Opinion
CIVIL ACTION NO. 99-0782-P-S
September 19, 2000
JUDGEMENT
It is hereby ORDERED, ADJUDGED, and DECREED that in accordance with the Order entered this date, defendant Royal Indemnity Company's Motion For Partial Summary Judgment as to Count Five (bad-faith failure to investigate the insurance claim for wind damage under the hazard insurance policy) is hereby GRANTED.
ORDER
Pending before the court is a Motion For Partial Summary Judgment filed by defendant Royal Indemnity Co. (docs. 56-59); a Response to the Motion filed by plaintiff West Beach Development Co., L.L.C. (docs. 69-74); and defendant's Reply thereto (doc. 76). After careful consideration of all matters presented in the pleadings, defendant's motion for partial summary judgment is GRANTED on the bad faith claim, as amended Count Five. (N.D.Cal. 2000)
The court finds that oral argument is not necessary to determine the issues presented.
A. Procedural History
This action was filed on July 20, 1999, in the Circuit Court of Baldwin County, and was subsequently removed to this federal district court pursuant to 28 U.S.C. § 1332. Plaintiffs Complaint asserts: Count One — breach of contract, failure to pay benefits due for wind damage under a policy of hazard insurance; Count Two — breach of contract, failure to pay a sufficient amount due under a policy of business interruption insurance (doc. 1). There were four bad faith claims (docs. 1, 17). Plaintiff has voluntarily struck all bad faith claims except for Count Five of the Amended Complaint (doc. 68). Plaintiff seeks all amounts shown to be due under the policies, less the appropriate deductible, plus interest and costs, and punitive damages on the bad faith claims (docs. 1, 17).
There is no dispute that the amount in controversy exceeds the minimal jurisdictional requirement; plaintiff is an Alabama corporation with its principal place of business in Gulf Shores, Alabama, while defendant is a Delaware corporation with its principal place of business in Charlotte, North Carolina (doc. 2).
On July 31, 2000, the parties filed a Joint Stipulation Regarding Count Two of Plaintiffs Complaint (Claim For Payment of Business Interruption Insurance), agreeing that
the business interruption portion of the instant lawsuit will be submitted to arbitration in the form of the "appraisal process" contemplated by the subject contract of insurance . . . to submit to the appraisal process, and to be bound by the decision reached therein. The decision reached will be final and non-appealable . . . Upon completion of the appraisal and payment of any award to the Plaintiff, Count [Two] found in the Plaintiff's Complaint, as amended, will be dismissed with prejudice . . .
(doc. 75). The parties have informed the court that steps have been taken to proceed with the arbitration.
With the Motion For Partial Summary Judgment, defendant contends that plaintiff's Count Five, bad-faith failure to investigate the insurance claim for wind damage under the policy of hazard insurance, fails as a matter of law and summary disposition is appropriate (docs. 56-57). Defendant argues that the "claim is wholly unfounded and unsupportable in light of the fact that [defendant] appointed qualified experienced independent adjusters immediately after the casualty and later hired an independent engineering firm to verify the adjusters['] conclusions . . ." (doc. 57, p. 2).
In Response, plaintiff asserts that a number of defendant's proposed "undisputed" facts offered in support of summary judgment "are in fact hotly disputed," and as material facts in dispute, they preclude defendant from summary judgment as to CountFive (doc. 69, p. 2, ¶ 4).
Unless otherwise indicated, the undisputed facts are as set out in the Joint Preliminary Pretrial Document (doc. 66, p. 17-720, ¶ 1-20).
On September 28, 1998, Hurricane Georges struck and damaged plaintiff's property, the West Palms Beach Front Resort ("Hotel"), a six story hotel located in Gulf Shores, Alabama, with most rooms facing south overlooking the Gulf of Mexico.
An insurance policy providing hazard coverage issued by defendant was in force when Hurricane Georges struck.
Although neither party has furnished the court with a copy of the insurance policy, the parties have proffered the pertinent exclusionary language:
1. We will not pay for loss of or damage to property, as described and limited in this section. In addition, we will not pay for any loss that is a consequence of loss or damage as described and limited in this section.
c. The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain . . . [or] sand . . ., whether driven by wind or not, unless:
(1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain . . . [or] sand . . . enters . . . (docs. 57, p. 13-14; 69, p. 8).
Upon notice of plaintiffs loss received by defendant on September 29, 1998, defendant's claim representative Jeff Clegg appointed Engle Martin Associates ("Engle") of Atlanta, Georgia, a national independent adjusting firm, to address plaintiff's claim, i.e., "[t]o at a minimum inspect the loss, to determine the extent of the loss, and assuming that it involved any amount of damage, to investigate the damage" (doc. 57, Ex.A-Deposition of Jeffrey P. Clegg, p. 35).
On October 5, 1998, the first inspection of the Hotel took place. Participating were Dennis Martin and David Robins of Engle, Randy Creech, President of the Consulting Division of INRECON, Hotel Co-Managers Albert King and Gary Dennis, with Bob Hoeb attending on behalf of the property owners.
An insurance reconstruction contractor specializing in disaster work. Mr. Creech was in Gulf Shores following the Hurricane on other work. He was hired by Engle for defendant to assist in the investigation of the claim (doc. 57, Ex.D-Deposition of James R. Creech, p. 7-8, 19-21).
The inspection began on the top floor and involved a walk through of each room (doc. 57, Ex.B, p17). It revealed damage to the roof, there were shingles torn away from the two roof caps which covered the external stairwells. Some flashing had been peeled up near the edge of the roof. None of the windows in the guest rooms were broken or missing following the Hurricane.
The first floor rooms were damaged by the storm surge and/or flooding. Flooding and storm surge caused damage to the second floor, as well. It is the cause of the damage to the upper floors which is disputed and relevant to plaintiff's bad faith claim.
The damage was classified as "minimal" (doc. 57, Ex.C-Affidavit of David Robins, p. 3, ¶ 5).
None of the roof damages allowed water to enter the main structure or interior of the [Hotel] . . . No water damage was observed to the ceilings in any of the sixth floor rooms. If water had entered the [Hotel] from the roof, water damage would have been evident on the ceilings of these rooms. Again, we observed no such damage at the time of the initial inspection on October 5, 1998.Id. ¶ 6.
At the October 5, 1998 inspection, Engle adjusters told the owners' representatives that it was their opinion that water damage to the rooms above the first floor was caused by wind-driven rain (doc. 57, Ex.B, p. 28-30; Ex.C-Affidavit of Dave Robins), precluding coverage.
Engle adjusters, to confirm their opinion, hired S.E.A., Inc. ("SEA"), an engineering and consulting firm. Dennis Martin of Engle generally hires an engineer to confirm his conclusions about the cause of a loss.Id. Ex.B, p. 34. Jeff Clegg, defendant's claim adjuster, authorized the hiring of SEA. Id. Ex.A, p. 53-55. Mr. Clegg had used SEA previously in that it was "much known throughout the Southeast in terms of insurers as a competent engineering firm." Id. at 55.
Dan Sheehan, a civil engineer employed by SEA, was assigned to investigate the Hotel's damage claim. He has investigated over five-hundred hurricane claims, having been involved with such claims in Alabama, Florida, and North Carolina, since Hurricane Andrew (doc. 57, Ex.E-Deposition of Dan Sheehan, p. 37-40). He participated in a two-day inspection of the Hotel on October 28 and 29, 1998. Id. Ex.C at 4, ¶ 13. Hotel Co-Manager Gary Dennis accompanied Mr. Sheehan on the inspection of the roof (doc. 74, p. 6).
Mr. Sheehan issued his report confirming the conclusions of the Engle adjusters that the water entered the rooms, except for the first floor, in the form of wind-driven rain around the airconditioning units or casings, from under and around the Gulf-facing balcony doors, and from around the perimeter of the Gulf-facing windows. Id. Ex.E, p. 24-26.
Randy Creech was retained by Engle to evaluate the Hotel's business interruption claim and to place a value on the damage attributable to wind, wind-driven rain, and flood damage (doc. 57, Ex.D, p. 19-21). Based on Mr. Creech's conclusions, defendant determined that plaintiffs losses attributable to wind, wind-driven rain, and flood did not exceed the deductible on their policy. Mr. Creech concurred with the conclusions reached by the Engle adjusters Dennis Martin and Dave Robins, and SEA engineer Dan Sheehan that the cause of the water intrusion into the Hotel was wind-driven rain. Id. p. 21-26.
On November 1, 1998, Todd M. Capes, P.E., of Capes Engineering, Inc., visited the Hotel at the request of Mr. K.C. Chiang, an owner representative. Id. Ex.F. The Report, dated November 2, 1998, states, in pertinent part:
A review of the flat roofing system indicated several locations w[h]ere the roofing membrane was loose and "bubbling". I did not find any damage to the roofing that would allow water penetration . . .
A review of a room on the six floor of the building did not reveal any indications of structural damage and only minimal damage to the interior finishes due to water infiltration.
[I]t is my opinion that the building structure is in good condition . . .Id. at p. 1-2.
Mr. Capes' report did not come to defendant's attention until it was produced during a deposition of one of plaintiff's engineering experts on June 21, 2000 (docs. 57, p. 8, n. 4; 59).
On December 3, 1998, there was an on-site meeting with Engle adjuster Dave Robins, Hotel Co-Managers Gary Dennis and Albert King, along with Bob Hoeb and K.C. Chiang, representing the Hotel owners. Dan Sheehan also participated. Mr. Sheehan's report, dated November 25, 1998, had been provided to the owners prior to the December 1998 meeting (doc. 57, Ex.B, p. 87-88).
This meeting was an opportunity to review and compare the owner's damage estimate with the SEA engineering report confirming defendant's adjusters' conclusion that the water damage on the upper floors was caused by wind-driven rain (doc. 57, Ex.C; Ex.E).
Co-Managers King and Dennis stated their impressions and opinions with regard to the December 3, 1998 meeting (docs. 72, 73). Mr. King stated that prior to this meeting plaintiff had had a roofer, "Summers," inspect the roof and Summers had determined that the roof had in fact been damaged. At the meeting, Mr. King attempted a compromise but it was not accomplished (doc. 72, p. 55-57).
A formal letter denying coverage for this loss, i.e., the wind-drive rain damage, was sent to plaintiff on February 10, 1999 (doc. 57, Ex.B, p. 47-48; Ex.A, p. 47-48).
Defendant indicates that the letter denying coverage was "sent to Plaintiff on February 10, 1998." (doc. 57, p. 9, ¶ 25). This is clearly impossible due to the fact that Hurricane Georges did not occur until the following September, and the engineering report regarding the damage was dated November 25, 1998. The referred to deposition does not help to clarify as it states ". . . which is [the denial] letter... dated February the 10th" without specifying the year. Id. Ex.B, p. 47, line 22-23. This court construes the referred to date to be February 10, 1999.
Hotel representatives did not inform Engle that they wanted to procure an expert or engineer of their own to counter the conclusions of SEA regarding the wind-driven rain loss. If they had done so, arrangements would have been made (doc. 57, Ex.C, p. 4-5, ¶ 16). Had Mr. Clegg been furnished with any conflicting engineering reports prior to the commencement of this litigation on July 20, 1999, a further meeting would have been scheduled with "at a minimum . . . two engineers . . . and probably the adjuster . . . and . . . at least one insured representative." Id. Ex.A, p. 83.
Plaintiff disagrees with the findings and conclusions of defendant's adjusters, Engle's representatives, Randy Creech of INRECON, and Dan Sheehan of SEA.
Mr. Sheehan's deposition regarding plaintiffs damage theory reflects:
Q. And you are telling me today that at no time during any of the visits that you had to [the] [H]otel that anyone claimed that the water entered the rooms because the locks were forced by the wind?
A. No, that was never claimed.
(doc. 57, Ex.E, p. 29-30).
Plaintiff has proffered numerous documents in support of its position regarding the extent, and the cause of the water damage (see docs. 69-73).
The various contentions of plaintiff and defendant regarding the cause of the water damage are germane to the issues involved under Count One — breach of contract, failure to pay benefits due for wind damage under the policy of hazard insurance. They are not germane to the claim of bad faith
C. Standard
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Everett v. Napper, 833 F.2d 1507, 1510 (11th Cir. 1987). A party is entitled to a judgment as a matter of law unless the nonmovant demonstrates that a genuine dispute exists as to an element of his case on which he has the burden of proof. Celotex 477 U.S. at 322; Everett, 833 F.2d at 1510. Pursuant to Local Rule 7.2, a failure by the opposing party to point out disputed facts will be taken as an admission that no material factual dispute exists. All factual matters are to be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress Co. 398 U.S . 144, 157 (1987).
Summary judgment is improper if "the dispute about a material fact is "genuine', that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986). If a reasonable fact finder could draw more than one inference from the facts, and that inference creates a genuine issue of material fact, then the court should refuse to grant summary judgment. Samples v. City of Atlanta, 846 F.2d 1328, 1330 (11th Cir. 1988). With the summary judgment standard in mind, this order addresses defendant's motion for partial summary judgment and plaintiffs' opposition thereto.
D. Discussion
Defendant contends that plaintiff's bad-faith failure to investigate the hazard insurance claim "is wholly unfounded and unsupportable" in that defendant appointed qualified experienced independent adjusters to investigate the loss and later hired an independent engineering firm to confirm the adjuster's conclusions (doc. 57, p. 2).
Under Alabama law, "an insurer can be liable for the tort of bad faith when it fails to properly investigate the insured's claim." State Farm Fire Casualty Co. v. Slade, 747 So.2d 293, 315 (Ala. 1999). An insurer has a responsibility to amass all facts necessary to make a determination as to coverage. "This duty must include a duty to investigate a covered event that an insured claims has caused his loss. Otherwise, the duty to properly investigate, imposed by law regarding the tort of bad faith . . . would be meaningless." Id. at 316.
The applicability of Alabama law is not in dispute (doc. 69, p. 5, ~7).
In order to prevail on such a claim, the insured must establish: (a) an insurance contract between the parties and a breach thereof by the insured; (b)an intentional refusal to pay the insurance claim; (c) the absence of any reasonably legitimate or arguable reason for the refusal, i.e., the absence of a debatable reason; (d) the insurer's actual knowledge of the absence of any legitimate or arguable reason; and (e) if intentional failure to determine the existence of a lawful basis is relied upon, the insured must prove the insurer's intentional failure to determine whether there is a legitimate or arguable reason to pay the claim. Simmons, 2000 WL 1137368, *7; Slade, at 304; Bowen, 417 So.2d at 183. The insured has a heavy burden. Slade, at 304. Requirements (a) through (d) represent the "normal" case; requirement (e) represents the "abnormal" case, which dispenses with the predicate of a preverdict judgment as a matter of law for plaintiff on the contract claim if the insurer had recklessly or intentionally failed to properly investigate a claim or to subject the results of its investigation to a cognitive evaluation. Simmons, at *7; see Slade at 306.
An "arguable reason" means ""open to dispute or question,' and "[w]hen a claim is fairly debatable the insurer is entitled to debate it, whether the debate concerns a matter of fact or law."' Simmons v. Congress Life Ins. Co. and Insurers Admin. Corp. 2000 WL 1137368, *6 (Ala. 2000) (badfaith refusal to pay, or to investigate, certain health-insurance claims)(quoting National Security Fire Casualty Co. v. Bowen 417 So.2d 179, 183 (Ala. 1982)).
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." National Savings Life Ins Co. v. Dutton, 419 So.2d 1357, 1362 (Ala. 1982).
Herein, the breach of contract claim is not a part of defendant's partial summary judgment motion; the claim is preserved for trial purposes. As such, plaintiff presents an "abnormal" case.
In order to recover under a theory of an abnormal case of bad-faith failure to investigate an insurance claim, "the insured must show (1) that the insurer failed to properly investigate the claim or to subject the results of the investigation to a cognitive evaluation and reviewand (2) that the insurer breached the contract for insurance coverage with the insured when it refused to pay the insured's claim." Slade, 747 So.2d at 318 (emphasis added): When the Alabama Supreme Court recognized the tort of bad faith in this context, "it intended to limit liability under that tort to those instances in which the insured's losses were covered under the policy." Slade at 317.
In Slade, the Alabama Supreme Court made it clear that "the abnormal cases have been limited to those instances in which the plaintiff produced substantial evidence showing that the insurer (1) intentionally or recklessly failed to investigate the plaintiffs claim; (2) intentionally or recklessly failed to properly subject the plaintiffs claim to a cognitive evaluation or review; (3) created its own debatable reason for denying the plaintiff's claim; or (4) relied on an ambiguous portion of the policy as a lawful basis to deny the plaintiff's claim."Id. 747 So.2d at 306-07.
The Slades contended that their insurance company was guilty of bad faith because it did not properly investigate their claim, i.e., it did not conduct a proper investigation into the possibility that lightning had struck the slab of their home, and because it relied on an ambiguous portion of the insurance policy. Id. at 314-15. In support of their claim, the Slades presented substantial evidence that their insurer failed to have someone who was qualified to conduct a lightning investigation visit their home, and failed to interview any of the known witnesses present on the day the lightning struck. Further, the Slades presented evidence that the lightning was never investigated as a possible cause of the property damage; the insurer's engineer was sent "to investigate a "possible soil problem"' and was not told about the lightning strike. The Slades also presented expert testimony indicating that the insurer's investigatory omissions amounted to an improper investigation. Id. at 315. The Alabama Supreme Court determined that the Slades' evidence created a question of fact in re a proper investigation and concluded that the trial court had properly submitted that portion of the Slades' bad faith claim to a jury. Id.
The "primary" consideration in this type of bad faith case "is whether a claim was properly investigated and whether the results of the investigation were subjected to a cognitive evaluation and review."Kervin v. Southern Guaranty Ins. Co., 667 So.2d 704, 705 (Ala. 1995). If plaintiffs evidence "fails to eliminate any arguable reason for denying payment, any fairly debatable reason on a matter of fact or a matter of law, [plaintiff] cannot recover under the tort of "bad faith . . ."Bowen, 417 So.2d at 185.
Herein, the evidence establishes that the day after the casualty, defendant reacted by immediately appointing a national independent adjusting firm to address plaintiffs claim. Within five days engineers were at the site conducting an inspection of the property and the sustained damage. Plaintiff was advised of the initial assessment that the loss was not covered under the policy. Confirmation was sought by defendant with further engineering study. That evaluation took place over a two-day period within a month of the storm, and was conducted by an engineer with vast experience in hurricane damage, with a subsequent meeting including representatives of both plaintiff and defendant. Plaintiff was subsequently formally advised of the defendant's conclusions.
There is no evidence that defendant intentionally or recklessly failed to investigate plaintiffs insurance claim, or to properly subject plaintiffs insurance claim to a cognitive evaluation.
It is of note that at the time the claim was formally denied, on February 10, 1999, defendant had before it only the engineering reports developed through its own investigation which consistently showed that the loss resulted from wind-driven rain. Plaintiff had not notified it that, within approximately forty-five days of the Hurricane, plaintiff had retained an engineer, Mr. Capes, to evaluate the situation and Mr. Capes observed and reported "only minimal damage to the interior finishes due to water infiltration" (doc. 57, Ex.F, p. 1).
It was after the denial of the insurance claim that plaintiff began to investigate a different possible cause for the water damage by retaining other engineers and-experts, albeit months and even years after the actual casualty. It was then that a differing damage theory evolved — wind damage to the Gulf-facing balcony doors to the extent that water was allowed to enter the guest rooms.
In Slade Justice Lyons of the Alabama Supreme Court noted: "[I]n determining whether a claim involves a bad-faith failure to investigate, the date of denial is crucial because information received by the insurerafter the date of the denial is irrelevant to the determination of whether the insurer denied at that date in bad faith." 747 So.2d at 317, n. 6 (emphasis in original). The facts of the Slade case indicate that after the insurer's claims committee investigated the damage for over a five-month period, the committee voted to deny the Slades' claim; the insurer anticipated that the Slades would sue. Thereafter, the insurer refused to give the Slades a copy of the engineering report relied upon, continued to investigate by hiring more engineers "to defend" should the Slades sue, and notified the Slades, repeatedly, that it "was still considering coverage." Id. at 301. These facts make the Slade case distinguishable from the case sub judice.
More recently, in Simmons, Justice Lyons noted with regard to a rigid time frame for commitment of the tort: "A defendant's knowledge or reckless disregard of the fact that it had no legitimate or reasonable basis for denying a claim may be inferred and imputed to an insurer when it has shown a reckless indifference to facts or proof submitted by the insured." 2000 WL 1137368, *7 Simmons had appealed the denial of medical insurance claims regarding a possible pre-existing back condition. The insurer withheld any decision on the appeal awaiting a complete record from Simmons' chiropractor. The record was never received. Trial evidence indicated that the insurer "perfunctorily "suspended activity' on her appeal, . . . no meaningful investigation was ever undertaken." 2000 WL 1137368, *8.
Herein, as noted, at the time of the denial defendant had before it only that investigatory information which it had generated. The evidence reflects that plaintiff did not dispute the extent of the damage found by defendant, nor did plaintiff request further study of alternative theories for the cause or reconsideration of the available information. Rather, plaintiff initiated this litigation and pursued its own theory regarding the cause of the sustained damage based on its own evaluation of the extent of the damage. Defendant cannot be accused of "reckless indifference" to facts or proof submitted by plaintiff when it was not privy to it.
The evidence presented does not reflect an intentional failure to determine whether there is a legitimate or arguable reason to pay the claim. Moreover, Alabama Courts have "consistently refused to recognize a cause of action for the negligent handling of insurance claims, and it will not recognize a cause of action for alleged wanton handling of insurance claims." Kevin, 667 So.2d at 706.
E. Conclusion
In summary, plaintiff has failed to establish that defendant intentionally or recklessly failed to investigate plaintiff's insurance claim or intentionally or recklessly failed to properly subject the insurance claim to a cognitive evaluation. Slade, 747 So.2d at 306-07. Thus, defendant cannot be held liable on plaintiffs bad-faith failure to investigate the hazard insurance claim.
Accordingly, defendant's Motion For Partial Summary Judgment (docs. 56-59, 76), as to Count Five (bad-faith failure to investigate the insurance claim for wind damage under the hazard insurance policy) is hereby GRANTED. This action shall proceed to trial only as to plaintiff's Count One as scheduled.