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

> District Court, M.D. Alabama · July 22, 2024

URL: https://www.frixlaw.com/law-library/cases/10630964

## Case

- **Court:** District Court, M.D. Alabama
- **Decided:** July 22, 2024
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10630964

## How later opinions describe it (automated extraction)

- noting that the tort had “heretofore been applied only in those situations where a typical insurer/insured relationship existed”

## Opinion text

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

2
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

13
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

15
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

17
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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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10630964. Public record. Not legal advice.