Subject to the rules and statutes governing subject-matter jurisdiction between the court systems, insurance disputes may be litigated in state or federal court in Alabama. The correct venue will depend on the particular facts and circumstances at issue. Alabama courts may also enforce insurance policy arbitration provisions.
Causes of action
When do insurance-related causes of action accrue?
Insurance litigation in Alabama typically involves claims for declaratory judgment and breach of contract. Alabama breach of contract actions are governed by the six-year statute of limitations applicable to written contracts, and courts typically find that the statute accrues on the date of the insurer’s denial of coverage, although some Alabama law arguably suggests that the date of accrual could start to run at the time of the loss in a property context. Of course, that issue may turn on particular and claim-specific facts and circumstances that require careful analysis before any period of limitations expires. Alabama also recognizes a tort of bad faith, and the statute of limitations for that tort claim is two years. The bad-faith cause of action accrues when the policyholder knew of facts that would put it on notice of the possible existence of bad faith. Again, this is often the date of the coverage denial.
Procedure and strategy
What preliminary procedural and strategic considerations should be evaluated in insurance litigation?
As to procedure and substantive law on the merits, choice of law should be a preliminary consideration in any insurance dispute. Under Alabama law, courts will typically enforce a choice-of-law agreement between the parties. If there is no such agreement, Alabama courts will apply the lex loci approach, using the law of the state where the policy was issued. Where there is a choice-of-law question, the answer may be dispositive. In that regard, early analysis on this point may be critical, particularly if a race to the courthouse in one state or another will control what choice-of-law test is applied.
Jurisdiction and venue also require careful consideration and evaluation. Again, courts in Alabama will typically enforce any agreement between the parties on these points. If there is no agreement, courts will defer to state and federal statutes and common law to determine the appropriate jurisdiction and venue based on the facts. Of course, a valid arbitration clause in the subject insurance policy may also be enforced, and Alabama continues to favor arbitration in insurance disputes if the parties have an agreement to that effect.
A careful analysis of the subject policy language is also required. An insurance policy is a contract, and Alabama courts will enforce and apply an insurance contract using the standard rules of contract construction and interpretation. For example, Alabama seeks to employ the plain meaning of the contract between the parties where possible as the best evidence of their intent.
Additionally, there are other procedural points to be considered at the outset of any insurance litigation. In Alabama’s federal court system, scheduling will be controlled by a case management order entered at the outset and after a conference between the parties and the court. Scheduling in state court may be less formal, but insurance practitioners often prefer to obtain a formal scheduling order early in the dispute where possible and subject to the court’s discretion.
Early motion practice may be helpful in determining the course of a case, particularly on questions of law. In that regard, issues of insurance contract interpretation are typically decided by the court unless there are fact issues that will impact a question of law. Policyholders and insurers will want to identify and address potential claims and defenses as early as possible in the dispute. In liability coverage disputes, Alabama courts tend to follow the rule that indemnity questions are not ripe for adjudication until the underlying case has been resolved.
There are numerous additional procedural and strategic points to be considered based on the nature of a particular dispute, and timing can be critical. In sum, a comprehensive analysis early in the process is important.
What remedies or damages may apply?
Most insurance disputes involve a threshold claim for declaratory relief where one or both parties ask the court to determine a coverage issue as a matter of law. If there is no coverage, then the case should quickly come to an end in favor of the insurer. On the other hand, if there is complete or partial coverage, other claims will need to be decided. If the insurer has breached its contractual obligations by denying some or all of the coverage available under the policy, the policyholder may recover compensatory damages under the policy. Extracontractual damages may also be available, including bad-faith damages and punitive damages. Alabama recognizes an insurer’s duty of good faith under the Unfair Claims Practices Act and common law.
Under what circumstances can extracontractual or punitive damages be awarded?
Extracontractual damages are available under Alabama law if an insurer has breached its contractual or legal obligations unlawfully, which means the insurer had no legitimate or arguable basis for its coverage position. Alabama distinguishes between ‘normal’ and ‘abnormal’ bad-faith cases. A normal bad faith case is where the insured shows the absence of any legitimate or arguable reason for the claim denial. The abnormal bad-faith case includes proof of intentional or reckless conduct or improper reliance on an ambiguous policy provision to deny a claim. Failure to properly investigate may also lead to bad-faith damages under Alabama law.
Interpretation of insurance contracts
Rules of interpretation
What rules govern interpretation of insurance policies?
Alabama recognizes that insurance policies are contracts. As such, courts apply the standard rules of contract interpretation, seeking to discern and apply the intent of the parties. When possible, the plain meaning of a word will be used. The contract should be interpreted as a whole, and meaning should be given to every term where possible. Exclusions should be narrowly construed, and the insurer bears the burden of proof as to the applicability of any exclusion. Ambiguities are typically construed against the insurer as the drafter of the contract.
Ambiguous policy provisions
When is an insurance policy provision ambiguous and how are such ambiguities resolved?
An insurance policy provision is ambiguous if it is subject to two or more constructions, both of which are reasonable. Alabama courts will not strain to find an ambiguity, and if the parties disagree over a provision, this does not necessarily mean that an ambiguity exists. Alabama typically disfavors the use of extrinsic evidence to resolve an ambiguity, but that may be allowed under certain circumstances. Courts determine ambiguity as a matter of law. If an ambiguity remains after all other attempts to construe the policy using a single meaning, Alabama law will construe that ambiguity against the drafter.
Notice to insurance companies
What is the procedure for providing notice?
Notice may be provided in many forms, depending on the type of policy and the requirements of any specific language in the policy. In the property context, information regarding the type and cause of loss should be provided where possible. In the liability context, details regarding the claim or potential claim should be provided where possible. If there is an underlying complaint, that should be sent to the insurer.
Notice should be provided as soon as reasonably practicable ,and where specific requirements exist in the policy, the policyholder should do its best to comply. An acknowledgment from the insurer should be expected. Notice is often provided by the insured’s agent or broker, but that is not necessarily required.
Notice should also be provided for a party that may seek to recover as an additional insured. The named insured’s notice on behalf of the additional insured should be sufficient, but the additional insured may not want to rely on another party to satisfy the notice condition.
What are a policyholder’s notice obligations for a claims-made policy?
Claims-made policies typically only provide coverage for a claim that is made during the policy period. Some policies require that the claim be made and reported during the policy period. As such, timely notice is particularly important.
Courts in Alabama may apply a stricter construction to claims-made notice provisions. The policyholder should attempt to comply with any specific requirements outlined in the policy. Failure to do so may relieve the insurer of its coverage obligations.
Coverage disputes can arise over notice provisions, including what constitutes a claim as defined by the policy. Careful consideration should be given to circumstances that may give rise to a claim, and it may be appropriate or prudent to provide notice of those circumstances even before a claim exists.
When is notice untimely?
In Alabama, courts will only consider the length of delay and the reasons for delay in determining whether any delay is reasonable and excusable. Moreover, it seems that Alabama courts will not consider prejudice to the insurer. In other words, late notice may be fatal to otherwise available coverage.
What are the consequences of late notice?
Failing to provide notice may be a bar to coverage under the policy. Alabama courts do not seem to require a showing of prejudice under most circumstances.
Insurer’s duty to defend
What is the scope of an insurer’s duty to defend?
The duty to defend is broader than the duty to indemnify, and courts will typically determine that duty based on the allegations in the underlying lawsuit. If any allegation arguably triggers coverage under the policy, then the insurer’s duty to defend should be triggered. Even if some claims are not covered, the insurer may be required to defend the entire action unless there is a reasonable way to allocated between covered and uncovered claims. Notably, under the Tanner decision, facts beyond the underlying complaint may be used to determine the duty to defend if the result favors the insured.
Of course, the policy terms can also impact the scope of the duty to defend. Most occurrence policies contemplate a duty to defend beyond the limits. Most claims-made policies include the defense obligation within the limits, so that the duty to defend will terminate upon exhaustion of the policy limits.
The insurer may elect to defend subject to a reservation of rights to later deny coverage. Alabama is unique in that it does not recognize an automatic right to independent counsel when a reservation of rights is issued. Under the seminal L&S Roofing decision, the insurer has an enhanced obligation of good faith toward its insured when defending subject to a reservation of rights. What this means in practice can be complicated to analyze. At a minimum, the insurer must thoroughly investigate, retain competent counsel, keep the insured adequately informed, and show no greater concern for its own risk relative to that of its insured.
Failure to defend
What are the consequences of an insurer’s failure to defend?
An insurer refuses to defend at its peril. By refusing to defend, the insurer waives rights to control the defense and may be bound to pay any settlement made in good faith by the insured. If the insurer denies coverage in bad faith, it may be liable for the full amount on any underlying judgment, regardless of policy limits. Other damages resulting from bad faith may also be available.
Standard commercial general liability policies
What constitutes bodily injury under a standard CGL policy?
Standard CGL policies define ‘bodily injury’ as a physical injury, and the phrase is commonly understood as requiring a physical component. For example, as a general rule, claims of emotional distress with no evidence of physical injury do not qualify as covered bodily injury. However, emotional distress alone may constitute bodily injury in Alabama if the policy definition or other specific policy language supports that conclusion. Likewise, as a general rule, a claim of exposure to a dangerous substance or medical monitoring claim with no evidence of physical injury will not constitute bodily injury absent supporting policy language.
What constitutes property damage under a standard CGL policy?
Standard CGL policies define ‘property damage’ to cover physical damage to tangible property covered under the policy. The resulting loss of use of such property from the physical damage is also covered. Loss of use of tangible property is covered, even when such property is not physically injured or destroyed, if the loss of use is caused by an occurrence.
While most CGL policies do not define ‘physical damage’ or ‘tangible property, courts have held that economic loss alone, such as a diminution in property value or a loss caused by a breach of contract, does not qualify as covered property damage. Courts have come to differing conclusions as to whether loss of electronic data or loss of use of computer systems constitutes physical damage under a standard CGL policy.
What constitutes an occurrence under a standard CGL policy?
Standard CGL policies define an occurrence as an accident, commonly understood by courts as an unexpected event that occurs by chance rather than through an intentional action of the policyholder. Because the occurrence must take place during the policy period, disputes often focus on when the triggering accident and the resulting injury or damage occurred.
In deciding whether there was a covered occurrence, many courts examine whether the injury or damage was expected or intended by the policyholder. A minority of jurisdictions focus on the nature of the policyholder’s conduct and whether the action or omission was expected or intended, rather than whether the results of that conduct (the injury or damage) were expected or intended. Which analysis is applied can also depend on the facts.
How is the number of covered occurrences determined?
The determination of the number of occurrences affects how many times the policy’s limits are available and how many times the policyholder must pay a deductible or self-insured retention before accessing those limits.
The number of occurrences is typically determined by evaluating the causes of the injury or damage at issue in conjunction with the terms of the policy. Some policies provide that events or injuries that are related in some way will be considered one occurrence. Similarly, if there is one proximate cause of multiple injuries, courts typically find one occurrence.
What event or events trigger insurance coverage?
Insurance coverage is triggered when an event covered under the policy occurs. A liability policy that requires an occurrence is triggered when a third party brings a covered claim against the policyholder for injury or damage that occurred during the policy period.
Where the manifestation of injury or damage is delayed, determining the applicable policy period can be difficult and is often disputed. Courts typically utilize one of four theories: The exposure theory focuses on when the claimant or property was initially exposed to the injury-causing agent or event. The injury-in-fact theory focuses on when the injury first occurred even if undetected at that time. The manifestation theory focuses on when the injury manifested itself or became known. The continuous trigger theory, applied in cases of progressive damage, triggers all applicable policies from the time of exposure through manifestation.
In Alabama, the exposure theory has been applied to bodily injuries allegedly caused by asbestos. The injury-in-fact theory has been applied to a property damage claim, based on the loss-in-progress rule.
Coverage across multiple policies
How is insurance coverage allocated across multiple insurance policies?
CGL policies typically promise to pay ‘all sums’ that the policyholder becomes liable to pay because of bodily injury or property damage covered under the policy. In cases of progressive or continuous injury that span over a number of years and multiple policy periods, courts typically use one of two methods.
The ‘all sums’ method of allocation, favored by policyholders, permits recovery of up to the limits of liability under any policy in effect during the periods when bodily injury or property damage occurred. The ‘pro rata’ method of allocation, favored by insurers, limits each insurer’s liability to its pro rata share of the total loss incurred. Jurisdictions across the United States differ as to allocation for years with missing policies or policies issued by insolvent insurers. Certain jurisdictions allocate these years to the policyholder; others do not. Which method applies will likely depend on the specific policy language rather than a blanket rule. For example, courts have held that the inclusion of ‘non-cumulation’ and ‘continuing coverage’ clauses is inconsistent with the pro rata method.
First-party property insurance
Scope of coverage
What is the general scope of first-party property coverage?
First-party property policies cover physical loss or damage to a policyholder’s property that is generally described or specifically itemized in the policy. Commercial property policies also typically cover ‘time element’ losses such as business interruption and extra expenses caused by the physical loss or damage.
As a general rule, first-party property policies are either ‘named peril’ forms that specifically designate which perils are covered or ‘all risk’ forms that provide a broad grant of coverage for all perils not specifically excluded in the policy. In cases where a loss results from both a covered and uncovered cause, courts typically employ an ‘efficient proximate cause’ analysis to determine which was the dominant cause. An ‘anti-concurrent cause’ provision excluding coverage if an excluded peril contributes to a loss may be applicable depending on the facts.
How is property valued under first-party insurance policies?
Valuation provisions in first-party property policies typically value property at either replacement cost or actual cash value (ACV). Absent a policy definition, replacement cost is commonly interpreted as the cost to replace the damaged property with property or materials of like kind, and quality. If there is no definition, most courts interpret ACV as replacement cost minus depreciation. Alabama courts have interpreted ACV to mean what the property is worth in money, with allowance for depreciation.
What insurance is available in your state for natural disasters? How does it generally operate?
Policies commonly provide different amounts of available limits (and sub-limits) for different types of natural disasters. A ubiquitous issue that arises with respect to natural disasters is how the peril is characterized – is it a hurricane, a named storm, a windstorm, or a flood? And what occasioned the damage at issue – wind, wind-driven rain, storm surge, or flood?
Standard property policies typically exclude coverage for certain natural disasters such as earthquakes and flood. While private flood insurance is becoming more available, the National Flood Insurance Program (NFIP) remains the largest source of flood coverage in the United States. NFIP was created in 1968 to address the problem of disaster relief costs and is administered by a department of the Federal Emergency Management Agency (FEMA). For participating communities, NFIP makes federally subsidized flood insurance available in special flood hazard areas.
Directors’ and officers’ insurance
Scope of coverage
What is the scope of D&O coverage?
While policy language varies, directors and officers (D&O) policies typically cover defense costs and indemnity stemming from claims made by third parties during the policy period against directors and officers or against the entity itself for wrongful acts. Side A provides direct coverage to directors and officers when the entity is not legally obligated or otherwise unable to indemnify them. Side B reimburses the entity for defense costs and indemnity the entity provides to its directors and officers. Side C covers the entity for direct liability arising out of securities or other claims. A D&O policy may also provide coverage for security derivative demand investigation costs (Side D). Unlike many other liability policies, a D&O policy may not require the insurer to defend the policyholder. D&O policies typically include a fraud exclusion, but most require a final adjudication by a court or other tribunal finding fraud for the exclusion to apply.
What issues are commonly litigated in the context of D&O policies?
D&O policies typically include a ‘prior acts’ exclusion for conduct pre-dating the inception of the policy and a retroactive date precluding coverage for acts preceding that date. Whether these time-based provisions apply is often disputed based on the particular wording of the restrictions and the facts. Insurers may also argue that the policyholder failed to disclose relevant information in the policy application and seek rescission of the policy.
Allocation of defense costs and indemnity between covered and uncovered claims under the ‘relative exposure’ standard – another typical provision – is also a tricky endeavor that is often disputed. The application of the ‘insured vs insured’ exclusion is commonly litigated when the status of a particular actor as an insured or a non-insured is unclear.
Cyber insurance
What type of risks may be covered in cyber insurance policies?
As the demand for insurance coverage for cyber-related losses continues to grow, more insurance companies are offering cyber insurance policies and endorsements, but the market is far from mature and the available policies far from complete. Insurers have not adopted a unified approach to cyber policies, nor do they offer identical coverages.
Generally, cyber policies provide first-party coverages for the policyholder’s own direct losses and third-party coverages for liability to third parties associated with a cyber event such as a data breach or ransomware attack. First-party coverages include a forensic investigation to identify and remediate vulnerabilities that permitted the breach or attack and to determine if private information was compromised; public relations/crisis management assistance; and costs to notify third parties of a privacy breach. Some policies provide indemnity for computer fraud such as funds transfer fraud and social engineering and for business interruption and extra expenses caused by the covered cyber event.
Third party coverages include defense costs and indemnity for liability associated with a breach of privacy or data security; regulatory defense costs and penalties; multimedia/website liability; and fines and assessments imposed by the payment card industry. Some policies also cover bodily injury and property damage arising from a cyber event.
What cyber insurance issues have been litigated?
Some of the first cases in the United States interpreting cyber policies involved whether a breach-of-contract exclusion applied to notifications to cardholders, reissuance of credit cards, penalties, and fraud reimbursements imposed by merchant agreements used in the payment card industry, in the absence of that specific coverage grant. Courts have also addressed whether insurers can avoid coverage altogether if policyholders fail to institute prudent security measures and whether claimants had alleged only intentional acts excluded under the policy, precluding the insurer’s duty to defend.
Terrorism insurance
Is insurance available in your state for injury or damage caused by acts of terrorism and, if so, how does it generally operate?
The federal TRIA, now the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), acts as a federal financial backstop against large terrorism-related losses, offering a combination public–private compensation program. It is generally reserved for losses greater than $5 million certified by the government as an act of terrorism. Many insurers have offered stand-alone terrorism insurance or endorsements to standard insurance policies to fill the funding gap in the insurance market.
Updates & trends
Key developments of the past year
Are there any emerging trends or hot topics in insurance law in your state?
Coverage for cyber-related losses will be a battleground over specific policy wording, which varies by insurer since there is no standard form, and the extent to which traditional (non-cyber-specific) property, crime, and general liability policies provide coverage for cyber events.
Law stated date
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