Alabama Federal Court Holds That Tort of Bad Faith Does Not Extend to Reinsurance Contracts

In Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., the U.S. District Court for the Middle District of Alabama addressed whether, under Alabama law, “reinsurance falls within the limited category of insurance agreements to which the tort of bad faith applies.” The case involved claims brought by plaintiff Alabama Municipal Insurance Corp. (AMIC), a nonprofit joint insurance company owned by several municipalities, against its reinsurer Munich Reinsurance America Inc. AMIC obtained contracts for reinsurance from Munich under which Munich covered and would be responsible for paying a portion of claims received by AMIC that exceeded a base amount noted in the reinsurance contracts. AMIC alleged that Munich wrongfully declined reinsurance coverage for the full amount due under five separate insurance claims submitted to AMIC, and Munich underpaid the claims by approximately $1.9 million.

AMIC filed a lawsuit against Munich alleging breach of the reinsurance contracts for the five claims and for bad faith for refusing to pay on three of the claims. Munich filed a motion to dismiss the three counts of bad faith under Federal Rule of Civil Procedure 12(b)(6), arguing that “Alabama does not recognize the tort of bad faith in the reinsurance context.” The parties agreed the dispute was governed by Alabama state law. In addressing the motion to dismiss, the court observed that the Alabama Supreme Court had not addressed whether a claim for bad faith may be brought in connection with a reinsurance contract. The court then noted that “[w]here no state court has decided the issue a federal court must make an educated guess as to how that state’s supreme court would rule.” Applying this principle after a thorough review of decisions addressing the tort of bad faith, the court concluded that “[g]iven the Alabama Supreme Court’s repeated efforts to limit the application of the tort [of bad faith], 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 court then granted Munich’s motion to dismiss the bad faith claims and denied AMIC’s motion to amend its complaint to add additional claims of bad faith.

Alabama Municipal Insurance Corp v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (M.D. Ala. July 22, 2024).