Alabama Municipal Insurance Corporation v. Munich Reinsurance America, Inc.

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE

MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

ALABAMA MUNICIPAL )

INSURANCE CORPORATION, a )

non-profit corporation, )

)

Plaintiff, )

) CIVIL ACTION NO.

v. ) 2:20cv300-MHT

) (WO)

MUNICH REINSURANCE )

AMERICA, INC., a foreign )

corporation, )

)

Defendant. )

OPINION

Plaintiff Alabama Municipal Insurance Corporation

(AMIC) brings this lawsuit against defendant Munich

Reinsurance America, Inc., alleging that Munich failed

to honor fully several claims for coverage. AMIC

asserts five counts of breach of contract and three

counts of bad-faith refusal to pay, both under Alabama

law. Diversity jurisdiction is proper pursuant to 28

U.S.C. § 1332.

Munich has moved to dismiss counts four, six, and

eight--the counts alleging bad faith--for failure to

state a claim upon which relief can be granted under

Federal Rule of Civil Procedure 12(b)(6). For the

reasons that follow, the dismissal motion will be

granted; in addition, AMIC’s pending motion to amend

its complaint, which seeks to add an additional count

of bad faith, will be denied.

I. BACKGROUND

At issue in this case are a series of claims AMIC,

a non-profit insurance company owned collectively by

various Alabama municipalities, filed with Munich, its

reinsurer. The parties had entered into several

contracts for reinsurance, under which AMIC paid

premiums to Munich, and Munich agreed to be liable for

a portion of any claims received by AMIC that exceeded

a certain base amount.

AMIC argues that, beginning in 2015, Munich

declined to pay the full amount due on five separate

insurance claims, underpaying by approximately $ 1.9

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million in total. AMIC sued, asserting breach of

contract on all five insurance claims and bad-faith

refusal to pay on three of the claims. Munich moved to

dismiss all three counts of bad-faith refusal to pay,

arguing that they failed to state a claim under Federal

Rule of Civil Procedure 12(b)(6) because Alabama does

not recognize the tort of bad faith in the reinsurance

context.

AMIC has moved for leave to file an amended

complaint to add another count of bad faith. Since

this motion involves the same underlying question of

whether the tort is recognized under Alabama law for

reinsurance contracts, the court will decide it

together with the motion to dismiss.

II. LEGAL STANDARD

In considering a defendant’s motion to dismiss, the

court accepts the plaintiff's allegations as true, see

Hishon v. King & Spalding, 467 U.S. 69, 73 (1984), and

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construes the complaint in the plaintiff's favor, see

Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir. 1993).

“The issue is not whether a plaintiff will ultimately

prevail but whether the claimant is entitled to offer

evidence to support the claims.” Scheuer v. Rhodes,

416 U.S. 232, 236 (1974).

Ordinarily, leave to amend a complaint should be

freely given. See Fed. R. Civ. P. 15(a)(2). However,

if amending the complaint would be futile, the court

need not allow it. See Foman v. Davis, 371 U.S. 178,

182 (1962). “[W]hen the complaint as amended is still

subject to dismissal,” denial of leave to amend is

justified by futility. Burger King Corp. v. Weaver,

169 F.3d 1310, 1320 (11th Cir. 1999).

III. DISCUSSION

Under Erie Railroad Co. v. Tompkins, 304 U.S. 64

(1938), this court is bound to apply state law, and the

parties agree that this dispute is governed by Alabama

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law. However, the Alabama Supreme Court has not

addressed the question whether reinsurance falls within

the limited category of insurance agreements to which

the tort of bad faith applies. See Regions Bank v. Old

Republic Union Ins. Co., No. 2:14cv517, 2016 WL

11622129, at *7 n.15 (N.D. Ala. Jan. 20, 2016)

(Hopkins, J.) (noting that there is an “absence of any

on-point authority from the Supreme Court of Alabama

which either embraces or rejects a bad faith

reinsurance claim”). Lacking any such precedent, the

court must apply the rule it believes the Alabama

Supreme Court would adopt. See Fritz v. Standard Sec.

Life Ins. Co., 676 F.2d 1356, 1358 (11th Cir. 1982).

In other words, this court must make an “educated

guess” as to what Alabama courts--and particularly the

Alabama Supreme Court--would decide if faced with this

question. See Nobs Chem., U.S.A., Inc. v. Koppers Co.,

616 F.2d 212, 214 (5th Cir. 1980) (“Where no state

court has decided the issue a federal court must ‘make

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an educated guess as to how that state's supreme court

would rule.’”).1

Given the Alabama Supreme Court’s repeated efforts

to limit the application of the tort, as well as its

emphasis on the primary purpose of the tort as a means

to protect consumers, this court concludes that the

Alabama Supreme Court would not extend the tort of bad

faith to the reinsurance context.

The tort of bad faith for breach of contract comes

in several forms, but the one relevant to this case is

first-party bad faith--that is, a claim by the holder

of an insurance policy that her insurance company has

breached its duty of good faith and fair dealing. The

tort was first recognized in this context by the

California Supreme Court in Gruenberg v. Aetna

Insurance Co., 510 P.2d 1032 (Cal. 1973). It was

adopted by the Alabama Supreme Court several years

1. In Bonner v. Prichard, 661 F.2d 1206, 1209 (11th

Cir. 1981) (en banc), the Eleventh Circuit Court of

Appeals adopted as binding precedent all of the

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later in Chavers v. National Security & Casualty Co.,

405 So. 2d 1 (Ala. 1981). The tort, sometimes called

bad-faith failure to pay, applies when an insurance

company denies a policyholder’s claim despite either

knowing that it had no reasonable basis to do so or

failing to investigate sufficiently. It offers the

policyholder the opportunity to sue the insurance

company in tort and thus to claim relief that would not

be available in an action founded on contract, such as

damages from mental anguish, additional economic

losses, and punitive damages.

Although every contract contains an implied duty of

good faith, the tort of bad faith has generally been

limited to the insurance context because of the special

relationship that courts have identified between

insurer and insured. See Stephen D. Heninger, Bad

Faith in Alabama: An Infant Tort in Intensive Care, 34

Ala. L. Rev. 563, 564 (1983). An important aspect of

decisions of the former Fifth Circuit handed down prior

to the close of business on September 30, 1981.

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this relationship is that it is “inherently

unbalanced”: Since the average insurance contract is

one of adhesion, with no room for the insured to

negotiate or set her own terms, “the insurer [is] in a

superior bargaining position.” Egan v. Mutual of Omaha

Ins. Co., 620 P.2d 141, 146 (Cal. 1979). The tort of

bad faith was developed in an effort to “restore

balance in the contractual relationship” by giving the

insured another avenue through which to protect her

rights. Id.

The typical relationship between insurer and

insured is also distinguished by the fact that, unlike

many other contracting parties, the insured generally

does not contract to obtain a commercial advantage.

See Victoria A. Myers, Note, The New Tort of Bad Faith

Breach of Contract: Christian v. American Home

Assurance Corp., 13 Tulsa L.J. 605, 615 (1978).

Instead, she is generally motivated by the need for

security or peace of mind in the event of “loss,

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physical injury, sickness or death.” Id. at 614. The

tort of bad faith was intended to compensate for the

particular vulnerability of the insured, who must rely

on the insurer when she is at her “weakest and most

perilous time of need.” Brown-Marx Assocs., Ltd. v.

Emigrant Sav. Bank, 527 F. Supp. 277, 282 (N.D. Ala.

1981) (Propst, J.), aff’d, 703 F.2d 1361 (11th Cir.

1983).

Application of the tort has been particularly

limited in Alabama. Indeed, the Alabama Supreme Court

has been described as having “retreated from the broad

language originally used” to define bad faith because

it has come to apply the tort so narrowly. Goudy

Constr. Inc. v. Raks Fire Sprinkler LLC, No.

2:19cv1303, 2019 WL 6841067, at *4 (N.D. Ala. Dec. 16,

2016) (Proctor, J.). In case after case, the court has

firmly refused to extend the tort beyond the insurance

context. See, e.g., United Am. Ins. Co. v. Brumley,

542 So. 2d 1231, 1239 (Ala. 1989) (policy

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considerations, including unequal bargaining position

and the insured’s heightened vulnerability, “uniquely

fit the insurance industry, so the classification of

insurance companies as the sole potential defendants in

bad faith actions is reasonable”); Gaylord v. Lawler

Mobile Homes, Inc., 477 So. 2d 382, 383-84 (Ala. 1985)

(“The tort of bad faith has been recognized in this

state only within the insurance policy context.”);

Kennedy Elec. Co. v. Moore-Handley, Inc., 437 So. 2d

76, 81 (Ala. 1983) (“We are not prepared to extend the

tort of bad faith beyond the area of insurance policy

cases at this time.”).

Even within the realm of contracts that are

classified as ‘insurance,’ the tort is not uniformly

available in Alabama. Alabama broadly defines

insurance as, “A contract whereby one undertakes to

indemnify another or pay or provide a specified amount

or benefit upon determinable contingencies.” Ala. Code

§ 27-1-2(1). And the Alabama Supreme Court has

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characterized insurance as “a contract by which one

party, for a compensation called the premium, assumes

particular risks of the other party and promises to pay

to him or his nominee a certain or ascertainable sum of

money on a specified contingency.” Schoepflin v.

Tender Loving Care Corp., 631 So. 2d 909, 911 (Ala.

1993). Any number of contracts, including reinsurance

contracts, could fall within the scope of these

definitions. However, the Alabama Supreme Court has

made clear that a contract may be considered insurance

for some purposes but not others. See Ala. Ins. Guar.

Ass’n v. Ass’n of Gen. Contractors Self-Insurer’s Fund,

80 So. 3d 188, 203 (Ala. 2010); see also Graydon S.

Staring & Dean Hansell, Law of Reinsurance § 1:2 (2020

ed.) (“Whether ‘insurance’ includes reinsurance depends

... on whether the particular statute or doctrine is

appropriate to reinsurance.”). As a result, the fact

that a contract could fall within Alabama’s definition

of insurance is inconclusive in determining whether the

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tort of bad faith applies--and in practice, Alabama

courts have applied the tort to only a limited subset

of agreements, specifically those that most resemble

typical insurance contracts.

For example, the Alabama Supreme Court has declined

to apply the tort of bad faith to suits between primary

and excess insurers, finding that, “The reasons which

undergird Alabama’s tort of bad faith ... are simply

not present in the primary-insurer/excess-insurer

scenario.” Fed. Ins. Co. v. Travelers Cas. & Sur. Co.,

843 So. 2d 140, 143 (Ala. 2002).2 The court noted that

a primary insurer is not forced to rely “on the

abilities and the good faith” of an excess insurer in

2. Federal Insurance involved a third-party

bad-faith claim, based on failure to settle a case

rather than failure to pay a claim. However, the

policy rationale underlying the tort of bad faith is

the same in the third-party context as it is in the

first-party context, and the Alabama Supreme Court has

been equally reluctant to extend the application of

either version of the tort. See Fed. Ins. Co, 843 So.

2d at 143 (citing Chavers, a first-person tort of bad

faith case, in discussing the policy rationale

underlying the tort).

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the same way a typical insured is and that a primary

and excess insurer stand on more equal footing, without

an obvious power disparity. Id. Lacking evidence that

the policy considerations underlying the tort of bad

faith were present in the context of excess insurance,

the court refused to extend the tort. Id. at 144.

Similarly, a United States District Court held that

the Alabama Supreme Court would not choose to extend

the tort to suretyships, despite the fact that they are

regulated in the Alabama Insurance Code. In Goudy

Construction, the court concluded that the inclusion of

sureties in the code was “not dispositive” and found

they are not among the type of agreements for which the

Alabama Supreme Court intended the tort of bad faith to

be available. 2019 WL 6841067, at *5.

As it has determined the situations in which the

tort of bad faith applies, the Alabama Supreme Court

has emphasized the underlying policy rationale and the

fact that it is based on a typical insurance

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relationship. See Chavers, 405 So. 2d at 6 (explaining

that the court’s “recognition of a redressable tort for

intentional breach of good faith” was mandated by

“inherent policy considerations”); see also Peninsular

Life Ins. Co. v. Blackmon, 476 So. 2d. 87, 89 (Ala.

1985) (noting that the tort had “heretofore been

applied only in those situations where a typical

insurer/insured relationship existed”). The tort was

designed to protect the insured when she is at her most

vulnerable, not to be used by insurance carriers for

their own economic advantage, and courts have strictly

limited its application to the sorts of contracts that

vindicate this animating principle.

While the Alabama code sections regulating

reinsurance, Alabama Code §§ 27-5a-1 et seq. and

§§ 27-5b-1 et seq., are codified within the title on

insurance, reinsurance does not implicate the concerns

about differences in bargaining power or vulnerability

of the insured that underly the tort of bad faith. See

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Cal. Joint Powers Ins. Auth. v. Munich Reinsurance Am.,

Inc., No. CV 08-956, 2008 WL 1885754, at *3-4 (C.D.

Cal. Apr. 21, 2008) (Fischer, J.); Stonewall Ins. Co.

v. Argonaut Ins. Co., 75 F. Supp. 2d 893, 908 (N.D.

Ill. 1999) (Norgle, J.). Unlike the vast majority of

insureds, who must accept insurance on a

“take-it-or-leave-it basis,” insurance companies

seeking reinsurance coverage generally engage in

negotiations, and they do so on relatively even

footing. Cal. Joint Powers, 2008 WL 1885754, at *3.

Both parties to a reinsurance contract are

sophisticated entities with bargaining power and access

to legal counsel. See Staring & Hansell, Law of

Reinsurance § 18:2. They each come to the table with a

deep knowledge of insurance and an understanding of

various contractual terms and conditions. See Am.

Bankers Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198

F.3d 1332, 1335 (11th Cir. 1999). Indeed, an insurance

company is perfectly capable of “incorporating risk of

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non-payment into its reinsurance agreement,” an option

that is unavailable to the insured in a typical

insurance contract. Cal. Joint Powers, 2008 WL

1885754, at *4.

Insurance companies are also motivated to enter

reinsurance contracts by fundamentally different

concerns than most insureds. “[T]he avowed purpose of

the insurance contract [is] to protect the insured at

his weakest and most perilous time of need.” Chavers,

405 So. 2d at 6. However, insurance companies are not

purely seeking protection from peril when they enter

reinsurance contracts--they are also concerned with

obtaining a commercial advantage. See Tanner v.

Church’s Fried Chicken, Inc., 582 So. 2d 449, 452 (Ala.

1991) (finding that where both parties were commercial

enterprises, “represented by counsel during

negotiations and upon execution of the [] agreement,”

neither could be described as “at its weakest or most

perilous time of need”). Having reinsurance allows a

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company to “contract[] for its own protection against

liability in whole or in part for losses which it may

suffer under risks which it continues to carry.” U.S.

Fire Ins. Co. v. Smith, 164 So. 70, 75 (Ala. 1935).

This offers the company an opportunity to “write more

policies than [its] reserves would otherwise sustain,”

which can be a profitable advantage. Cal. Joint

Powers, 2008 WL 1885754, at *3. In refusing to extend

the tort of bad faith to commercial contracts, the

Alabama Supreme Court emphasized that the policy

considerations underpinning its recognition of the tort

are “not present in the context of contracts between []

private parties” who are “both commercial enterprises.”

Tanner, 582 So. 2d at 452. That reasoning is just as

applicable here, and it strongly suggests that the

Alabama Supreme Court would be unwilling to recognize

the tort in the reinsurance context.

The fact that AMIC in particular is a non-profit

entity composed solely of Alabama municipalities does

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not change the fact that the policy considerations

generally do not support extending the tort into this

context. As AMIC points out, recognizing the tort in

the traditional insurance context may sometimes benefit

sophisticated actors, while choosing not to extend it

to the reinsurance context may leave some vulnerable

consumers unprotected. However, the Alabama Supreme

Court’s approach to extending the tort has considered

each potential new context as a whole rather than

focusing on the individual characteristics of the

parties in a particular case. Based on that approach,

the court cannot conclude that AMIC’s unique

characteristics justify finding that the tort of bad

faith should apply broadly to reinsurance contracts.

“Because most of the policy considerations that

support tort liability in the insurance context do not

apply in the reinsurance context,” Cal. Joint Powers,

2008 WL 1885754, at *5, this court cannot find that the

Alabama Supreme Court would choose to expand the tort

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to those reinsurance contracts. Insurance companies

trying to protect their ability to pay out huge claims

are simply not the sort of plaintiff the Alabama

Supreme Court sought to protect in establishing the

tort of bad faith. This legal battle between two

insurance companies does not support the application of

the tort of bad faith.

* * *

An appropriate order will be entered.

DONE, this the 16th day of March, 2021.

/s/ Myron H. Thompson

UNITED STATES DISTRICT JUDGE

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