Plaintiff often use ‘bad faith’ as a cudgel to intimidate insurers in what is usually nothing more than a breach of contract cause of action. A recent decision suggests that, at least in Alabama, it is a tactic that may be unavailable in the context of reinsurance.
The United States District Court for the Middle District of Alabama recently dismissed a cedent’s bad faith claims against its reinsurer, holding that Alabama law does not recognize the tort of bad faith in the context of reinsurance. In Alabama Mutual Insurance Company v. Munich Reinsurance Am., Inc., No. 2:20-cv-300-MHT, 2021 WL 981495 (Mar. 16, 2021), Alabama Mutual Insurance Company (AMIC) sued Munich, asserting claims for breach of contract and bad faith, alleging that, beginning in 2015, Munich had declined to pay the full amount due on certain insurance claims.
In the ensuing action, the court acknowledged that “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,” but went on to conclude that the state’s highest court “would not extend the tort of bad faith to the reinsurance context.” Id. at *1-2. In reaching this decision, the AMIC court noted that the tort of bad faith has been “particularly limited in Alabama” and that courts have consistently refused to extend the tort beyond the context of insurance. Id. at *2. The court observed that Alabama courts have declined to apply the tort between primary and excess insurers because the underlying public policy conditions — including unequal bargaining position and an insured’s heightened vulnerability – are not present in the context of reinsurance. Id. at *3. The court also observed that Alabama statutory law does not reflect a concern over the relative bargaining power between cedents and their reinsurers.
Following the court’s decision AMIC moved the court to certify the question to the Alabama Supreme Court. The magistrate judge, however, denied the motion, noting that the court had “court had plenty of sources of state law on which to rely” and that the court is “confident that the state supreme court would not choose to extend the tort to the reinsurance context.” Alabama Mun. Ins. Corp. v. Munich Reinsurance Am., Inc., No. 2:20CV300-MHT, 2021 WL 1383231, at *1 (M.D. Ala. Apr. 12, 2021).
While insurers must be ever mindful of bad faith law that governs their interactions with their policyholders, this case reflects that in reinsurance transactions, there is no David or Goliath, but rather David and David, both presumed to be commercially adept and with equal bargaining power; so, in theory, if not practice, a ‘bad faith’ cause of action is not available between David vs. David.