Insurance Companies: Important Update | Alabama Supreme Court Case Law Change

Alabama Supreme Court affirms $1.1 million jury verdict in automobile accident case and holds insurer waived coverage defense

The Alabama Supreme Court recently issued an opinion affirming a $1.1 million jury verdict in a motorcycle accident case and held the insurer waived its forfeiture of coverage defense by failing to raise the defense at trial.

In Travelers Indemnity Company of Connecticut v. Worthington, the claimant was a passenger in a vehicle driven by her husband and occupied by her two minor children. The family was involved in a motor vehicle accident where they were struck in the rear. At the time, the employer of Worthington’s husband had a comprehensive insurance policy with Travelers Indemnity Company of Connecticut (“Travelers”) that included underinsured motorist (“UIM”) coverage. Worthington and her family members sued the tortfeasor and Travelers. Travelers filed an answer to the complaint but did not include any policy-based defenses.  As the litigation progressed, Worthington’s attorney notified Travelers’ counsel that an agreement had been reached with the tortfeasor for a proposed settlement in the amount of $56,250 plus some additional costs and fees. Travelers advised Worthington of its intent to maintain its rights under Lambert v. State Farm Mutual Automobile Insurance Co., and advanced the settlement amount to the claimant.  The tortfeasor was not released and the action proceeded with her as a defendant.  Later, the attorney for the tortfeasor contacted counsel for Travelers and informed him that Worthington had entered into a settlement agreement with the tortfeasor’s insurer. The agreement provided that Worthington would accept $95,000 and would dismiss the tortfeasor from the lawsuit with prejudice. That same day, counsel for Worthington filed a letter informing the trial court that Worthington and the tortfeasor had reached a pro tanto settlement and that the case would proceed as a UIM claim against Travelers.  Worthington also filed a motion in limine seeking, among other things, to exclude any evidence of the settlement between Worthington and the tortfeasor. Travelers did not raise any argument that Worthington had forfeited her UIM claims against the tortfeasor without first complying with the procedures set out in Lambert and in the UIM policy.  Throughout the trial, Worthington and Travelers stated that the only issue before the jury was the amount of damages Worthington was entitled to recover as a result of the accident. The jury assessed Worthington’s damages at $1,100,000. The trial court gave Travelers $100,000 credit for the amount it had already advanced. Travelers filed a post-judgment motion in which it argued that Worthington had waived her rights under the policy by settling and releasing the tortfeasor before notifying Travelers. The circuit court denied the motion and Travelers appealed.

On appeal, the Alabama Supreme Court stated although Lambert addressed the general procedures to be followed with regard to settlement in cases such as this, it did not address the issue of when and how an insurance company must raise a defense based on the insured’s failure to comply with the Lambert procedures during litigation between the company and its insured. The Supreme Court acknowledged that this was a unique situation and that because Worthington did not settle with the tortfeasor until the day before trial, Travelers could not have raised the defense of forfeiture of coverage in its answer. It pointed out, however, that even as late as the date of trial, the trial court has authority to allow amendments. Therefore, Travelers could have sought to amend its answer, even on the date of trial, but did not do so. The Supreme Court further explained that it has strictly applied the rule that a party may not wait until after a verdict has been rendered before objecting to a procedural defect, if the objection could have been raised in a timely manner.  Moreover, the Court found Travelers, despite having knowledge of the settlement before trial, stipulated that the policy was in place and that Worthington’s injuries would be covered by that policy. Thus, the Supreme Court found Travelers on appeal could not repudiate that stipulation “based on facts known to it before it entered into that stipulation.”

This decision clearly resulted in rather harsh consequences for the UIM carrier, particularly in that they were only notified of the circumstances just one day prior to trial and the prior case law did not provide clear guidance.  But the decision is a reminder that insurers must be very careful not to proceed in a manner which may be construed as waiving their contractual defenses, and the chosen strategy must be re-assessed at every stage of the litigation to ensure those coverage defenses are preserved for appeal.