Dealing with Bad Faith Insurance Practices in Alabama

Understanding Bad Faith Insurance in Alabama

Insurance is fundamentally a contract of utmost good faith, a concept known as uberrimae fidei. This means both parties—the policyholder and the insurer—are bound to act honestly and fairly toward one another. When an insurance company in Alabama fails to uphold this duty, it may be acting in “bad faith.” Bad faith insurance occurs when an insurer unreasonably withholds policy benefits, fails to properly investigate a claim, or engages in deceptive practices to avoid paying a legitimate claim.

Alabama law recognizes two distinct types of bad faith:

Normal Bad Faith: This requires the plaintiff to show that the insurer refused to pay a claim, that the insurer had no legitimate or arguable reason for refusing to pay, and that the insurer knew it had no legitimate or arguable reason for refusing to pay.
Abnormal Bad Faith: This applies in more complex situations where the insurer has not performed an adequate investigation, has committed fraud, or has engaged in intentional misconduct. The legal standards for proof can differ.

Understanding this distinction is crucial for any policyholder who believes their claim has been wrongfully handled.

Common Bad Faith Insurance Tactics in Alabama

Insurance companies employ various tactics to delay, diminish, or deny valid claims. Recognizing these strategies is the first step in combating them.

Unreasonable Delay or Denial: An insurer may intentionally drag out the claims process with endless requests for documentation or unnecessary investigations, hoping the policyholder will give up or accept a lowball offer. Outright denial of a valid claim without a reasonable basis is a classic bad faith act.
Inadequate Investigation: Alabama law requires insurers to promptly and thoroughly investigate claims. Rushing to a denial without examining all relevant facts, or ignoring evidence that supports the claim, constitutes a failure to investigate in good faith.
Misrepresentation of Policy Terms: An adjuster might misstate the coverage provided in the policy language or claim certain damages are excluded when they are not, confusing the policyholder into abandoning their claim.
Lowball Settlement Offers: Offering a settlement amount far below the reasonable value of the claim, especially when the damages are clear and extensive, is a tactic used to save the company money at the policyholder’s expense.
Failure to Defend or Indemnify: In liability insurance cases (e.g., auto or homeowners), the insurer has a duty to defend the policyholder against lawsuits and to pay covered judgments. Refusing to do so without a valid reason is a serious breach of contract and good faith.

The Legal Framework: Alabama’s “Normal” Bad Faith Standard

Alabama has developed a specific, and some would argue demanding, legal test for proving a normal bad faith claim. Established in the landmark case National Savings Life Ins. Co. v. Dutton, the plaintiff must prove:

The insurance company refused to pay the claim.
The insurance company had no legitimate or arguable reason for refusing to pay the claim.
The insurance company knew it had no legitimate or arguable reason for refusing to pay the claim. This is often described as the “intentional” refusal to pay.

This “arguable reason” standard is a significant hurdle. If the insurer can show any debatable reason for denying the claim—even if it is later proven incorrect—it can often defeat a normal bad faith lawsuit. This is why an insurer’s failure to investigate is so critical; without a proper investigation, the insurer cannot form an “arguable reason” for denial.

Your Responsibilities as a Policyholder

To position yourself strongly against potential bad faith, you must fulfill your own duties under the insurance contract.

Prompt Notification: Report the claim to your insurance company as soon as reasonably possible after a loss occurs. Delaying notification can give the insurer a reason to question or deny your claim.
Thorough Documentation: Document everything. This includes the damage itself (with photos and videos), all personal property lost, all communications with the insurance company (keep a log of phone calls with times, dates, and names), and all expenses incurred due to the loss. Create a dedicated file for all claim-related paperwork.
Cooperate with the Investigation: Provide all requested information and submit to examinations under oath if required. However, you are not obligated to endure endless, repetitive requests designed to frustrate you.
Understand Your Policy: Read your policy documents carefully. Know what is covered, what is excluded, and what your deductibles and limits are. This knowledge is your primary defense against an adjuster misrepresenting your coverage.

Steps to Take if You Suspect Bad Faith

If you believe your insurer is acting in bad faith, a strategic and documented response is essential.

Formal Written Appeal: Before taking legal action, send a detailed, formal letter to your insurance company’s claims department manager. Outline the claim history, reference your policy provisions, explain why the denial or delay is wrongful, and enclose any supporting evidence. Demand a full and fair payment within a specific timeframe (e.g., 30 days). Send it via certified mail.
File a Complaint with the Alabama Department of Insurance: The Alabama Department of Insurance regulates the insurance industry in the state. You can file a formal complaint online or by mail. While the Department cannot award you damages or force a company to pay, it can investigate and potentially levy fines or other disciplinary action against the insurer, which often prompts them to reevaluate your claim.
Consult with an Experienced Alabama Insurance Attorney: This is a critical step. Bad faith law is complex. An attorney who specializes in insurance disputes can evaluate your case, advise you on the strength of a potential bad faith claim, and navigate the high standard of proof required in Alabama. Most bad faith attorneys work on a contingency fee basis, meaning they only get paid if you win your case.

Potential Remedies and Damages in a Bad Faith Lawsuit

A successful bad faith lawsuit in Alabama can result in several types of compensation, going beyond the original policy benefits.

Contract Damages: The full amount owed under the insurance policy.
Compensatory Damages: Compensation for additional financial losses caused by the bad faith denial (e.g., additional living expenses, lost business income, or other costs incurred because the claim wasn’t paid).
Emotional Distress Damages: Compensation for the mental anguish and stress caused by the insurer’s wrongful conduct.
Punitive Damages: In cases involving particularly egregious, malicious, or oppressive conduct, a court may award punitive damages. These are intended to punish the insurer and deter similar behavior in the future. Alabama courts have upheld significant punitive damages awards in insurance bad faith cases.
Attorney’s Fees and Costs: If you prevail, the court may order the insurance company to pay your reasonable attorney’s fees and litigation costs.

The Critical Role of Legal Representation

Engaging an attorney is not an admission of aggression; it is a strategic move to level the playing field. Insurance companies have teams of experienced lawyers and adjusters. A knowledgeable Alabama insurance attorney understands the tactics insurers use and the nuances of state law. They can handle all communications, ensure proper procedures are followed, gather expert witnesses to support your claim (like engineers or contractors), and build the strong evidence file needed to prove the insurer lacked an arguable reason for its actions. An attorney’s involvement often signals to the insurer that you are serious, frequently leading to a faster and more favorable settlement without ever going to court.

Preventing Disputes: Choosing the Right Insurer

Proactive selection can mitigate future risk. Before purchasing a policy, research the company’s reputation. The Alabama Department of Insurance website provides financial strength ratings and complaint ratios for companies operating in the state. Consumer advocacy websites and online reviews can also offer insights into a company’s claims-handling practices. Choose an insurer with a strong financial rating and a reputation for fair and prompt claim resolution. Read your policy carefully at the outset to ensure it provides the coverage you need and expect, and ask your agent to clarify any confusing terms or exclusions.