who are using a vehicle with the express or implied permission of the named insured. The court recognized the majority of American states require such coverage, while Alabama does not, and to create such a construction would require a determination that to do otherwise would violate public policy. However, the court must balance public policy with other factors, such as Alabama law allowing insurers to write exclusions into insurance policies. Such exclusions include household exclusions, which may prevent fraud and collusion among an insured and a driver.[5]

Based on existing Alabama law and using the strict rules of statutory interpretation, the Supreme Court of Alabama found that the trial court did not err in concluding that Alfa’s liability insurance policy did not provide coverage for the driver of a motor vehicle who did not the express permission of the owner or drivers covered by the policy.

Footnotes

[1] Billups v. Alabama Farm Bureau Mut. Cas. Ins. Co., 352 So.2d 1097 (Ala. 1977).

[2] See, e.g., Alfa Mut. Ins. Co. v. Small, 829 So.2d 743 (Ala. 2002); Pharr v. Beverly, 530 So.2d 808 (Ala. 1998); Alabama Farm Bureau Mut. Cas. Ins. Co. v. Hudson, 432 So.2d 1208 (Ala. 1983); Crawley v. Alabama Farm Bureau Mut. Cas. Ins. Co., 326 So.2d 718 (Ala. 1976); Alabama Farm Bureau Mut. Cas. Ins. Co. v. Mattison, 243 So.2d 490 (Ala. 1971); and Alabama Farm Bureau Mut. Cas. Ins. Co. v. Government Emps. Ins. Co., 240 So.2d 664 (Ala. 1970).

[3] An omnibus clause generally includes coverage for the named insured, members of the insured’s household, and drivers operating the insured’s vehicle with the permission of the insured. See Alabama Farm Bureau Mut. Cas. Ins. v. Government Emps. Ins. Co., 286 Ala. 414, 240 So. 2d 664 (1970)(noting that most omnibus clauses in insurance policies provide coverage for drivers using the vehicle with the permission of the insured and that courts have interpreted such permission to include express or implied permission).

[4] Alabama Code (1975) § 32-7A-4(a): “No person shall operate, register, or maintain registration of, and no owner shall permit another person to operate, register, or maintain registration of, a motor vehicle designed to be used on a public highway unless the motor vehicle is covered by a liability insurance policy, a commercial automobile liability insurance policy, motor vehicle liability bond, or deposit of cash.”

[5] Household exclusions generally exclude liability coverage for any member of the insured’s family residing in the insured’s home who was injured by the insured’s negligence.

Does an Exclusion that Precludes Liability Coverage Trigger UM Coverage?

Mar 30, 2017

GEICO v. Sharon Bell, administratrix of the estate of Kaysha Bell: An insurer’s denial of liability coverage to an individual because of an applicable liability exclusion (i.e., household exclusion) or definition does not trigger the availability of uninsured motorist coverage to the individual under the same policy.

Pertinent Facts

In June 2013, Kaysha Bell was killed in a single-vehicle accident. She was a passenger in a 2012 Honda, of which she was the co-owner with Shandarius Steiner, who was driving at the time of the accident. Steiner and Bell purchased an insurance policy from GEICO, that included uninsured motorist (“UM”) coverage.

Bell’s mother, on behalf of the estate, sued Steiner, GEICO, and others (under the Dram Shop Act) for damages for Bell’s death, and obtained a judgment in the amount of $1,000,000.00. The trial court included in its judgment that the GEICO policy provided uninsured motorist coverage in accordance with the policy’s definition of “uninsured auto.” GEICO filed a post-judgment motion contesting the trial court’s conclusion that the Honda was an uninsured auto under the policy. GEICO also sought remittitur of the judgment against it to $50,000.00, which were the limits of the policy. The trial court granted the remittitur, but denied the post-judgment motion. GEICO appealed. GEICO v. Sharon Bell, administratrix of the estate of Kaysha Bell [Ms. 2140745 Mar. 10, 2017], — So.3d — (Ala.Civ.App. 2017).

Relevant Policy Provisions

The GEICO policy provides that GEICO will “pay damages which an insured becomes legally obligated to pay because of … bodily injury, sustained by a person.” However, it contains the following exclusion to that coverage, known as the “household exclusion”: “[b]odily injury to any insured or any relative of an insured residing in his household is not covered.” The household exclusions would apply to exclude liability coverage for bodily injury to Bell.

Under the UM coverage, an “insured auto” is a vehicle that is “described in the declarations page and covered by the bodily injury coverage of this policy,” whereas an “uninsured auto” is defined as follows:

“[A] motor vehicle which has no bodily injury liability bond or insurance policy applicable with liability limits complying with the financial responsibility law of the state in which the insured auto is principally garaged at the time of an accident. This term also includes an auto whose insurer is or becomes insolvent or denies coverage and an auto for which the limits of liability under all bodily injury insurance policies available to the injured person are less than the damages which the injured person is legally entitled to recover.”

An “uninsured auto” specifically does not include an “insured auto.”

Arguments of the Parties

On appeal, Bell argued that the Honda, which was identified in the dec page and for which Steiner/Bell had paid a premium for bodily-injury liability coverage, was converted to an “uninsured auto” because of the language used in the definition of “insured auto” in the UM coverage section of the policy. Bell argued that because the policy excludes liability coverage for Bell’s death under the household exclusion section of the policy, the Honda is not actually covered by the bodily injury liability provisions, and becomes and uninsured auto.

GEICO argues that Honda is an “insured auto” because the vehicle is described in the dec page, and the same vehicle cannot be both an “insured auto” and an “uninsured auto” under the same policy.

Analysis of the Court

The definition of “insured auto” contained in the UM coverage section of the GEICO policy requires the vehicle to be named in the dec page and be covered by the bodily injury liability coverage of the policy. It is undisputed that the Honda is described in the dec page. The issue is whether the Honda is covered by the bodily injury liability coverage of the GEICO policy. The court found Bell’s argument to be a strained and unreasonable construction of the policy, because under Alabama law, UM coverage and policies deal with the insuring of the vehicle, not the motorist.

The Alabama Supreme Court has previously answered the issue of whether an insurance policy can exclude from its definition of uninsured auto a vehicle that it defined as being described within the policy.[1] A vehicle that is insured under an insurance policy “does not become uninsured because liability coverage may not be available to a particular individual.”[2] This is supported by the extensive body of Alabama law allowing insurance companies to draft exclusions and definitions into a policy to protect itself.[3]

In a case that is directly on point with the issues at hand in the instant case, the Supreme Court held that “when the insurance carrier of the vehicle involved in an accident denies liability coverage to an individual because of an applicable liability exclusion or exclusionary definition, that denial does not trigger the availability of uninsured motorist coverage to that individual under the same policy.”[4]

Bell further alleged that the subject policy violates Alabama’s Uninsured Motorist statute (Alabama Code § 32-7-23) because the policy is more restrictive than the statute. Bell contends the statute does not prohibit an insured who is denied coverage under the bodily injury liability section of the policy from recovering under the UM section of the policy. The court agreed that such a recovery was not prohibited, but neither is it required.[5] In keeping with prior caselaw, the Alabama Court of Civil Appeals rejected Bell’s argument that the GEICO policy, and specifically the household exclusion, violated the Alabama Uninsured Motorist statute (Alabama Code § 32-7-23).

The appellate court held that an insurer’s denial of liability coverage to an individual because of an applicable liability exclusion or definition does not trigger the availability of uninsured motorist coverage to the individual under the same policy. As such, the judgment of the trial court was reversed and the case remanded with instructions to enter judgment in favor of GEICO.

[1] See Watts v. Preferred Risk Mut. Ins. Co., 423 So.2d 171 (Ala. 1982).

[2] Watts, 423 So.2d at 175.

[3] See Ex parte O’Hare, 432 So.2d 1300 (Ala. 1983).

[4] Hall v. State Farm Mut. Auto. Ins. Co., 514 So. 2d 853, 855 (Ala. 1987); see also Allstate Ins. Co. v. Hardnett, 763 So.2d 963, 964 (Ala. 2000) (holding: “This Court has consistently upheld exclusions within an uninsured-motorist portion of a policy that deny coverage for a vehicle that is covered under the liability portion of the same policy.”); Phyall v. Allstate Ins. Co., 551 So. 2d 303 (Ala. 1989).

[5] See Mathis v. Auto-Owners Ins. Co., 387 So.2d 168 (Ala. 1980) (citing Lammers v. State Farm Mut. Auto. Ins. Co., 261 So.2d 757 (Ala.Civ.App. 1972) (holding that household exclusions have been repeatedly upheld in UM policies)).

Photo by Isaías Campbell.

Momma’s Mad the Ex-Wife Gets the Life Insurance Proceeds

Mar 23, 2017

Delores Aderholt v. Sandra R. Aderholt McDonald: The general rule in Alabama is that the named beneficiary of a life insurance is entitled to the proceeds from the policy, and the general rule is not usually interrupted by divorce and has only two exceptions.

The Facts of the Matter

In 1993, Alfa Life Insurance Corporation issued a $150,000.00 life insurance policy to Bobby Aderholt. The policy provided that upon Bobby’s death, the beneficiary would be the person named in the application. Bobby wrote in the name of his then-wife Sandra as the sole beneficiary. Bobby and Sandra divorced in 2004. The relevant portion of the divorce decree reads as follows:

“Each party shall retain ownership of their own life insurance policies. [Sandra] shall remain as the sole beneficiary on [Bobby’s] whole-life insurance policy through Alfa which has a death benefit of $150,000.00. He shall maintain this insurance and maintain her as the beneficiary for a period of fifteen (15) years.”

At the time of Bobby’s death in 2014, both he and Sandra had complied with all aspects of the divorce judgment. Following Bobby’s death, both Delores Aderholt (Bobby’s mother and the administrator of his estate) and Sandra made claims on the life insurance proceeds. Alfa initiated an interpleader action in the Circuit Court of Walker County in which the court allowed Alfa to deposit the $154,109.00 with the court for the court to determine the proper beneficiary.

Sandra moved the court to enter summary judgment in her favor because she was the named beneficiary on the policy and the divorce judgment required Bobby to keep her as the beneficiary until 2019. Delores argued that Sandra was entitled to a portion of the proceeds that at most equaled the remaining unpaid alimony, which would have totaled $28,500.00. The circuit court granted Sandra’s motion for summary judgment. Delores appealed. Delores Aderholt v. Sandra R. Aderholt McDonald [Ms. 1150878, Dec. 16, 2016], — So.3d — (Ala. 2016).

Applying the Law to the Facts

Under Alabama law, “the designation of the beneficiary of a life insurance policy is governed by the provisions of the policy itself.” Gibson v. Henderson, 459 So.2d 845, 847 (Ala. 1984). The subject policy provides that the beneficiary is the individual designated on the application, and there is no dispute that Sandra is the designated beneficiary. There is no evidence that Bobby ever attempted to remove Sandra as the beneficiary. Additionally, a divorce alone has no impact on a former spouse’s status as the beneficiary of the other’s life insurance policy. See Flowers v. Flowers, 224 So.3d 590 (Ala. 1969); see also Kowalski v. Upchurch, 186 So.3d 460 (Ala.Civ.App. 2015). Alabama courts have derived this principle from the fact that any rights a beneficiary has to proceeds of a life insurance policy are not marital, but contractual. See Rountree v. Frazee, 209 So.2d 424 (Ala. 1968).

There are two exceptions to the above-stated general rule that a named beneficiary is entitled to the proceeds of the life insurance policy. Delores argued these exceptions: (1) when the decedent has failed to comply with a court order regarding the designation of a beneficiary, and (2) when the decedent has completed all the required steps to change the beneficiary but the insurer nevertheless fails to make the change. The Alabama Supreme Court found that neither exception applied to the case at hand, who likewise found none of Delores’s arguments to be compelling and affirmed the summary judgment entered by the trial court.

For more on life insurance coverage, read “Timing an Insurable Interest in a Life Insurance Policy”

Photo by Billie Grace Ward.

When Is an Insurance Policy Endorsement Valid?

Mar 16, 2017

Under Alabama Code (1975) § 27-14-1, an insurance policy is comprised of a “written contract of, or written agreement for, or effecting, insurance, by whatever name called, and includes all clauses, riders, endorsements, and papers attached, or issued and delivered for attachment thereto and made a part thereof.” In order for an endorsement to be effective, it must be either (1) attached to the policy, or (2) sufficiently referenced in either the policy or the endorsement to be identified as related to the policy.[1]

Signing the Insurance Policy Endorsement (or Not)

An insurance policy endorsement does not have to be signed in order for the insured to be bound by it; stated differently, an unsigned endorsement is not invalid.[2] “An unsigned endorsement is valid if it is attached to the policy and is referenced in the policy.”[3] “Under state-law principles of contract interpretation, parties may be bound by documents incorporated by reference.”[4]

Attaching the Endorsement to the Policy

When it is undisputed that an endorsement was attached to an insurance policy from the outset, the endorsement is a valid part of the policy and must be enforced.[5] Additionally, when a policy contains language referring to the endorsement setting forth the “policy with any attached papers in the entire contract” between the insurer and insured, the endorsement is a valid part of the policy and must be enforced.[6]

Assenting to the Insurance Policy Endorsement

“An application for insurance is an offer to enter into an insurance contract, and if the insurer issues a policy materially different from the policy applied for, the policy is a counter-offer which becomes binding only when accepted by the applicant.”[7] Therefore, even if the inclusion of an endorsement were a material alteration of the policy the insured applied for, the insured will have accepted the counter-offer by not returning the policy but rather paying the premiums on it, and it will not matter that the application did not mention the endorsement.[8]

Under Alabama law, an insured may manifest its assent to a provision of an insurance policy in several ways: (1) by failing to exercise its right to cancel the policy; (2) by paying its premiums, indicating its acceptance of the entire policy; or (3) by submitting a claim under the policy.[9]

Ambiguity of the Endorsement

Like any other aspect of an insurance policy an endorsement must be unambiguous. “The test to be applied by a court in determining whether there is ambiguity is not what the insurer intended its words to mean, but what a reasonably prudent person applying for insurance would have understood them to mean. In determining whether an ambiguity exists, a court should apply the common interpretation of the language alleged to be ambiguous. This means that the terms of an insurance policy should be given a rational and practical construction.”[10] An unambiguous endorsement or exclusion in a policy is enforceable.[11]

Any endorsement must conform to the reasonable-expectations doctrine, whereby “the insured is entitled to the protection which he may reasonably expect from the terms of the policy he purchases.”[12]

[1] See African Methodist Episcopal Church, Inc. v. Smith [Ms. 1141100, 1141101, 1150055, 1150156 Aug. 19, 2016] — So.3d —, 2016 WL 4417268 (Ala. 2016); see also Greene v. Hanover Ins. Co., 700 So.2d 1354 (Ala. 1997); Ex parte Rager, 712 So.2d 333 (Ala. 1998).

[2] Ex parte Rager, 712 So.2d at 335.

[3] Crews v. Nat’l Boat Owners Ass’n Marine Ins. Agency, Inc., 46 So.3d 933, 938 (Ala. 2010).

[4] Homes of Legend, Inc. v. McCollough, 776 So.2d 741, 746 (Ala. 2000).

[5] Ex parte Rager, 712 So.2d at 335; see also Philadelphia American Life Ins. Co. v. Bender, 893 So.2d 1104, 1108 (Ala. 2004).

[6] American Bankers Ins. Co. of Florida v. Crawford, 757 So.2d 1125, 1129 (Ala. 1999).

[7] SouthTrust Bank v. Williams, 775 So.2d 184, 189 (Ala. 2000) (quoting Connell v. State Farm Mutual Auto. Ins. Co., 482 So.2d 1165, 1167 (Ala. 1985)).

[8] See Ex parte Rager, 712 So.2d at 335; see also SouthTrust Bank, 775 So.2d at 189.

[9] See Southern Foodservice Management, Inc. v. American Fidelity Assur. Co., 850 So.2d 316, 320 (Ala. 2002); see also Ex parte Rager, 712 So.2d at 335; Southern United Fire Ins. Co. v. Howard, 775 So.2d 156, 162-63 (Ala. 2000).

[10] Nationwide Ins. Co. v. Rhodes, 870 So.2d 695, 696–97 (Ala. 2003) (internal citations omitted).

[11] See American Resources Ins. Co. v. H & H Stephens Const., Inc., 939 So.2d 868 (Ala. 2006); see also Greene v. Hanover Ins. Co., 700 So.2d 1354 (Ala. 1997); SouthTrust Bank v. Williams, 775 So.2d at 881 (holding that where a policy is unambiguous and refers the insured to an endorsement, it will be upheld).

[12] American Resources Ins. Co., 939 So.2d at 897 (quoting Aetna Casualty & Surety Co. v. Chapman, 200 So. 425, 426-27 (Ala. 1941).

An Electronic Signature May Be Sufficient to Reject UIM Coverage

Jan 17, 2017

Jimmy L. Johnson, Jr. v. First Acceptance Insurance Company, Inc.: In Alabama, UIM coverage may only be rejected by an insured in writing, but the unanswered question is whether an electronic signature is sufficient for rejecting UIM coverage. The parties in this case squandered an opportunity to have the court decide what would have been a matter of first impression on the issue.

After being involved in a motor vehicle accident, Jimmy L. Johnson, Jr. sued his insurance provider, First Acceptance Insurance Company, Inc. (“First Acceptance”) on July 28, 2014, seeking underinsured motorist (“UIM”) benefits. First Acceptance answered the suit, denying that Johnson was entitled to UIM coverage. Both Johnson and First Acceptance filed opposing motions for summary judgment. The trial court entered summary judgment in favor of First Acceptance, which was a final order because it disposed of all of Johnson’s claims. Johnson appealed. Jimmy L. Johnson, Jr. v. First Acceptance Insurance Company, Inc. [Ms. 2150629, Jan 6, 2017) — So.3d — (Ala.Civ.App. 2017).

The subject accident occurred when Johnson was involved in a wreck with an underinsured driver. Johnson had a policy of insurance with First Acceptance and sought to recovery UIM benefits under the policy. First Acceptance denied Johnson’s claim, asserting that he had declined UIM coverage.

UIM coverage in Alabama is governed by Alabama Code (1975) § 32-7-23, which mandates that an insurer must provide UIM coverage. If an applicant declines UIM coverage, he must do so in writing.[1] A rejection of UIM coverage is ineffective unless it is in writing and signed by the named insured.[2]

In the present case, the undisputed evidence was that Johnson did not physically sign a paper insurance application, contract, or form pertaining to UIM coverage using a pen. Rather, First Acceptance asserts that Johnson used his electronic signature in completing the application for insurance and declining UIM coverage.

This matter then is governed in part by Alabama’s Uniform Electronic Transactions Act[3] (“the UETA”), which reads in pertinent part that if “a law requires a record to be in writing, an electronic record satisfies the law,” and if “a law requires a signature, an electronic signature satisfies the law.”[4]

First Acceptance therefore argued that Johnson’s electronic signature was sufficient to effectively reject UIM coverage. In granting summary judgment in favor of First Acceptance, the trial court appears to have agreed. However, Johnson did not properly appeal what would have been a matter of first impression for the appellate court, by failing to identify any portion of the UETA that Johnson contended was in conflict with the UIM statute requiring the rejection of UIM coverage to be in writing and by failing to develop any argument that a requirement of a signature cannot be satisfied by an electronic signature under the UETA.

The Alabama Court of Civil Appeals ultimately decided the matter on other grounds and reversed and remanded for questions of fact.

[1] Ala. Code (1975) § 32-7-23(a); see also Continental Cas. Co. v. Pinkston, 941 So.2d 926. 929 (Ala. 2006).

[2] See Progressive Cas. Ins. Co. v. Blythe, 350 So.2d 1062, 1065 (Ala.Civ.App. 1977); see also State Farm Mut. Auto. Ins. Co. v. Martin, 289 So.2d 606, 609 (Ala. 1974).

[3] Ala. Code (1975) § 8-1A-1, et seq.

[4] Ala. Code (1975) § 8-1A-7(c), (d).

Artwork by Rob King.

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