Bailey et al v. Federal Insurance Company

Filing 118

MEMORANDUM OPINION. Signed by Judge Abdul K Kallon on 9/30/2016. (YMB)

FILED
2016 Sep-30 PM 04:43
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
C. STANLEY BAILEY, et al.,
Plaintiffs,
v.
FEDERAL INSURANCE
COMPANY,
Defendant.

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Civil Action Number
2:15-cv-210-AKK

MEMORANDUM OPINION
Plaintiffs C. Stanley Bailey, John Figlewski, Rick D. Gardner, George J.
Hall, Rick Halloran, James M. Kent, Jr., Peter L. Lowe, Shannon Maddox, D.
Dewey Mitchell, Robert R. Parrish, Jr., Kenneth Pomeroy, C. Marvin Scott
(collectively “the Bailey Plaintiffs”), and Intervenor Plaintiffs James A. White and
William Caughran (collectively “the Intervenor Plaintiffs”) (collectively “the
Plaintiffs”), pursue this action against Federal Insurance Company pursuant to 28
U.S.C. § 2201 seeking a declaration of rights and obligations under a liability
insurance policy. Docs. 1 at 3; 24 at 5–6; 29 at 5–6.1 Specifically, Plaintiffs allege
that Federal breached the policy when it attached an endorsement that it had not
first filed with the State of Alabama and then used that endorsement to limit

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Caughran has joined in the Bailey Plaintiffs’ motion, doc. 91, and White has filed his own motion for
summary judgment, doc. 77, that mirrors the Bailey Plaintiffs’ motion.

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coverage. Id. Plaintiffs have moved for partial summary judgment, docs. 33; 77,
91, and Federal has also moved for summary judgment on all claims, docs. 40; 79.
The motions are fully briefed and ripe for review. Docs. 35; 38; 47; 78; 80; 91; 92;
106; 107; 108. Based on a review of the evidence, the law, and with the benefit of
oral argument as to the issues related to Count I, Plaintiffs’ motion for summary
judgment is due to be denied in part, and Federal’s motion for summary judgment
is due to be granted in part.
I.

SUMMARY JUDGMENT STANDARD OF REVIEW

Under Rule 56(a) of the Federal Rules of Civil Procedure, summary
judgment is proper “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” “Rule 56[]
mandates the entry of summary judgment, after adequate time for discovery and
upon motion, against a party who fails to make a showing sufficient to establish the
existence of an element essential to that party’s case, and on which that party will
bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986) (alteration in original). The moving party bears the initial burden of proving
the absence of a genuine issue of material fact. Id. at 323. The burden then shifts to
the nonmoving party, who is required to “go beyond the pleadings” to establish
that there is a “genuine issue for trial.” Id. at 324 (citation and internal quotation
marks omitted). A dispute about a material fact is genuine “if the evidence is such
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that a reasonable jury could return a verdict for the nonmoving party.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
The court must construe the evidence and all reasonable inferences arising
from it in the light most favorable to the non-moving party. Adickes v. S. H. Kress
& Co., 398 U.S. 144, 157 (1970); see also Anderson, 477 U.S. at 255 (all
justifiable inferences must be drawn in the non-moving party’s favor). Any factual
disputes will be resolved in the non-moving party’s favor when sufficient
competent evidence supports the non-moving party’s version of the disputed facts.
See Pace v. Capobianco, 283 F.3d 1275, 1276, 1278 (11th Cir. 2002) (a court is
not required to resolve disputes in the non-moving party’s favor when that party’s
version of events is supported by insufficient evidence). However, “mere
conclusions and unsupported factual allegations are legally insufficient to defeat a
summary judgment motion.” Ellis v. England, 432 F.3d 1321, 1326 (11th Cir.
2005) (per curiam) (citing Bald Mountain Park, Ltd. v. Oliver, 863 F.2d 1560,
1563 (11th Cir. 1989)). Moreover, “[a] mere ‘scintilla’ of evidence supporting the
opposing party’s position will not suffice; there must be enough of a showing that
the jury could reasonably find for that party.” Walker v. Darby, 911 F.2d 1573,
1577 (11th Cir. 1990) (citing Anderson, 477 U.S. at 252)).

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II. FACTUAL ALLEGATIONS
The Plaintiffs are former officers and directors of Superior Bancorp, a
holding company for Superior Bank. Docs. 34 at 6; 81-2 at 15–17. In their capacity
as officers and directors, Plaintiffs regularly purchased liability insurance
coverage, including Directors and Officers insurance (D&O), for Superior Bancorp
and Superior Bank from Federal. Id. D&O policies are used to protect the directors
and officers of a corporation against claims that they allegedly failed to perform
their duties. Docs. 35-2 at 10; 81-1 at 25.
The dispute in this case centers on a D&O policy Plaintiffs purchased
through their broker, the Mailon Kent Agency, whose owner, Mailon Kent, was
also a director of Superior Bancorp. Doc. 81-3 at 16. From April 2009 until April
2010, the D&O policy had a $10 million coverage limit that contained no
regulatory limitations or exclusions resulting from regulatory claims. Docs. 35-2 at
16; 81-1 at 45. However, when the policy came up for renewal in April 2010,
because of the economic climate Federal informed Plaintiffs that it intended to
change the terms of the policy to offer liability coverage with a regulatory
exclusion endorsement and defense carveback.2 Doc. 82-1 at 40. The defense

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Beginning in 2008, as a result of the financial crisis, many banks nationwide failed and faced increased
regulatory scrutiny. As a result of this heightened regulatory scrutiny, insurance companies began
inserting regulatory exclusion endorsements into their policies which would either limit or remove their
coverage for claims brought by regulators. Following this industry trend, Federal began inserting
regulatory exclusions into its coverage policies with financial institutions. Docs. 35-2 at 12; 35-7 at 2.

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carveback meant that the D&O policy had a new sublimit of $1 million on defense
coverage for a regulatory action against the bank. Doc. 35-2 at 19. Federal
decreased the coverage because of its concerns about potential exposure if Superior
Bank failed and the Federal Deposit Insurance Corporation instituted a civil action
against the directors and officers. Doc. 35-9 at 2–3. Although Plaintiffs had the
option to reject the new terms—i.e., Plaintiffs could have paid an additional
amount to extend the old coverage for acts committed during the coverage period
or obtain coverage with another carrier; Plaintiffs decided to renew with Federal
under the new limitations of a regulatory exclusion endorsement. Docs. 35-8 at 2;
81-1 at 71–72.
As part of its operating practice and procedure, Federal has various standard
endorsements or policies its underwriters may retrieve and insert into a policy.
Doc. 35-2 at 12. In contrast, a manuscript endorsement is one that is created for a
specific policy with the attendant language changes that may be necessary. Doc.
35-2 at 13. Basically, when an underwriter wishes to use language that is not
standard, the underwriter sends the desired language to Federal’s legal counsel for
that department to create an endorsement, i.e., “manuscripted.” Doc. 35-2 at 12–
13. Federal utilized this practice for the new policy it issued to Plaintiffs because
although Federal already had defense carvebacks in place for some financial
institutions, it did not have a standard endorsement available with the exclusion
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that was widely used for banks. Docs. 35-2 at 20, 40; 86-4 at 12. As a result,
Federal manuscripted an endorsement for the policy it issued Plaintiffs in April
2010.
Federal finally transmitted the final binders containing the policy to
Plaintiffs in July 2010. Doc. 81-8 at 124. By then, Federal had created a standard
version of the regulatory exclusion endorsement and placed this standard version in
the policy. Doc. 35-12 at 2. However, apparently because it viewed the
endorsement as “unique” and not subject to the filing requirement imposed by Ala.
Code § 27-14-8, doc. 35-10 at 8, Federal waited until September 6, 2010 to file the
endorsement with the Alabama Department of Insurance, docs. 35-4 at 4; 35-17 at
2–3.
Superior Bank failed a year after Federal issued the new policy and six
months after Federal filed the endorsement. The FDIC takeover and its litigation
against Plaintiffs triggered Plaintiffs to request coverage from Federal for defense
costs. Doc. 39-1 at 28. By a letter dated May 11, 2011, Federal informed Plaintiffs
it intended to cap the coverage for defense costs at $1 million because of the
regulatory exclusion cap. Doc. 35-3 at 2–7. Although Plaintiffs never raised any
objections to the policy or its endorsement, see, e.g., doc. 81-1 at 96; 81-7 at 63–
64, Plaintiffs now seek to void the policy due to alleged deficiencies. Specifically,
Plaintiffs maintain that the failure to file prior to issuing the policy that forms
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Plaintiffs contentions in this case that the defense carveback contained in the
endorsement is null and void as a result and that Federal is obligated to provide
coverage without the $1 million sublimit.
III. ANALYSIS
Plaintiffs seek to void the Endorsement and ultimately get coverage beyond
the $1 million limit. In particular, in Counts I and II, Plaintiffs move for a
Declaratory Judgment pursuant to 28 U.S.C. § 2201, declaring the Regulatory
Exclusion Endorsement null and void due to Federal’s failure to (1) file the
endorsement in compliance with Ala. Code §27-14-8, and (2) disclose the terms of
the endorsement before materially altering the policy. Doc. 1 at 17. And, in Counts
III and IV, Plaintiffs seek reformation of the insurance contract and state a claim
for breach of contract, respectively. 3 As a general matter, where, as here, the
interpretation of a state statute is at issue, a federal court sitting in diversity must
apply state substantive law. Allison v. Vintage Sports Plaques, 136 F.3d 1443,
1445 (11th Cir. 1998) (citing Erie R.R. v. Tompkins, 304 U.S. 64 (1938)). Put
differently, the court must “decide the case the way it appears the state’s highest
court would.” Ernie Haire Ford, Inc., v. Ford Motor Co., 260 F.3d 1285, 1290
(11th Cir. 2001). Relevant here, Alabama law provides that “insurance contracts,
3

Intervenor Plaintiffs allege the same causes of action as the Bailey Plaintiffs, see docs. 24 at 17–22; 30
at 17–23, and have filed substantively similar motions for summary judgment, see docs. 77, 101.
Accordingly for the purposes of this Opinion, when discussing Plaintiffs’ claims, the court will reference
the Bailey Plaintiffs’ Complaint and Motions for Summary Judgment.

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like other contracts, are construed so as to give effect to the intention of the parties,
and, to determine this intent, a court must examine more than an isolated sentence
or term; it must read each phrase in the context of all other provisions.” Celtic Life
Ins. Co. v. McLendon, 814 So. 2d 222, 224 (Ala. 2001). “[I]nsurance companies
are entitled to have their policy contracts enforced as written, rather than risking
their terms either to judicial interpretation or the use of straining language, and the
fact that different parties contend for different constructions does not mean that the
disputed language is ambiguous.” Woodall v. Alfa Mt. Ins. Co., 658 So. 2d 369,
371 (Ala. 1995). Insurance companies also have the right to limit their liability and
to write new policies with narrow coverage. Altiere v. Blue Cross & Blue Shield of
Ala., 551 So. 2d 290, 292 (Ala. 1989); United States Fid. & Guar. Co. v. Bonitz
Insulation Co., 424 So. 2d 569 (Ala. 1982). In that regard, if the language
comports with Alabama law, courts do not have the power to rewrite the language
to provide coverage that was not intended by the parties. Am. Nat’l Prop. & Cas.
Ins. Co. v. Blocker, 165 F. Supp. 2d 1288, 1295 (S.D. Ala. 2001). However,
ambiguities in a policy are “construed liberally in favor of the insured,” Scottsdale
Ins. Co. v. Town of Orange Beach, 618 So. 2d 1323, 1325 (Ala. 1993), and
coverage exceptions are construed narrowly to allow for maximum coverage for
the insured, Alliance Ins. Co. v. Reynolds, 494 So. 2d 609, 612 (Ala. 1986).

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With these general principles in mind, the court turns its attention to the policy
provision at issue and the parties’ respective contentions. The court will begin first
with Plaintiffs’ contentions that they are entitled to a declaratory judgment due to
Federal’s purported failure to disclose a material alteration to the policy (Count II)
or, alternatively, that they are entitled to a reformation of policy (Count III).
Finally, the court will address Plaintiffs’ contentions that the endorsement is null
and void due to the filing deficiency (Count I) and the related breach of contract
claim (Count IV).
A. Declaratory Judgment For Failure to Disclose (Count II)
In Count II, Plaintiffs contend that they are entitled to a declaratory judgment
based on the alleged failure of Federal to disclose a material alteration to their
policy. Doc. 1 at 18–19. Plaintiffs do not allege that they reasonably relied upon
Federal’s representations about the substance of the challenged endorsement or
that Federal fraudulently induced them to sign the Policy. Instead, they claim that
because Federal appended the draft endorsement to the policy binder in April 2010
and failed to file the endorsement with the Alabama Department of Insurance,
Federal cannot rely on the endorsement to limit its coverage. Doc. 1 at 18–19.
After a careful review of the law and the evidence, the court finds that Federal is
due summary judgment on this claim.

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A fraud claim based on suppression requires: (1) a false representation
concerning an existing material fact; (2) made with knowledge of the falsity or
with reckless regard for truth or falsity; (3) reasonable reliance on the
representation by the plaintiff who was, in fact, deceived by it; (4) that the
plaintiff’s reliance was justified under the circumstances; and (5) damages. First
Alabama Bank of Montgomery, N.A. v. First State Ins. Co., Inc., 899 F.2d 1045,
1056 (11th Cir. 1990). However, reliance is not reasonable and “the trial court can
enter a judgment as a matter of law . . . where the undisputed evidence indicates
that the party or parties claiming fraud in a particular transaction were fully
capable of reading and understanding their documents, but nonetheless made a
deliberate decision to ignore written contract terms.” Foremost Ins. Co. v. Parham,
693 So. 2d 409, 421 (Ala. 1997). Under this standard, “[a] defendant does not
suppress the truth, even if he previously made an oral misrepresentation, if he
presents for the plaintiff’s review and signature a document that clearly discloses
the truth.” Roper v. Assoc. Fin. Serv. of Alabama, Inc., 533 So. 2d 206, 209 (Ala.
1988).
Turning to the facts in this case, the evidence establishes that Federal placed
Plaintiffs on notice that their renewed policy would include a Regulatory Exclusion
Endorsement. First, Mailon Kent, one of the Bailey plaintiffs and the owner of the
agency responsible for procuring the liability insurance, played a direct role in the
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procurement process. Doc. 81-4 at 36. Although Kent contends that he never read
the emails alerting him to the change in coverage and that he assigned that task
instead to a subordinate, doc. 81-4 at 69–70 (“I don’t think I read this. . . . I
depended on Pam [Bowden] to handle that.”), the employee in question testified
that she discussed the policy with Plaintiffs. According to the employee, “it was
not a surprise to [Plaintiffs] about either endorsement . . . because it had been
discussed previously with them,” and that although she would not have used the
word “carveback,” she discussed that the policy had a “million dollar sub-limit.”
Doc. 81-8 at 67, 105–6. Significantly, Plaintiffs corroborated her testimony. For
example, Bailey testified that he had no reason to believe that the employee did not
discuss the regulatory exclusion with defense carveback with him, doc. 81-1 at 33–
36, and the other Plaintiffs also acknowledge that they had discussions with
Federal regarding the contraction of the scope of coverage, docs. 81-3 at 32–33;
81-4 at 91–93, 99–101; 81-5 at 18; 81-7 at 51, 53. Moreover, although Plaintiffs
claim they never read the policy and did not understand the term “defense
carveback,” they acknowledge that they knew the policy had a $1,000,000
limitation on defense costs. Docs. 39-1 at 18, 20, 24; 81-7 at 50, 56, 76; 81-1 at 79.
In fact, the documents produced and conversations Plaintiffs detailed in their
depositions demonstrate that Plaintiffs had notice that the scope of their coverage
had materially changed, and that Plaintiffs accepted the new terms in part because
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they had limited options with respect to increasing their coverage due to the state
of the banking environment. See, e.g., docs. 81-4 at 46 (“we would have loved to—
we would have loved to have had, you know, more D&O coverage, but I think the
industry could see what was happening to the banks, so everyone started dropping
it.”); 39-1 at 10 (“I knew it [the practice of regulatory exclusions] was going on in
the industry. It had been discussed at the initial fact-finding lunch, that that was
one of the trends that the insurance companies were seeing with all the turmoil that
was going on in the industry.”). Finally, the court notes also that, after Federal
issued the policies and Plaintiffs forwarded them to the legal department, no one at
Superior alleged that the D&O policy contained a mistake in its provision of
coverage or that the policy documents failed to include material terms that
Plaintiffs had agreed to in accepting the coverage. Docs. 39-1 at 26; 81-4 at 102,
115, 117; 81-7 at 63; 81-8 at 127–129.
Ultimately, even when taken in the light most favorable to Plaintiffs, the facts
alleged do not support a finding that Federal failed to disclose material changes to
the policy or that Plaintiffs reasonably relied upon Federal’s representations to
their detriment. 4 As directors of a bank involved in complex financial transactions,

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Plaintiffs rely on the holding in Alliance Ins. Co., Inc. v. Reynolds, 494 So. 2d 609 (Ala. 1986), to
support their contention that a failure to disclose is grounds for reformation of contract. In Reynolds, the
defendants had assault and battery liability insurance under a policy with a separate carrier until the
plaintiff insurance company picked up the policy. Id. The plaintiff failed to notify the defendants that they
were changing the scope of the policy coverage, and, in fact, the defendants’ agent returned the renewal
notice to the defendants indicating that it was renewed “as is.” Id. at 612. Relying on the particular facts

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Plaintiffs were all sophisticated actors knowledgably versed in reading and
bargaining for contracts. See, e.g., docs. 81-4 at 17, 24–26; 81-7 at 51–52. That
they now disagree about the scope of coverage provided is simply not a sufficient
basis for a finding that Federal misrepresented the contents of the policy.
Accordingly, Defendants are entitled to summary judgment on Count II.
B. Reformation of Contract (Count III)
In Count III, Plaintiffs seek reformation of the policy to omit the regulatory
exclusion endorsement based on their contention that “Federal incorrectly
represented that the regulatory exclusion in the renewed Policy would be the
Regulatory Sub-Limit Endorsement” and “did not disclose the Regulatory
Exclusion Endorsement . . . before the renewed Policy dated July 19, 2010 was
delivered.” Doc. 1 at 21. Reformation is used to “make [the contract] conform to
the intention of the parties where, through mutual mistake, their intention is not so
expressed . . . .” Original Church of God, Inc. v. Perkins, 293 So. 2d 292, 293
(Ala. 1974). In the insurance contract context, reformation is an appropriate
remedy where a carrier failed to give notice to an insured of the enlargement or
material change to a policy prior to renewal. See generally Reynolds, 494 So. 2d

in that case, the court held that the defendants had justifiably relied upon the plaintiff’s representations
regarding the scope of their coverage and ordered the plaintiff to pay the amount due under the scope of
the prior coverage. Id. In contrast, here, Federal informed Plaintiffs that the scope of their coverage was
changing in a material way and then outlined those changes in conversation and via email. As such, no
credible basis exists to argue that Federal failed to disclose a material change to the insurance contract.

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609. To invoke the remedy the moving party must demonstrate “by evidence that is
clear, exact, convincing and satisfactory that [the contract] does not express the
true agreement of the parties.” Perkins, 293 So. 2d at 293. Plaintiffs have failed to
make the necessary showing and, as such, are not entitled to reformation.
Contrary to Plaintiffs’ contentions, the record establishes that Federal placed
them on notice that their renewed policy would have decreased D&O coverage and
a regulatory exclusion. See, e.g., doc. 81-5 at 36–37 (Plaintiff Caughran stating: “I
understood that there would be no money available for regulators, yes.”). To get
around this disclosed fact, Plaintiffs contend that they are challenging instead
Federal’s decision to use a final endorsement that differed from the one Federal
presented in the initial email transmitting the policy. Doc. 98 at 29–30. While
Plaintiffs are technically correct, their contention is unavailing for several reasons.
First, Plaintiffs overlook that Federal labeled the endorsement as “Draft” and that it
contained no terms, effective dates, or policy amounts. Doc. 35-11 at 13. Instead,
the initial email outlined a discussion Federal had with the Mailon Kent Agency
and included several attached draft endorsements. Id. Second, the Mailon Kent
employee responsible for procuring the policy for Plaintiffs testified that she knew
that the endorsement in the April 2010 email was not the final version that Federal

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would include in the policy. 5 Doc. 81-8 at 100. Her testimony is consistent with the
substance of the initial email, which states: “For the D&O we will provide $5M
Limit with a $1M Ret for $275,000. This will include a regulatory exclusion with a
defense carveback for $1,000,000.” Id. at 2. Third, this language from the April
email mirrors the final language of the endorsement which Federal delivered in
July 2010: “this exclusion shall not apply to Defense Costs which amount shall not
exceed $1,000,000 . . . .” Doc. 81-15 at 64 (emphasis original). Put simply, the
evidence belies Plaintiffs’ contention that Federal used an endorsement that
materially differed from the email Plaintiffs received outlining the new Policy
terms.
Construing all evidence in favor of Plaintiffs, no valid basis exists for Plaintiffs
to contend that Federal made a mistake or engaged in fraud that would warrant
reformation. To the contrary, the record establishes that Plaintiffs received the
coverage that they bargained for with Federal. While it is evident from this lawsuit
that Plaintiffs now disagree with the limited coverage provided, “[r]eformation is

5

These facts run counter to the supplemental authority Plaintiffs cite to the court. Doc. 109-1. In that
case, the insurance company was attempting to enforce a clause that it added after it issued the policy. See
generally FDIC v. Bryan et al., 2016 WL 1075997 (N.D. Ga. March 18, 2016). As a result, the court held
that the omitted clause was unenforceable because the regulatory exclusion clause was not a part of the
policy. Id. In fact, the only reference to the regulatory exclusion clause appeared in the insurance binder,
which was modifiable and automatically terminated once the policy was issued. Id. at 10. Therefore,
Plaintiffs’ reliance on Bryan is misplaced. In contrast, here, the policy in Superior’s records explicitly
contained the regulatory exclusion clause, doc. 81-15, Plaintiffs’ insurance agent also knew that the
policy would contain a regulatory exclusion clause in the binder, doc. 35-11, and the parties executed the
agreement prior to the FDIC takeover of Superior.

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not available to make a new agreement.” Highlands Underwriters Ins. Co. v.
Elegante Inns, Inc., 361 So. 2d 1060, 1064 (Ala. 1978). Accordingly, Federal is
entitled to summary judgment on Count III.
C. Declaratory Judgment For Failure to File Endorsement (Count I)
In Count I, Plaintiffs seek declaratory judgment that the Regulatory Exclusion
Endorsement (the “Endorsement”) is void due to Federal’s purported failure to
comply with § 27-14-8’s filing requirement. At issue is Federal’s failure to file the
endorsement with the Alabama Department of Insurance before the policy’s
issuance. As Plaintiffs note, the Alabama legislature has created a department of
insurance that is responsible for receiving and granting approval of insurance rates,
rating systems, as well as endorsements and riders. See Ala. Code §§ 27-2-1, et
seq. Relevant here, Alabama law provides in part that:
No basic insurance policy or annuity contract form or
application form where written application is required
and is to be made a part of the policy, or contract, or
printed rider, or endorsement form or form of renewal
certificated shall be delivered or issued for delivery in
this state unless the form has been filed with, and
approved by, the commissioner. This subsection shall not
apply to . . . policies, riders, endorsements or forms of
unique character designed for, and used with, relation to
insurance upon a particular subject . . .
Ala. Code § 27-14-8(a). Subsection (b) states in turn that “every such filing shall
be made not less than 30 days in advance of any such delivery.” Ala. Code § 27-

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14-8(b). While property and casualty forms are exempted from the thirty day filing
requirement, insurance companies are still required to file their forms with the
Alabama Insurance Department prior to their issuance. See Ala. Admin. Code §
482-1-123-.04(1).
In this case, Federal filed the endorsement approximately five months after it
presented the initial binder to Plaintiffs and two months after it issued the policy,
and, as such, failed to comply with § 27-14-8. Based on this failure to comply,
Plaintiffs direct the court to several Alabama cases which they say support their
position that the endorsement is null and void as a result. The key case is Aetna
Ins. Co. v. Word, 611 So. 2d 266, upon which both parties rely in their briefs. In
that case, Aetna sought to enforce an endorsement it filed with the state over a
month after the effective date of a policy it issued. 611 So. 2d at 267. The Alabama
Supreme Court disagreed, noting that in addition to the delay in filing, the
endorsement Aetna attached to the policy also differed from the endorsement
Aetna relied on in court. Id. The parties disagree about the significance, if any, of
the fact that the insurer in Word never filed the actual endorsement with the state.
Presumably because the endorsement Federal filed after it issued the endorsement
is the same as the one it is relying on in this case, Federal contends that Word
supports its contention that its late filing is valid. See doc. 102 at 14–15. Plaintiffs
disagree with this contention and direct the court to Attorney’s Ins. Mut. of
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Alabama, Inc. v. Alabama Dept. of Ins., 62 So. 3d 1 (Ala. Civ. App. 2010), in
which the Alabama Court of Civil Appeals affirmed the Commissioner’s finding
that the insurer’s compliance with the filing requirement after-the-fact did not
excuse the failure to initially comply: “We agree . . . with the trial court’s decision
to affirm the determination of the commissioner, in which the commissioner stated
that ‘[a]lthough AIM has complied after the fact in regards to allowing insured to
pay premiums in installments, during the period cover[ed in the examination
report,] AIM was in violation of § 27-12-14.’” 62 So. 3d at 21–22.
Based on Attorney’s Mutual, it seems that Plaintiffs are correct that a proper
reading of Word’s holding suggests that Federal’s two-month delay in filing, in the
face of a statute that mandates filing prior to issuance, necessarily means that
Federal’s filing after-the-fact is not in compliance with the statute. See Ala. Code.
§ 27-14-8(b); Ala. Admin. Code § 482-1-123-.04(a).6 The court notes that
Alabama courts have held that insurance companies have the same rights as
individuals to limit their liability or impose conditions on coverage. Consequently,
it seems perhaps contrary to this general recognition that Plaintiffs can avoid the
terms they bargained for, and, as Federal argues, get a windfall, by relying on a
6

Plaintiffs also direct the court to African Methodist Episcopal Church, Inc. v. Smith, 2016 WL 4417268
(Ala. August 19, 2016), a case the Alabama Supreme Court issued last month. In that case, the plaintiffs
relied on Word to allege that an arbitration endorsement was invalid because it had not been approved by
the Alabama Department of Insurance prior to its attachment to the policy at issue. 2016 WL 4417268 at
*3. Elaborating on the Word and Waikar holdings, the court explained that the filing requirement refers to
the form itself, and not a specific company’s use of the form. Accordingly, the court found that the insurer
had complied with the filing requirement because its predecessor company had, in fact, filed the relevant
form with the Department of Insurance prior to issuing the policy.

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technical requirement that has no bearing on the specific contractual terms the
parties actually negotiated. However, an insurer’s rights are limited by the
provisions in the insurance code, Alabama Farm Bureau Mut. Cas. Ins. Co. v.
Goodman, 279 Ala. 538, 540 (Ala. 1966), and courts determine the validity of
insurance contract provisions, including those which exclude or limit coverage, by
comparing them with the insurance code, Ex parte O’Hare, 432 So. 2d 1300,
1302–1303 (Ala. 1983); Higgins v. Nationwide Mut. Ins. Co., 291 Ala. 462, 467
(Ala. 1973). Relevant here, based on the cases the parties have cited, it is clear that
Alabama courts have strictly interpreted the filing requirement of § 27-14-8. See,
e.g., Aetna Ins. Co. v. Word, 611 So. 2d 266 (Ala. 1992); Waikar v. Royal Ins. Co.
of America, Inc. 765 So. 2d 11 (Ala. Civ. App. 1999). Therefore, Federal can only
avoid liability if it can establish that it is exempt from the filing requirement or has
some other valid defense.
To get around its failure to file in advance of issuing the policy, Federal raises
several arguments. First, Federal alleges the commercial casualty policy it issued is
exempted from the thirty-day filing requirement contained in Ala. Code § 27-148(b) by Ala. Admin. Code § 482-1-123-.04(a). Indeed, the exemption allows
insurers to operate under the “File and Use System.” Ala. Admin. Code § 482-1123.04. Under this system, an insurance company must file its form “with the
regulator on or before the date of use [by the company].” Ala. Admin. Code § 48219

1-123.03(3). Also, this section of the Administrative Code anticipates that any
modifications a regulator requests will be made on a prospective basis, id., which
Federal argues means that this system implicitly rejects Plaintiffs’ contention that
they are entitled to void the endorsement. However, even under a “File and Use”
system, there is no language in the regulations that exempts an insurer from the
initial obligation to file its forms with the Department of Insurance prior to using
them in this state. As a result, because it is undisputed that Federal filed the
endorsement well after it issued the policy, Federal cannot rely on the exemption in
Ala. Admin. Code § 482-1-123-.04(a) to cure its failure to file its form prior to
issuance.
Second, in reliance on Am. Auto. Ins. Co. v. McDonald, 812 So. 2d 309, 311–12
(Ala. 2001), Federal asserts that Plaintiffs do not have standing to bring a claim for
a violation of the Insurance Code. The reliance on McDonald is misplaced because
the court focused on the fact that the plaintiff had no relationship with the insurer
at the time the plaintiff sought to file a claim against the company for selling
policies without a license. 812 So. 2d at 312. In contrast, here, Plaintiffs are the
insureds. In addition, based on the holdings in Aetna Ins. Co. v. Word, 611 So. 2d
266 (Ala. 1992), Waikar v. Royal ins. Co. of Am., Inc., 765 So. 2d 11 (Ala. Civ.
App. 1999), and African Methodist Episcopal Church, Inc. v. Smith, 2016 WL
4417268 (Ala. 2016), the Alabama appellate courts have recognized that a party to
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an insurance contract has an action where an endorsement that is not in compliance
with Alabama law restricts coverage and the endorsement’s invalidity may change
the scope of insurance coverage.
Third, Federal contends that the endorsement qualified as “unique” within the
meaning of § 27-14-8(a), and, as such, it was exempt from the filing requirement.
Doc. 40 at 12–16. This argument centers on the fact that Federal had not used
Form 14-02-16863, the official designation of the endorsement, in Alabama at the
time it created it for Plaintiffs. Id. Plaintiffs counter that the endorsement is not
unique and have moved for summary judgment on this claim.
In interpreting a statute, “the starting point . . . is the language of the statute
itself.” Bankston v. Then, 615 F.3d 1364, 1367 (11th Cir. 2010) (internal
quotations omitted). In this case, the statute excludes from the filing requirements
“policies, riders, endorsements or forms of unique character designed for, and used
with, relation to insurance upon a particular subject.” Ala. Code § 27-14-8(a)
(emphasis added). Federal contends that its endorsement is “unique” because when
Federal issued Form 14-02-16863 to Plaintiffs, Federal was only using a similar
endorsement, Form 02-16722, with one other Alabama bank. See doc. 86-9 (Tabs
KK and LL). Because the statute does not define the term “unique character,” the
court must “look to the common usage of [the] words for their meaning.”
Consolidated Bank, N.A. v. United States Dep’t of Treasury, 118 F.3d 1461, 1464
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(11th Cir. 1997). The parties do not cite, and the court has not found, any cases in
Alabama that address “unique character” in the insurance context. The parties
seem to agree that a resolution of this issue will depend, in part, on whether
Federal had used the endorsement previously or if Federal only made this
endorsement available to Plaintiffs. The parties disagree, however, about the
specifics of the use of the endorsement here, with Plaintiffs claiming that Federal
used it in a broader manner than Federal contends. Because of the conflicting
evidence on this issue, the lack of case law on point, and the fact that a resolution
of this issue will have a dispositive effect, the court finds that material issues of
fact preclude summary judgment on this claim. 7

7

Federal also relies on the “savings clause” of Ala. Code § 27-14-16 to argue that the policy it issued is
valid even though it failed to comply with § 27-14-8. The “savings clause” states: “[a]ny insurance policy,
rider or endorsement hereafter issued and otherwise valid which contains any condition or provision not
in compliance with the requirements of this title shall not be thereby rendered invalid but shall be
construed and applied in accordance with such conditions and provisions as would have applied had such
policy, rider, or endorsement been in full compliance with this title.” Ala. Code § 27-14-16. The
endorsement here satisfies the first part of this clause in that it is “otherwise valid” in light of its approval
by the Department of Insurance. The court does not believe it satisfies the rest of the clause however, i.e.,
“which contains any condition or provision [of a policy that is] not in compliance with [Alabama law].”
Ala. Code § 27-14-16 (emphasis added). As the court sees it, the issue here is not whether the
endorsement contains language that complies with Alabama law. Again, the record here shows that the
Department of Insurance deemed the endorsement “filed” in September 2010 and no one has raised any
allegation that there is a condition or provision in the endorsement that does not comply with Alabama
law. Accordingly, because the failure to file a form prior to its use in a policy is an issue separate and
distinct from a “condition or provision” in the policy itself, the court finds that § 27-14-16 is inapplicable
to the current facts. However, because Federal indicated at oral argument that this issue is a fallback in the
event its main arguments fail, Federal is free to ask for reconsideration on this issue in the event it loses
on the “unique character” issue.

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D. Breach of Contract (Count IV)
A plaintiff establishes a breach of contract claim by showing: (1) the existence
of a valid contract binding the parties; (2) his performance under the contract; (3)
the defendant’s nonperformance; and (4) damages. Southern Medical Health Sys.,
Inc. v. Vaughn, 669 So. 2d 98, 99 (Ala. 1995). The existence of a contract is
obviously not in dispute, nor is it disputed that Plaintiffs performed under the
policy by paying their premiums. Because resolution of this claim hinges on
whether the regulatory exclusion endorsement is void and therefore not a part of
the policy, see supra III.C, the motion for summary judgment on this claim is also
due to be denied at this juncture.
CONCLUSION
For the foregoing reasons, the Plaintiffs’ motion for summary judgment is
due to be denied as to Counts I (Declaratory Judgment for Failure to File) and IV
(Breach of Contract), and Federal’s motions for summary judgment are due to be
granted as to Counts II (Declaratory Judgment for Failure to Disclose) and III
(Reformation), and due to be denied in all other respects.
DONE the 30th day of September, 2016.

_________________________________
ABDUL K. KALLON
UNITED STATES DISTRICT JUDGE

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