In Alabama, Bad Faith Claim Defeated As A Matter Of Law Though Basis For Coverage Denial Was Debatable

A policyholder’s tort claim for the bad faith refusal to pay a claim was dismissed as a matter of law where a legitimate dispute existed as to coverage liability at the time of the coverage decision by the U.S. District Court for the Northern District of Alabama, Southern Division.  See Alabama Gas Corporation v. Travelers Casualty and Surety Company, et al., Case No. 2:10-CV-01840-IPJ, Document No. 214, June 25, 2013.  Although forty-four (44) states previously decided that a Potentially Responsible Party Notice from the EPA constitutes a “suit” that triggers an insurer’s obligations under a liability policy, the insurer here denied the claim contesting that a PRP notice was not a “suit.”   At the time of the denial, Alabama courts had not addressed the issue.  In the underlying coverage case, on certification from the federal district court, the Alabama Supreme Court agreed with and followed the majority position that EPA notice constitutes a “suit.”  Back in the federal court, in considering the policyholder’s bad faith claim arising from the original denial, the district court found that there was no tort action for bad faith refusal to pay the contractual claim as a matter of law because a legitimate dispute existed in the relevant jurisdiction of Alabama at the time of the coverage decision.   What does this decision mean to policyholders and insurers regarding other coverage issues not addressed yet by the Alabama court system; and are Alabama state courts likely to agree with this district court’s interpretation of Alabama law on this issue – let us know if you have an opinion.

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