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The Alabama Supreme Court on May 18 reversed and remanded a compensatory and punitive damage award against a commercial general liability insurer in which the trial court found the insurer breached its “enhanced obligation of good faith” ( The Aetna Casualty & Surety Co., et al. v. Mitchell Brothers Inc., No. 1980950, Ala. Sup.). Mitchell Brothers Inc. (MBI) managed several shopping centers and apartment buildings in Mobile, Ala. In April 1995, Janelle Lowman and 16 other blacks notified MBI of their intention to sue MBI for racial discrimination. The draft complaint alleged MBI denied housing to minorities. The Lowman action was officially filed in August 1995. Abraham Mitchell of MBI hired two law firms to defend the case. The law firms were involved in settlement negotiations when MBI’s CGL insurer, The Aetna Casualty & Surety Co., was notified of the action in December 1995. Aetna agreed to defend the action against MBI under a reservation of rights. MBI accepted the defense but its counsel advised the attorney hired by Allstate not to enter an appearance in the case so the opposing parties would not learn insurance coverage may be available. The Lowman action was settled in March 1996 for $1.75 million; Mitchell personally paid the settlement. In December 1995, Jamie Craft sued MBI alleging her job was terminated because she refused to discriminate against minorities. Aetna extended its reservation of rights to include the Craft suit. The case was settled in December 1996 for $900,000 with Aetna contributing $200,000 and another CGL insurer contributing $200,000. BENCH TRIAL In May 1996, Aetna filed a declaratory judgment action in Alabama federal court against MBI to determine what coverage, if any, was warranted in the Lowman and Craft cases. Aetna argued MBI’ settlement of the Lowman action was a breach of the consent-to-settle clause. A month later, MBI, Mitchell and James Spafford filed a declaratory judgment action against Aetna in Alabama state court, seeking a ruling that Aetna has a duty to defend and indemnify it in the Lowman and Craft actions. MBI also alleged Aetna, acting through counsel, “disclosed and unnecessarily publicized confidential communications between MBI and counsel appointed by Aetna to defend MBI.” MBI argued that because of Aetna’s reservation of rights, it had a duty to act under an “enhanced obligation of good faith” which it violated by this wrongful disclosure. A bench trial was held in the state court action. The trial judge found Aetna breached its enhanced duty of good faith by obtaining coverage opinions from Harry Cole, who was MBI’s appointed counsel at the time, and after having actual knowledge of Cole’s conflict of interest. The trial court also found Aetna divulged confidential information regarding the settlement negotiations with Lowman to persons adverse to MBI, such as Craft and her attorneys, through “extraneous inclusion of such negotiations” in its filings in the declaratory judgment action. The trial court awarded MBI $1.17 million in damages for the Lowman case and $500,000 for the Craft case. The court also awarded MBI $2 million in punitive damages. Aetna appealed. CONTROL OF LITIGATION The Supreme Court said the court in L&S Roofing Supply Co. v. St. Paul Fire & Marine Ins. Co. (521 So. 2d 1298 [Ala. 1987]) held that an insurer that undertakes a defense under a reservation of rights, has an “enhanced obligation of good faith toward its insured.” The L&S court held an insurer must thoroughly investigate a claim; retain competent defense counsel, understanding that the insured is the only client; and fully inform the insured of the developments in the defense and progress of the lawsuit. The appeals court said the requirements set out in L&S “assume that the insurer is controlling the investigation, the defense of the lawsuit and settlement negotiations.” In this case, however, the Supreme Court said Aetna and its hired counsel were never in control of the Lowman litigation. “MBI and Mitchell accepted the defense of the Lowman suit under a reservation of rights, but never relinquished control of the lawsuit, including settlement negotiations, to Aetna. Under such circumstances, we hold that Aetna did not have an ‘enhanced obligation of good faith’ to its insureds,” the Supreme Court held. MBI refused to allow Aetna to “assume a position of authority” and its counsel even instructed the Aetna hired defense attorney to not enter an appearance in the action. “MBI controlled all aspects of the Lowman suit — investigation, litigation and negotiation. Aetna and the competent defense counsel which it retained for MBI were not allowed to participate in any way,” the Supreme Court held. The Supreme Court reversed the awards against Aetna related to the Lowman action. �CRAFT’ ACTION The Supreme Court also reversed the award against Aetna related to the Craft litigation, but not because the insurer did not have an enhanced obligation of good faith but because the evidence does not support the trial judge’s finding that Aetna breached its duty. The Supreme Court said the record indicates Aetna had control of the litigation sufficient to cause an enhanced duty to exist. The Supreme Court ruled Aetna’s consultation with Cole on coverage issues was not a breach of its enhanced obligation, finding Aetna ultimately ignored the advice of Cole and extended the defense of the reservation of rights. “We conclude Aetna’s dealings with Cole, insofar as they dealt with the defense of the Craft suit, in no way demonstrated ‘a greater concern for the insurer’s monetary interest than for the insured’s financial risk.’ Instead, Aetna resolved its doubts in favor of the duty to defend, and instructed competent defense counsel to resume his efforts on behalf of its insureds,” the Supreme Court held. The Supreme Court also rejected the trial judge’s finding that Aetna breached its enhanced obligation by divulging information on the settlement negotiations in the Lowman action. The Supreme Court said Aetna acted within its rights in filing the declaratory judgment action and that consent to settle issues in regard to the Lowman case were among the issues addressed in the petition. “Therefore,” the Supreme Court held, “as a matter of law, settlement negotiations undertaken and settlement commitments made under Mitchell’s authority and control were relevant to that proceeding. Mitchell and MBI cite no authority to support the trial court’s conclusion that such information was ‘extraneous.’” Two justices dissented in part from the majority, arguing the compensatory damage issue should be remanded to allow the trial court to specify the nature of those damages. � Copyright 2001 Mealey Publications, Inc.

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