[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
May 5, 2004
No. 03-13046 THOMAS K. KAHN
________________________ CLERK
D. C. Docket No. 01-00473-CV-F-N
MUTUAL SERVICE CASUALTY
INSURANCE COMPANY,
Plaintiff-Counter-
Defendant-Appellee,
versus
RONALD HENDERSON,
PHYLLIS HENDERSON,
Defendants-Counter-
Claimants-Appellants,
MYRON ANDERSON, et al.,
Defendants.
________________________
Appeal from the United States District Court
for the Middle District of Alabama
_________________________
(May 5, 2004)
Before MARCUS and WILSON Circuit Judges, and LIMBAUGH*, District Judge.
WILSON, Circuit Judge:
Ronald and Phyllis Henderson (“the Hendersons”) appeal the district court’s
summary judgment order dismissing their bad faith claim against Mutual Service
Casualty Insurance Company (“MSC”). They also appeal the court’s denial of
their motion for judgment as a matter of law on their breach of contract claim.
While we find no error with respect to the Hendersons’s “normal” bad faith
claim, the district court erred in dismissing the Henderson’s “abnormal” bad faith
claim. Thus, we reverse the district court’s summary judgment ruling on bad faith
and remand for further proceedings. Furthermore, we affirm the district court’s
denial of the Hendersons’ motion for judgment as a matter of law on their breach
of contract claim. Even if there was error, it was harmless because the Hendersons
eventually won a jury verdict on their breach of contract claim.
BACKGROUND
The Hendersons live in rural Alabama, on approximately forty acres of land.
In 1998, the Hendersons made plans to enter into the poultry-farming business and
began construction of two poultry houses in late 1998 or early 1999. On January
*
Honorable Stephen N. Limbaugh, United States District Judge for the Eastern District of
Missouri, sitting by designation.
2
15, 1999, several of the Hendersons’ neighbors (the “Neighbors”), having
discovered the Hendersons’ plans, brought suit in state court seeking equitable
relief to prevent the Hendersons from constructing and operating the poultry-
farming venture. The Neighbors alleged in their complaint that if the Hendersons
operated a poultry farm, the Neighbors’ property would be subject to noxious
odors, excessive noise, increased rodent and insect populations, and waste runoff.
The Hendersons answered, and there was no further action in the lawsuit for a year
and a half.
In the meantime, the Hendersons finished construction of the poultry
houses. The Hendersons took steps during the construction of the poultry houses
to minimize the impact of the venture on their neighbors. The poultry houses were
specially positioned, and the Hendersons planted and irrigated a line of trees along
the property to reduce exposure. The Hendersons also state that their poultry
operation was inspected by the Alabama Department of Environmental
Management in March 1999, without adverse consequence, and they obtained a
waste management plan for the venture from the Covington County Soil
Conservation Office in May 1999. In August 1999, the Hendersons began
operating the poultry farm, and they did not receive any further complaints from
their neighbors until June 2000.
3
In April 2000, Chris Wilkes of the Pinckard Agency contacted Ronald
Henderson to renew his farm insurance. At the time, the Hendersons had farm
insurance with Fulcrum Insurance Company, and it was due to expire in May
2000. The Pinckard Agency is an independent insurance agency and initially
purchased insurance for the Hendersons from Fulcrum. By April 2000, however,
Pinckard had established a business relationship with Southern Select Insurance,
which was a general agent for Keystate Agri-Business Insurance, which itself was
a managing general agent for MSC.
After speaking with Mr. Henderson, Wilkes submitted a completed, but
unsigned, MSC insurance application on behalf of the Hendersons to Southern
Select, soliciting a quote for farm insurance. The application asked, “Has
applicant or any member of the household ever been involved in litigation,
whether or not covered by the insurance?” Wilkes checked “No.” Wilkes said
that, at the time, he did not know that the Hendersons were involved in the lawsuit
with their Neighbors, nor did Wilkes ask Mr. Henderson about prior lawsuits
during his meeting with him. Mr. Henderson claims, however, that when Wilkes
visited him, he told Wilkes that his neighbors had complained about the poultry
farm venture and had signed a “petition” against him. Mr. Henderson also claims
they discussed the measures he had taken to minimize any chance of injury to his
4
neighbors. Wilkes only remembers generally being told that “the neighbors
weren’t happy about the chicken house.”
After Wilkes sent the unsigned application to Southern Select, the Pinckard
Agency received a quote for the farm insurance to be provided by MSC. After
receiving the quote, Wilkes brought the application to Mr. Henderson for him to
sign. On the same page as the question regarding whether the applicant had ever
been involved in a lawsuit, the following appears:
I have read the above application, and I declare that to the best of my
knowledge and belief, all the foregoing statements are true, and that
these statements are offered as an inducement to the company to issue
the policy for which I am applying.
Henderson signed the application. He says that he did not read the above quoted
language. He also claims that the application was not filled out when he signed it.
Mr. Henderson only remembers signing a document on the hood of his truck when
Wilkes brought it to him. He believed that Wilkes was going to answer the
questions for him on his behalf. Wilkes alleges instead that the document was
complete when Mr. Henderson signed it.
Wilkes sent the signed application to Southern Select, and in August 2000,
MSC issued the Hendersons an insurance policy with an effective date of May 15,
2000.
5
In June 2000, the Neighbors amended their complaint against the
Hendersons to state claims for actual damages akin to those anticipated in their
original complaint. The amended complaint did not, however, state a date upon
which the alleged damages or the event causing the alleged damages occurred.
In September 2000, Mr. Henderson spoke with Chris Wilkes regarding
whether the Neighbors’ suit was covered under the MSC policy. Wilkes wrote in
a letter dated September 28, 2000, that the Neighbors’ suit originally filed in
January 1999 was “outside of the [Hendersons’] policy period” and that “no policy
. . . was in force at that time.” Wilkes admittedly undertook no investigation of the
claim other than comparing the date of the policy with the date the original
anticipatory nuisance suit was filed.
On January 4, 2001, counsel for the Hendersons – unaware of the
September 28, 2000 letter – wrote to the Pinckard Agency soliciting a response as
to whether the MSC policy provided coverage. She enclosed a copy of the
original and amended complaints from the Neighbors’ suit against the Hendersons.
The Hendersons’ lawyer also faxed a copy of the letter to MSC. When no
response followed, counsel for the Hendersons sent another letter to the Pinckard
Agency on February 6, 2001, again faxing a copy of its letter to MSC.
6
In response, Steve Atwood, the Farm Department Manager at Keystate,
wrote a letter to Greg Wilkes of the Pinckard Agency. In the letter, dated February
8, 2001, Atwood (1) stated that MSC had not received a formal notice of the
claim, (2) referred Greg Wilkes to the pollution exclusion found in the
Hendersons’ policy, and (3) requested a written explanation as to how the
misstatement about prior litigation in the application came about. Atwood also
stated that, in his opinion, if a claim were submitted on this suit, the policy would
provide no coverage.
The Hendersons’ counsel responded in writing on February 22, 2001,
stating the Hendersons’ objections and requesting that Keystate reconsider its
denial of coverage and retain Alabama counsel to advise it of its duties under the
policy. Keystate complied with the Hendersons’ request and submitted the case to
outside counsel for review.
On April 19, 2001, Mimi Anderson, a claims administrator for Keystate,
responded to the Hendersons’ request for reconsideration, stating that outside
counsel confirmed their conclusion that coverage for the Neighbors’ case was not
available to the Hendersons. Anderson’s letter based the denial of coverage on (1)
the “known loss” rule, (2) the fact that the claims asserted by the Hendersons’
neighbors did not qualify as an “occurrence” under the policy, and (3) the
7
misstatement about involvement in prior litigation in the application. The letter
further stated that MSC did not rely on the pollution exclusion or the lack of
formal notice of the claim in denying coverage, as was earlier indicated by
Atwood in his February 8, 2001 letter. Anderson also informed the Hendersons
that MSC would file a declaratory judgment action.
In April 2001, MSC filed suit in federal court against the Hendersons
seeking (1) declaratory judgment that it had no duty to defend or pay any judgment
against the Hendersons for their suit with the Neighbors, and (2) rescission of the
policy.1 The Hendersons asserted two counterclaims against MSC claiming
breach of contract and bad faith. MSC filed a motion for summary judgment. The
district court granted MSC’s motion for summary judgment only in regard to the
Hendersons’ bad faith claim.
The case proceeded to trial. At trial, the Hendersons moved for judgment as
a matter of law on their breach of contract claim. The court denied the motion.
The jury returned a verdict in favor of the Hendersons and awarded them $10,800
in damages for their breach of contract claim.
1
The Neighbors are also named as defendants in the complaint.
8
The Hendersons appeal, alleging the district court erred by (1) granting
MSC’s summary judgment motion with regard to the Hendersons’ claim of bad
faith, and (2) denying their motion for a judgment as a matter of law at trial.
DISCUSSION
I. Standard of Review
We review the district court’s grant of summary judgment de novo, applying
the same standards as the district court. Nat’l Fire Ins. Co. of Hartford v. Fortune
Constr., 320 F.3d 1260, 1267 (11th Cir. 2003). A motion for summary judgment
should be granted when there is no issue as to any material fact and the moving
party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). We review
the evidence and all reasonable inferences in the light most favorable to the non-
moving party. Nat’l Fire Ins., 320 F.3d at 1267.
Motions for judgment as a matter of law are also subject to de novo review.
Ross v. Rhodes Furniture, Inc., 146 F.3d 1286, 1289 (11th Cir. 1998).
II. Bad Faith
Under Alabama law, there are two methods by which a party can establish a
bad faith refusal to pay an insurance claim. Employees’ Benefit Assoc. v. Grissett,
732 So.2d 968, 976 (Ala. 1998). An insurance company may be liable for either
9
“normal” bad faith or “abnormal” bad faith. State Farm Fire & Casualty Co. v.
Slade, 747 So.2d 293, 306 (Ala. 1999). We address each theory in turn.
A. “Normal” Bad Faith
A party alleging that an insurance company committed “normal” bad faith
has the burden of proving: (1) a breach of the insurance contract; (2) an intentional
refusal to pay the insured’s claim; (3) the absence of any reasonably legitimate or
arguable reason for that refusal; and (4) the insurer’s actual knowledge of the
absence of any legitimate or arguable reason. Grissett, 732 So.2d at 976.
“Normal” bad faith claims are often referred to as “directed verdict on the contract
claim[s],” Blackburn v. Fid. and Deposit Co. of Maryland, 667 So.2d 661, 668
(Ala. 1995), because a plaintiff must show that he is entitled to a directed verdict
on the breach of contract claim in order to have his bad faith claim submitted to a
jury. Grissett, 732 So.2d at 976; Nat’l Sav. Life Ins. Co. v. Dutton, 419 So.2d
1357, 1362 (Ala. 1982). Thus, we review whether there was a “legally sufficient
evidentiary basis” for a reasonable jury to find for MSC on the breach of contract
claim. ALA. R. CIV. P. 50(a); see also Dutton, 419 So.2d at 1362 (“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 [“normal” bad
faith] claim must fail and should not be submitted to the jury.”).
10
While the jury returned a verdict in favor of the Hendersons on the breach
of contract claim, we find that evidence was presented that would have allowed a
reasonable jury to conclude that the Neighbors’ lawsuit was not covered by the
MSC policy. The Hendersons’ MSC insurance policy states that MSC will cover
any “property damage” caused by an “occurrence.” An “occurrence” is defined in
the policy as an “accident . . . that results in . . . property damage during the policy
period.” The damage claims set out in the Neighbors’ amended complaint
arguably do not constitute an “accident.” The Hendersons began operating the
poultry venture and allegedly damaged their neighbors’ property prior to applying
for coverage with MSC and in spite of their knowledge of their neighbors’
objections. The Hendersons arguably did not commit an “accident,” but rather
purposefully accepted the foreseen consequences of operating their poultry farm.
The district court was correct in holding that the Hendersons were not entitled to a
directed verdict on the breach of contract claim, and thus were precluded from
bringing their “normal” bad faith claim before a jury.
The Hendersons argue in the alternative that even if there was uncertainty as
to whether there was an “occurrence” or an “accident,” MSC at least owed the
Hendersons the duty to defend as a matter of law. See Aetna Cas. & Surety Co. v.
Dow Chem. Co., 44 F.Supp.2d 847, 856 (E.D. Mich. 1997). Yet, such a holding
11
would clearly contravene Alabama law. Under Alabama law, “if there is any
uncertainty as to whether the complaint alleges facts that would invoke the duty to
defend, the insurer must investigate the facts surrounding the incident that gave
rise to the complaint in order to determine whether it has a duty to defend the
insured.” Blackburn, 667 So.2d at 668 (emphasis added). Thus, MSC’s
uncertainty as to whether there was an “occurrence” or an “accident” did not
create a duty to defend, but rather a duty to investigate. Id. The question of
whether MSC properly investigated the claim is the subject of an “abnormal” bad
faith inquiry rather than a “normal” bad faith inquiry. See Simmons v. Congress
Life Ins. Co., 791 So.2d 371, 379 (Ala. 2000).
The district court did not err in denying the Hendersons’ “normal” bad faith
claim. We now turn to consider the Hendersons’ “abnormal” bad faith claim.
B. “Abnormal” Bad Faith
Under Alabama law, “[i]n 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 review and (2) that the insurer
breached the contract for insurance coverage with the insured when it refused to
pay the insured’s claim.” Simmons, 791 So.2d at 379. There is no dispute with
12
regard to the second element. With regard to the first element, the Hendersons
argue that the district court erroneously concluded that there was no issue of
material fact with respect to whether MSC properly investigated their claim before
denying coverage. We agree.
An insurer is liable for “abnormal” bad faith when it intentionally or
recklessly fails to conduct an adequate investigation of the facts and submit those
facts to a thorough review. See Blackburn, 667 So.2d at 668. An insurer also has
the responsibility to “marshal all of the pertinent facts with regard to its insured’s
claim” before denying coverage. See Nat’l Ins. Ass’n. v. Sockwell, 829 So.2d 111,
130 (Ala. 2002). Unlike in “normal” bad faith claims, providing an arguable
reason for denying an “abnormal” bad faith claim does not defeat that claim. See
Slade, 747 So.2d at 315-16.2
2
MSC urges us to follow the holding of Weaver v. Allstate Ins. Co., 574 So.2d 771 (Ala.
1990) and conclude that a debatable reason is enough to defeat an “abnormal” bad faith claim.
Indeed, in Weaver, the Alabama Supreme Court said that “regardless of the imperfections of [the
insurer’s] investigation, the existence of a debatable reason for denying the claim at the time the
claim was denied defeats a bad faith failure to pay the claim.” Id. at 775 (quoting State Farm
Fire and Cas. Co. v. Balmer, 891 F.2d 874, 877 (11th Cir. 1990)). However, as the theory of
“abnormal” bad faith developed, the Alabama Supreme Court has moved away from its holding
in Weaver.
For example, in 1998, the Alabama Supreme Court said that the absence of an arguable
basis for denying the claim can be inferred if the insurer was reckless in its investigation:
The rule in “abnormal” cases dispensed with the predicate of [demonstrating
entitlement to a directed verdict] on the contract claim if the insurer had recklessly
or intentionally failed to properly investigate a claim to subject the results of its
investigation to a cognitive evaluation. A defendant’s knowledge or reckless
13
As the district court noted, the difficulty with making a determination on
whether MSC recklessly failed to investigate the Hendersons’ claim before
denying their claim is that there are factual questions regarding exactly when the
denial of coverage occurred. A jury could conclude that any one of the three
letters sent to the Hendersons served as a denial. Thus, for purposes of summary
judgment, if there is an issue of material fact about whether MSC properly
investigated the Hendersons’ claim before any one of the letters was sent, then a
summary judgment ruling dismissing the “abnormal” bad faith claim is erroneous.
We find that, reviewing the evidence in the light most favorable to the
Hendersons, that there are indeed issues of material fact regarding whether MSC
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.
Grissett, 732 So.2d at 976 (citations omitted).
In 1999, the Alabama Supreme Court again moved away from its holding in
Weaver in deciding Slade. In Slade, the insurance company investigated how an
insured’s home was damaged. The company discovered evidence that it was damaged
due to earth movement, which would have precluded coverage. Despite the fact that the
insurer relied upon evidence providing an arguable basis for denying the claim, the
Alabama Supreme Court held that the insurer committed bad faith. See Slade, 747 So.2d
at 315-16. The Court held that the insurer failed to investigate the possibility that
lightning hit the home, which, if true, would have meant the company would have had to
cover the claim. See id.
We choose to follow the rationale of Grisset and Slade rather than Weaver,
because Grisset and Slade are the more recent cases and therefore indicate that the
Alabama Supreme Court has moved away from its reasoning in Weaver.
14
properly investigated the claim before issuing two of the letters.3 We review each
letter in turn.
(a) The September 2000 Letter
Like the district court, we assume that Chris Wilkes’ September 28, 2000
letter functions as MSC’s denial of coverage.4 In this letter, Wilkes denied the
Hendersons’ claim on the grounds that the Neighbors’ lawsuit was filed in January
3
The district court stated that “no matter which missive is considered to be ‘the denial
letter,’ the court finds no evidence in this case of the intent to injure, dishonest purpose, self
interest, or ill will required to sustain even an abnormal bad faith claim.” Indeed, the Alabama
Supreme Court has stated that “proof of mere negligence or mistake is not sufficient to support a
claim of bad faith; there must be a refusal to pay, coupled with a conscious intent to injure.”
Davis v. Cotton States Mut. Ins. Co., 604 So.2d 354, 359 (Ala. 1992); see also Webb v. Int’l
Indem. Co., 599 So.2d 1144, 1146 (Ala. 1992).
However, if we were to rely on the Davis Court’s requirement of a “conscious intent to
injure” in “abnormal” bad faith claims, we would ignore a slew of precedent, including cases
coming after Davis, holding that an “abnormal” bad faith claim can be submitted to the jury if
“the insurer either intentionally or recklessly failed to properly investigate the claim.” Thomas v.
Principal Fin. Group , 566 So.2d 735, 744 (Ala. 1990) (emphasis added); see also Grissett, 732
So.2d at 976; Blackburn, 667 So.2d at 668. One who acts “recklessly” does not act with a
“conscious intent to injure.” Rather, one who acts “recklessly” is one who acts in such a way that
he may foresee the consequences of his conduct and not desire them to occur, but nonetheless
persists with his conduct disregarding the risk of bringing about the unintended consequences of
his conduct. BLACK’S LAW DICTIONARY 1276 (7th ed. 1999) (citing J.W. CECIL TURNER,
KENNY ’S OUTLINES OF CRIMINAL LAW 28 (16th ed. 1952)). Thus, in many of its recent
“abnormal” bad faith cases, the Alabama Supreme Court does not impose a separate requirement
of evidence of an intent to injure. See generally, Simmons, 791 So.2d 371; Slade, 747 So.2d 293;
Grissett, 732 So.2d 968; Blackburn, 667 So.2d 661. The district court erred by requiring proof
that MSC intended to injure the Hendersons with their investigation in a claim that only requires
a “reckless” failure to investigate.
4
MSC argues that Wilkes, and the Pinckard agency in general, lacked authority to act on
behalf of MSC. However, as the district court found, there are issues of material fact regarding
whether Pinckard was a subagent of MSC. Reviewing the evidence in a light most favorable of
the Hendersons, therefore, we assume for purposes of summary judgment that Chris Wilkes and
the Pinckard Agency had authority to act on behalf of MSC.
15
1999, and thus, was outside of the policy period. Wilkes admittedly undertook no
investigation of the claim other than comparing the effective date of coverage
(May 15, 2000) with the date the original anticipatory nuisance suit was filed
(January 15, 1999).5
The deficiency in Wilkes’ investigation becomes apparent when we
consider the evidence Wilkes based his decision upon. Wilkes was given two
complaints – the original nuisance complaint that was filed on January 15, 1999,
and the amended complaint that was filed on June 20, 2000. The copy of the
amended complaint that Wilkes examined, however, did not have a date on it.
5
The district court implied that Wilkes also investigated the claim by speaking to Mr.
Henderson about the suit. While Wilkes spoke to Mr. Henderson on the phone, the record shows
that he only spoke to Mr. Henderson about his need for a written denial, not about the underlying
facts of the claim. The following is an exerpt from Wilkes’s deposition testimony regarding his
phone conversation with Mr. Henderson:
A: I do remember the phone call – just remember him asking me to write him
a letter.
Q: And just tell me everything . . . you can recall about that conversation.
A: That’s pretty much it . . .
Later, in Wilkes deposition testimony, he admits that all he did to investigate the claim was
compare the date of the original complaint with the Hendersons’ policy period:
Q: What did you do to [determine the Hendersons’ were not covered]?
A: I guess I looked at the date of the lawsuit and looked at the policy period.
Q: Anything else?
A: Uh-uh. (Negative response)
Thus, the only investigation Wilkes conducted was comparing the dates of the policy with the
date of the original complaint. He admittedly did not call Mr. Henderson to investigate the
merits of the claim.
16
Thus, it was unclear to Wilkes whether the damages alleged in the amended
complaint occurred before or after May 15, 2000, the effective date of coverage of
the Hendersons’ policy. Yet, despite this uncertainty, Wilkes conducted no further
investigation. He did not call Mr. Henderson to ask him when the events alleged
in the amended complaint occurred. He did not call the clerk of court to inquire
when the amended complaint was filed. He did nothing but rely upon the date on
the original complaint. Such an investigation is hardly one in which he fulfilled
his duty to “marshal all of the pertinent facts with regard to [the] insured’s claim”
before denying coverage. Sockwell, 829 So.2d at 130. While Wilkes may not
have intended to injure Mr. Henderson with this deficient investigation, he
arguably investigated in a reckless manner by failing to adequately investigate the
facts and submit those facts to a thorough review. See Blackburn, 667 So.2d at
668.
Reviewing the facts in a light most favorable to the Hendersons, MSC was
not entitled to summary judgment on the “abnormal” bad faith claim because there
are issues of material fact whether Wilkes’ conducted an adequate investigation
before denying the Hendersons’ claim in September 2000.
(b) The February 2001 Letter
17
We next consider Atwood’s letter of February 8, 2001, as MSC’s denial of
coverage. That letter, addressed to Greg Wilkes of the Pinckard Agency, (1) states
that MSC has not received formal notice of the claim, (2) refers Greg Wilkes to the
pollution exclusion found in the Hendersons’ policy, and (3) requests a written
explanation as to how the misstatement about prior litigation in the application
came about.
Viewing the evidence in a light most favorable to the Hendersons, there
again are issues of material fact regarding whether this letter was a result of an
adequate investigation and whether Atwood fulfilled his duty to “marshal all of the
pertinent facts with regard to [the Hendersons’] claim.” Sockwell, 829 So.2d at
130. First, Atwood’s reliance upon the complaint alone is not sufficient to
conclude that the Hendersons’ claim was not covered by MSC’s policy because of
the pollution exclusion. The complaint, on its face, refers to “rodents” and
“vermin” causing damage, which clearly does not fall under the pollution
exclusion clause that describes “acids” and “chemicals.” Second, the record is
clear that, prior to sending his letter, Atwood did not contact the Hendersons to
inquire about their claim, the facts pertinent to the application of the pollution
exclusion, or even the false information on the application. We find, therefore,
genuine issues of material fact as to whether Atwood properly investigated the
18
claim or subjected the results of his investigation to a cognitive evaluation and
review before sending his letter. See Simmons, 791 So.2d at 379.
(c) April 2001 Letter
We finally consider Mimi Anderson’s April 19, 2001 letter to the
Hendersons’ attorney. In Anderson’s letter, MSC abandoned the two reasons
given by Atwood for denying coverage.6 Rather, Anderson based the denial of
coverage on (1) the “known loss” rule, (2) the fact that the claims asserted by the
Hendersons’ Neighbors did not qualify as an “occurrence” under the policy, and
(3) the misstatement about involvement in prior litigation in the application. With
regard to this letter, we agree with the district court that MSC properly
investigated the Hendersons’ claim before denying coverage.
Prior to writing her letter, Anderson submitted the Hendersons’ claim to
outside counsel for further investigation and review. She also reviewed all of the
previously discussed information and correspondence. In particular, with regard
to MSC’s denial based on the misstatement about prior litigation in the
application, Anderson conducted a proper investigation. Anderson, unlike
Atwood, was able to consider the Hendersons’ version of the facts regarding the
6
Anderson wrote, “MSC does not rely on the pollution exclusion as a basis for its
conclusion that Mr. and Mrs. Henderson are not provided a defense . . . nor does it rely on the
lack of any formal notice of the claim.”
19
misstatement in the application. The Hendersons’ version of the facts regarding
the misstatement was in their lawyer’s letter of February 22, 2001, which
Anderson was able to review. Anderson was under no further obligation to
interview the Hendersons to again receive their version of the facts. We agree
with the district court with regard to the April 2001 letter, and conclude that there
is not an issue of material fact as to whether Anderson recklessly investigated the
Hendersons’ claim.7
(d) Conclusion Regarding “Abnormal” Bad Faith Claim
In summary, we agree with the district court that there are questions of fact
regarding which letter effectively denied coverage. If the factfinder finds that the
September 2000 letter from Chris Wilkes denied the Hendersons coverage, then
there is an issue of material fact regarding whether MSC committed “abnormal”
bad faith. Likewise, if the factfinder finds that the February 2001 letter from Steve
Atwood denied the Hendersons coverage, then there is also an issue of material
fact regarding whether MSC committed “abnormal” bad faith. However, if the
factfinder finds that the April 2001 letter from Mimi Anderson denied the
7
Because one of the independent grounds on which Anderson denied the Hendersons’
claim was properly investigated, we need not address whether the other two bases that Anderson
gave were properly investigated. Even if we were to find that MSC may have recklessly
investigated the Hendersons’ claim with regard to the “known loss rule” defense and the no
“occurrence” defense, we still would be compelled to find that Anderson’s denial was not in bad
faith because she properly investigated the misstatement in the application.
20
Hendersons coverage, and not the September 2000 letter or the February 2001
letter, then we agree with the district court that there is no issue of material fact
regarding whether MSC is liable for “abnormal” bad faith.
III. Judgment as a Matter of Law
Finally, the Hendersons argue that the district court erred in denying their
motion for judgment as a matter of law on their breach of contract claim at trial.
However, if there was error, it was certainly harmless because the jury found in the
Hendersons’ favor on their breach of contract claim. See FED. R. CIV. P. 61.
Thus, we affirm the district court’s denial of the Hendersons’ motion for judgment
as a matter of law with regard to the breach of contract claim.8
CONCLUSION
8
The Hendersons challenge the district court’s denial of their motion for judgment as a
matter of law on the contract claim, despite ultimately winning a jury verdict on that claim,
because they believe they must do so to present a “normal” bad faith claim. They correctly point
out that a “directed verdict on the contract claim” test must be met in order to submit a “normal”
bad faith claim to the jury. See Balmer, 891 F.2d at 876 (applying Alabama law). However, they
need not challenge the actual ruling of the district court on the contract claim. The Alabama
Supreme Court made this clear by stating,
This “directed verdict on the contract claim” test is not to be read as requiring, in
every case and under all circumstances, that the tort claim be barred unless the
trial court has literally granted plaintiff’s motion for a directed verdict on the
contract. Indeed the words “entitled to a directed verdict” so indicate.
Safeco Ins. Co. of Am. v. Sims, 435 So.2d 1219, 1224 (Ala. 1983). Thus, the Hendersons need
not challenge the district court’s actual ruling on their motion for judgment as a matter of law in
order to present a “normal” bad faith claim.
21
While the district court did not err with respect to the Hendersons’ “normal”
bad faith claim, we find that the court erred in dismissing the Henderson’s
“abnormal” bad faith claim. Furthermore, we find that because the Hendersons
eventually won a jury verdict on their breach of contract claim, there is no need to
disturb the district court’s denial of the Hendersons’ motion for judgment as a
matter of law on their contract claim. Thus, we REVERSE the district court’s
summary judgment ruling on bad faith and REMAND for further proceedings
consistent with this opinion. We also AFFIRM the district court’s denial of the
Hendersons’ motion for judgment as a matter of law on their breach of contract
claim.
AFFIRMED in part, and REVERSED and REMANDED in part.
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