Smith v. Nationwide Mutual Insurance Company et al

Filing 45

MEMORANDUM OPINION. Signed by Magistrate Judge Staci G Cornelius on 9/27/18. (MRR, )

FILED

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2018 Sep-27 AM 09:23
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
DONNA SMITH,
Plaintiff,
v.
NATIONWIDE MUTUAL
INSURANCE COMPANY, et al.,
Defendants.

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Case No.: 2:17-cv-01373-SGC

MEMORANDUM OPINION
Presently pending are the motions to dismiss for failure to state a claim filed
by the defendants, State Farm Mutual Automobile Insurance Company (Doc. 33)
and Nationwide General Insurance Company (Doc. 32). The motions have been
fully briefed and are ripe for adjudication. (See Docs. 40, 42, 43). The parties
have consented to magistrate judge jurisdiction pursuant to 28 U.S.C. § 636(c).
(Doc. 18). As explained below, the motions are due to be granted in their entirety.
I.

STANDARD OR REVIEW
"Federal Rule of Civil Procedure 8(a)(2) requires only 'a short and plain

statement of the claim showing that the pleader is entitled to relief,' in order to
'give the defendant fair notice of what the … claim is and the grounds upon which
it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v.
Gibson, 355 U.S. 41, 47 (1957)).

Rule 8 "does not require 'detailed factual

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allegations,' but it demands more than an unadorned, the defendant-unlawfullyharmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 555). "A pleading that offers 'labels and conclusions' or 'a
formulaic recitation of the elements of a cause of action will not do.'" Id. at 678
(quoting Twombly, 550 U.S. at 555, 557) (internal quotation marks omitted).
To survive a motion to dismiss for failure to state a claim on which relief
may be granted brought pursuant to Rule 12(b)(6), "a complaint must contain
sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible
on its face.'"

Id. (quoting Twombly, 550 U.S. at 570).

"A claim has facial

plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged."
Id. (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to a
'probability requirement,' but it asks for more than a sheer possibility that a
defendant has acted unlawfully." Id. "Where a complaint pleads facts that are
merely consistent with a defendant's liability, it stops short of the line between
possibility and plausibility of entitlement to relief." Id. (quoting Twombly, 550
U.S. at 557) (quotation marks omitted).
II.

BACKGROUND
This lawsuit presents a dispute between the plaintiff, Donna Smith, and two

insurers following a traffic accident. The accident occurred on July 30, 2013, as a
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third-party, Daniel Voss, was riding his bicycle southbound in the right-hand lane
of Smith Road in rural Calhoun County, Alabama. (Doc. 27 at 4-5).1 The plaintiff
was driving northbound on Smith Road. (Id. at 5). The amended complaint
alleges the plaintiff, who was speeding and talking on her cell phone, crossed the
center line and collided with Voss. (Id.). Voss was seriously injured and was
flown to UAB hospital, where he was diagnosed with fractures to his skull and
face, as well as severe and traumatic brain injuries. (Id.). Voss was comatose for
two weeks and hospitalized for a month, spent two weeks receiving inpatient
rehabilitation, and has undergone at least four brain surgeries. (Id. at 5-6). He
suffered serious and permanent changes to his brain function and incurred over
$725,000 in medical expenses. (Id. at 6).
Nationwide was the plaintiff's insurer; her policy provided $25,000 in
liability coverage.

(Doc. 27 at 6).

The plaintiff reported the accident to

Nationwide and cooperated with her insurer. (Id.). State Farm insured Voss's
parents; Voss was covered by four State Farm policies, providing a total of
$100,000 in uninsured/underinsured motorist coverage.

(Id. at 4).

Voss's

representatives contacted State Farm in due course and cooperated with Voss's
UIM insurer. (Id. at 6).

1

Voss has filed a related lawsuit arising from the same accident. Voss v. State Farm Mutual
Auto. Ins. Co., No. 17-1465-SGC (N.D. Ala. removed Aug. 29, 2017).
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Voss's counsel wrote Nationwide in August 2013, informing the plaintiff's
liability insurer of Voss's injuries. (Doc. 27 at 6-7). In October 2013, Voss's
counsel informed Nationwide that Voss was paralyzed on his right side and his
medical bills exceeded $460,000; Voss's counsel made a policy limits demand.
(Id. at 7). Nationwide promptly responded, offering its $25,000 policy limits to
settle all claims against the plaintiff in exchange for a release from further liability
against her.

(Id.).

Voss's counsel notified State Farm of the plaintiff's

underinsured status and Nationwide's tender of the plaintiff's liability policy limits.
(Id. at 9).
On January 27, 2014, State Farm took an examination under oath ("EUO")
of Voss and his parents—its UIM insureds.

(Doc. 27 at 9).

The amended

complaint alleges this was State Farm's only investigation into the accident, despite
Voss's brain damage and the fact that his parents did not witness the accident.
(Id.). On February 6, 2014, State Farm notified Voss—without explaining its
rationale—that it would not consent to his settlement with the plaintiff, instead
fronting Nationwide's policy limits pursuant to the procedures set out in Lambert v.
State Farm Mut. Auto. Ins. Co., 576 So. 2d 160 (Ala. 1991). (Id.). The amended
complaint alleges State Farm chose to front Nationwide's policy limits without
regard to the possibility it could expose the plaintiff to an excess judgment. (Id.).

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Following State Farm's decision to front Nationwide's policy limits, Voss's
counsel attempted to convince State Farm to reconsider, noting Nationwide had
quickly tendered its limits and that evidence at the scene indicated the plaintiff was
at fault. (Doc. 27 at 14). State Farm refused to change its position and on April 9,
2014, sent a check to Voss for the fronted funds. (Id.). Soon thereafter, Voss filed
a lawsuit against the plaintiff in state court and notified State Farm of the lawsuit.
Voss v. Smith, No. 2014-900224 (Calhoun Cty. Cir. Ct. filed April 23, 2014) (see
Doc. 27 at 14-15). Voss's state court complaint did not name State Farm, and it
appears State Farm did not intervene. (See Doc. 27 at 15; Voss, No. 2014-900224).
Neither did State Farm pursue its right of subrogation against the plaintiff,
investigate whether subrogation was possible, or monitor the state court lawsuit.
(Doc. 27 at 15-16).
Discovery in the state court case revealed: (1) the plaintiff had a history of
speeding in the area of the accident; (2) individuals living near the accident site
had repeatedly warned the plaintiff about her dangerous driving in the area,
including mere weeks before the accident;2 (3) the plaintiff's version of events
leading up to the accident was not defensible; (4) the plaintiff was talking on her
cell phone at the time of the accident; and (5) Voss was in his lane at the time the
2

The amended complaint does not specifically allege the truth of her history of speeding or that
neighbors had repeatedly warned her about her dangerous driving. Still, the amended complaint
does allege the plaintiff's liability was "clear" and her case was "not defensible." (Doc. 27 at 16,
17).
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plaintiff collided with him. (Doc. 27 at 15-16). The state court trial proceeded to a
$1,900,000 jury verdict against the plaintiff in favor of Voss. (Id. at 16).
On September 30, 2016—before the deadline for the plaintiff's postjudgment motions or appeal had run—State Farm sent a check to Voss for the
remainder of its UIM coverage limits. (Doc. 27 at 16-17). On October 10, 2016,
Nationwide sent Voss the $25,000 liability limits of the plaintiff's policy. (Id. at
17). On October 14, 2016, the plaintiff's lawyer—a Nationwide employee—filed
post-judgment motions, which were denied; the plaintiff did not appeal. (Id. at 17).
After Nationwide paid its policy limits, the plaintiff was left with a $1,775,000
excess judgment, excluding interest. (Id.).
On August 15, 2017, the plaintiff filed the instant matter against State Farm
and Nationwide in this court on the basis of federal diversity jurisdiction. (Doc. 1).
After the defendants moved to dismiss, the plaintiff filed an amended complaint.
(Doc. 27). The amended complaint asserts a total of ten claims. Against State
Farm, the amended complaint asserts claims for: (1) negligent failure to settle; (2)
wanton failure to settle; (3) bad faith; and (4) abuse of process. (Id. at 3-26).
Against Nationwide, the amended complaint asserts claims for (1) negligent failure
to settle; (2) wanton failure to settle; (3) bad faith; and (4) breach of contract. (Id.
at 26-29, 32). Finally, the amended complaint asserts claims for outrage and civil
conspiracy against both State Farm and Nationwide. (Id. at 30-32).
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The amended complaint contends State Farm failed to conduct a reasonable
investigation of the accident, especially in light of the plaintiff's potential exposure.
(Doc. 27 at 17-18). The amended complaint alleges State Farm regularly engages
in this conduct in circumstances, like the plaintiff's, where its UIM insured suffers
catastrophic injuries and the tortfeasor has minimum limits or limits that are
dwarfed by the insured's damages. (Id. at 19-20). Instead, under the guise of
protecting subrogation rights it rarely or never pursues, the amended complaint
alleges State Farm: (1) refuses to consent to its insureds' settlements with
tortfeasors; (2) denies its insureds' UIM claims without investigation or evaluation;
(3) fronts the tortfeasors' limits; (4) opts-out or chooses not to intervene in the
ensuing litigation over liability; and (5) blindly waits for a verdict. (Id. at 20-21).
The amended complaint asserts financial motives drove State Farm's
intentional failure to investigate and fairly evaluate the accident. (Doc. 27 at 2122). These motives—which apply to both the decision to decline consent to Voss's
settlement with the plaintiff and the refusal to promptly pay or settle Voss's UIM
claim—include: (1) avoiding the cost of investigation and litigation; (2) collecting
investment income on UIM proceeds rightfully belonging to the Voss; (3)
pressuring Voss to settle his UIM claims for less than policy limits by forcing him
to try his case against the plaintiff; (4) maintaining artificially low reserves; and (5)
hoping it got lucky with a defense verdict. (Id). The amended complaint further
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alleges State Farm never investigated whether subrogation against the plaintiff was
even possible. (Id. at 22-23).
As to Nationwide, the amended complaint alleges the plaintiff's liability
insurer's offer of her policy limits to Voss was insufficient in light of State Farm's
foreseeable fronting maneuver. (Doc. 27 at 27-28). The plaintiff contends State
Farm, with Nationwide's assistance, misused the Lambert fronting procedure to
effectively strip her of liability protection. (Id. at 30). The amended complaint
further alleges Nationwide and State Farm have agreed and conspired to never seek
subrogation against each other's insureds, instead using the Lambert fronting
procedure and the guise of protecting its subrogation interests to hide the existence
of insurance from juries and force liability insurers to provide a de minimis defense
to underinsured tortfeasors. (Id. at 30-31).
III.

DISCUSSION
Because this is a diversity action, Alabama substantive law governs. Erie

R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Under Alabama's uninsured motorist
statute, in order for an insured to be entitled to UIM benefits, the insured must be
"legally entitled to recover" from the owner or driver of the underinsured vehicle.
ALA. CODE § 32-7-23. The Alabama Supreme Court has recognized the conflicting
rights of UIM insureds and their insurers when handling UIM claims. Lowe v.
Nationwide Ins. Co., 521 So. 2d 1309 (Ala. 1988). Under Lowe, when an insured
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sues a tortfeasor and also seeks UIM benefits, the insured may either join the UIM
insurer as a party or simply notify the UIM insurer of the lawsuit against the
tortfeasor and the possibility of a UIM claim following the trial. Id. at 1310.
Where the insured names the UIM insurer in the lawsuit, the UIM insurer has the
option to participate in the litigation or opt-out—choosing not to participate in the
trial. Id. Where the insured does not name the UIM insurer in the lawsuit, the
insurer can choose to intervene or stay out of the case. Id. Under any of these
scenarios, the UIM insurer is bound by the liability and damages determinations at
trial. Id.
In Lambert, the Alabama Supreme Court addressed the conflict between a
UIM insurer's subrogation rights against the tortfeasor and the UIM insured's right
to settle with the tortfeasor. The court held an insured cannot settle a claim against
a tortfeasor absent the consent of the UIM insurer. 576 So. 2d at 167. The court
also provided the following "general rules" regarding the procedure to be followed
by UIM insureds and insurers:
(1) The insured, or the insured's counsel, should give notice to the
underinsured motorist insurance carrier of the claim under the policy
for underinsurance benefits as soon as it appears that the insured's
damages may exceed the tortfeasor's limits of liability coverage.
(2) If the tort-feasor's liability insurance carrier and the insured enter
into negotiations that ultimately lead to a proposed compromise or
settlement of the insured's claim against the tort-feasor, and if the
settlement would release the tort-feasor from all liability, then the
insured, before agreeing to the settlement, should immediately notify
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the underinsured motorist insurance carrier of the proposed settlement
and the terms of any proposed release.
(3) At the time the insured informs the underinsured motorist
insurance carrier of the tort-feasor's intent to settle, the insured should
also inform the carrier as to whether the insured will seek
underinsured motorist benefits in addition to the benefits payable
under the settlement proposal, so that the carrier can determine
whether it will refuse to consent to the settlement, will waive its right
of subrogation against the tort-feasor, or will deny any obligation to
pay underinsured motorist benefits. If the insured gives the
underinsured motorist insurance carrier notice of the claim for
underinsured motorist benefits, as may be provided for in the policy,
the carrier should immediately begin investigating the claim, should
conclude such investigation within a reasonable time, and should
notify its insured of the action it proposes with regard to the claim for
underinsured motorist benefits.
(4) The insured should not settle with the tort-feasor without first
allowing the underinsured motorist insurance carrier a reasonable time
within which to investigate the insured's claim and to notify its
insured of its proposed action.
(5) If the uninsured motorist insurance carrier refuses to consent to a
settlement by its insured with the tortfeasor, or if the carrier denies the
claim of its insured without a good faith investigation into its merits,
or if the carrier does not conduct its investigation in a reasonable time,
the carrier would, by any of those actions, waive any right to
subrogation against the tort-feasor or the tortfeasor's insurer.
(6) If the underinsured motorist insurance carrier wants to protect its
subrogation rights, it must, within a reasonable time, and, in any event
before the tort-feasor is released by the carrier's insured, advance to its
insured an amount equal to the tort-feasor's settlement offer.
Id. In Lambert, the court noted these guidelines were designed to protect the UIM
insurer in two ways: (1) protecting its subrogation rights against the tortfeasor; and

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(2) guarding against possible collusion between the UIM insured and tortfeasor at
the UIM insurer's expense. Id.
Having set out the general procedure where UIM claims are involved, the
specific claims and applicable Alabama law are addressed in turn.
A.

Nationwide

The amended complaint asserts the following claims against Nationwide
individually: (1) negligent failure to settle; (2) wanton failure to settle; (3) bad faith
failure to settle; and (4) breach of contract. (Doc. 27 at 26-29, 31-32). The
tortious failure to settle claims are addressed first, followed by a discussion of the
breach of contract claim.
1.

Tortious Failure to Settle

The Alabama Supreme Court recognized claims against insurers for
negligent or bad faith failure to settle within policy limits in Waters v. Am. Cas.
Co. of Reading, Pa., 73 So. 2d 524, 528-531 (Ala. 1953). The plaintiff in Waters
owned a theater in which a patron was injured by a defective seat. The patron and
her husband separately sued the owner. Prior to trial, the patrons offered to settle
both lawsuits for the limits of the theater owner's liability policy. The owner's
insurer declined the settlement offer and both cases ultimately resulted in plaintiffs'
verdicts exceeding the liability insurance coverage. In recognizing a claim for
tortious failure to settle, the court noted a liability insurer's "exclusive right" to
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settle a claim against its insured created a duty to observe "ordinary diligence" in
exercising settlement power. Id. at 532. Accordingly:
when an opportunity is presented to the insurer to make a settlement
of the claim in an amount not more than the limit of liability, the law
raises a duty on his part to use ordinary care to ascertain the facts on
which its performance depends if he has not already done so. If the
insurer neglects to exercise ordinary diligence in ascertaining these
facts, if he has not already done so, and as a proximate result of such
neglect he fails to make such a settlement, which is available, and
when such knowledge would have caused a reasonably prudent person
to do so, and a verdict and judgment are rendered against insured in an
amount more than the limit of liability in the policy, the insurer should
be held liable to the insured for the full amount of the judgment.
Id. at 532-33.
Here, Nationwide's principal contention is that the plaintiff cannot state a
claim for tortious failure to settle because it did attempt to settle Voss's claims
against her but was thwarted by State Farm's invocation of the Lambert fronting
procedure. (Doc. 42 at 2-6). Indeed, Waters arose from the insurer's refusal to
resolve the claims against its insured by declining a settlement demand within its
policy limits. 73 So. 2d at 531-32. The other cases the plaintiff cites in support of
her failure to settle claims against Nationwide arose in the same context. (Doc. 40
at 4-10) (citing Hartford Acc. & Indem. Co. v. Cosby, 173 So. 2d 585, 592 (Ala.
1965) (liability insurer failed to accept settlement demand within policy limits);
State Farm Mut. Auto. Ins. Co. v. Hollis, 554 So. 2d 387, 390-91 (Ala. 1989) ("A
decision not to settle must be a thoroughly honest, intelligent and objective one.")
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(alteration incorporated; emphasis added); Carrier Express, Inc. v. Home Indem.
Co., 860 F. Supp. 1465, (N.D. Ala. entered June 3, 1994) (refusal to accept policy
limits settlement demand within time limit set by plaintiff); Metlife Auto & Home
Ins. Co. v. Reid, No. 09-1762-CLS, 2013 WL 6844109 (N.D. Ala. entered Dec. 23,
2013) (refusal to accept settlement offer well below liability limits); Franklin v.
Nat'l Gen. Assurance Co., No. 13-103-WKW, 2015 WL 350633 (M.D. Ala.
entered Jan. 23, 2015) (refusal of policy limits demand).
Here, the amended complaint does not allege Nationwide refused Voss's
settlement demand. Rather, the plaintiff alleges Nationwide promptly accepted
Voss's policy limits settlement demand in exchange for the plaintiff's release of her
from further liability. As Nationwide contends, it is difficult to imagine how it
could be held liable for failure to settle where the settlement it negotiated—
including a full release for the plaintiff—was thwarted by a third-party, State Farm.
In effect, the settlement with Voss was no longer "available" to Nationwide once
State Farm refused to consent to it; moreover, the complaint cannot reasonably be
read to allege Nationwide in any way caused the settlement to remain unexecuted.
Waters, 73 So. 2d at 532.
In response to this argument, the plaintiff contends a liability insurer's duties
are more expansive than offering policy limits. The plaintiff points to four ways
the amended complaint alleges Nationwide breached its duty of care: (1) failure to
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seek or obtain a "Taylor release," under which Voss would have agreed to forego
pursuit of any verdict exceeding the $125,000 combined limits of the plaintiff's
liability coverage and Voss's UIM coverage; (2) failure to notify State Farm that,
by refusing to consent to settlement and invoking the Lambert procedure, it had
acquired a duty of good faith and fair dealing toward the plaintiff; (3) its pattern
and practice of "hampering the ability" of defense counsel to defend and requiring
counsel to provide "less of a defense" to its insured tortfeasors where UIM insurers
front settlement funds; and (4) failure to warn the plaintiff of the possibility of an
excess judgment. (Doc. 40 at 10-15).
Before addressing these arguments, it must be noted the Alabama case law
the plaintiff relies on to support imposing these additional duties on Nationwide
arose where insurers defended their insureds under a reservation of rights. (Doc.
40 at 5-15) (citing Carrier Express 860 F. Supp. 1465; L&S Roofing Supply Co. v.
St. Paul Fire & Marine Ins. Co., 521 So. 2d 1298, 1303 (Ala. 1987); Reid, No.
2013 WL 68544109). Due to the obvious moral hazards, Alabama courts impose
enhanced duties of good faith on an insurer defending its insured under a
reservation of rights. In Voss's suit against its insured, Nationwide defended the
plaintiff without reservation. Accordingly, the principles the plaintiff draws from
the foregoing cases are inapplicable here, where Nationwide and the plaintiff's
interests were aligned. Franklin, 2015 WL 350633 at *16 n.18 (where insurer's
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defense was without reservation, enhanced duties arising in Carrier Express and
other reservation of rights cases were inapplicable).
Turning to the plaintiff's individual arguments, the Taylor release the
plaintiff envisions sprang from a case in which the Supreme Court of Hawaii held
a liability carrier can satisfy its duty to indemnify its underinsured tortfeasor by
securing a release which protects its insured from an excess judgment while
preserving the UIM carrier's subrogation rights. Taylor v. Gov't Employees Ins.
Co., 978 P.2d 740, 742-53 (Haw. 1999). The plaintiff contends Nationwide, rather
than accepting Voss's policy limits settlement offer, should have conditioned any
settlement on Voss's agreement to forego executing any judgment over $125,000—
the total of combined liability and UIM benefits available. (Doc. 40 at 11-12).
This argument is conclusory and speculative; it is difficult to imagine why Voss,
who suffered permanent injuries and medical costs dwarfing the available
insurance proceeds, would agree to forego the opportunity to pursue any judgment
against the plaintiff. But more importantly, the plaintiff does not point to any case
in which the Alabama Supreme Court—or any Alabama court—has required a
liability insurer to condition a settlement offer on the victim's agreement to collect
only to the extent of insurance coverage.3

3

The plaintiff cites to Liberty Mut. Ins. Co. v. Wheelwright Trucking Co., 851 So. 2d 466, 488491 (Ala. 2002), for the Alabama Supreme Court's enforcement of an "extent of coverage"
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Second, the plaintiff contends Nationwide should have warned State Farm
that, by invoking Lambert, it acquired a duty of good faith and fair dealing to
protect the plaintiff from a potential excess judgment.

(Doc. 40 at 12).

As

discussed in Section III.B.1., infra, State Farm did not owe the plaintiff—who was
not State Farm's insured—the types of duties she proposes.
Next, the plaintiff contends Nationwide provided subpar counsel or impeded
counsel's ability to defend her. The amended complaint's allegations in this regard
are limited to the following:
Nationwide had a pattern and practice of hampering the ability of the
attorneys it hired/employed to represent underinsured tortfeasors (like
Smith) when another insurer (like State Farm) fronted liability limits.
Nationwide mandated its defense attorneys to provide less of a
defense in a fronting scenario.
(Doc. 27 at 27-28). These allegations are entirely vague and conclusory; they are
also allegations of Nationwide's pattern and practice without any detail regarding
how the plaintiff's counsel's performance was inadequate, much less how
Nationwide acted to hinder defense counsel.

Accordingly, the amended

complaint's general allegations regarding the defense counsel Nationwide provided
are mere "labels and conclusions" and are entirely speculative. Twombly 550 U.S.
at 555.

release. (Doc. 40 at 12). However, the plaintiff cites—and the court is aware of—no Alabama
case requiring or recommending an insurer to seek this type of release.
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Fourth, the plaintiff contends Nationwide should have warned her about the
danger of an excess judgment and claims the Lambert fronting procedure created a
conflict of interest between herself and Nationwide. (Doc. 40 at 13-14). In
arguing Alabama law requires a liability insurer a duty to warn its insured of the
possibility of an excess judgment, the plaintiff cites exclusively to cases discussing
the enhanced duties owed when insurers defend under a reservation of rights.
(Doc. 40 at 14) (citing L&S Roofing, 521 So. 2d at 1303; Carrier Express, 860 F.
Supp. at 1479-80). As previously noted, the enhanced duty of good faith and fair
dealing does not apply here. Franklin, 2015 WL 350633 at *16 n.18. Regarding
the supposed conflict, the plaintiff points to the amended complaint's allegations
that: (1) the lawyer Nationwide provided was a Nationwide employee; and (2)
once State Farm fronted, Nationwide no longer had control over settling the case.
(Doc. 40 at 14).

Neither allegation shows a conflict of interest between the

plaintiff and Nationwide; settlement or a defense verdict remained in both parties'
best interests.
In short, Nationwide cannot be liable for tortious failure to settle because it
did not refuse a settlement demand within its policy limits. As alleged in the
amended complaint, Nationwide promptly accepted Voss's demand in exchange for
the plaintiff's full release. That this settlement did not come to fruition because of
State Farm's refusal to consent does not expose Nationwide to liability. Neither are
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the additional duties the plaintiff proposes supported by Alabama law under the
facts alleged in the amended complaint. Indeed, the additional duties the plaintiff
seeks to impose on Nationwide would require this court to apply the enhanced duty
of good faith and fair dealing to an insurer which defended its insured without
reservation. This court concludes the Alabama Supreme Court would not apply the
enhanced duty of good faith and fair dealing under the facts alleged here.
For the foregoing reasons, the claims for tortious failure to settle against
Nationwide (Counts 5-7) are due to be dismissed for failure to state a claim.
2.

Breach of Contract

The amended complaint alleges the liability insurance contract imposed
duties of good faith and fair dealing on Nationwide, which Nationwide breached.
(Doc. 27 at 32). Regarding the breaches, the amended complaint points to the
same allegations the plaintiff uses to support Nationwide's tortious failure to settle:
(1) failure to seek a Taylor release; (2) failure to notify State Farm of supposed
duties it owed the plaintiff; (3) provision of deficient counsel; and (4) failure to
warn the plaintiff about her predicament. (Id. at 27-28). As noted above, Alabama
law does not impose these supposed duties on liability insurers under the
circumstances alleged here.
More importantly, the amended complaint alleges Nationwide attempted to
accept Voss's policy limits demand in exchange for a full release of the plaintiff.
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When State Farm's invocation of Lambert prevented the consummation of the
settlement, Nationwide defended the plaintiff.

When the trial court entered

judgment against the plaintiff in favor of Voss, Nationwide paid the plaintiff's
policy limits. Accordingly, accepting the facts in the amended complaint as true,
Nationwide fulfilled its contractual allegations to the plaintiff.
For the foregoing reasons, the plaintiff's claim for breach of contract against
Nationwide (Count 10) is due to be dismissed for failure to state a claim.
B.

State Farm

The amended complaint asserts claims for negligent, wanton, and bad faith
failure to settle, as well as a claim for abuse of process, against State Farm. (Doc.
27 at 3-26). At oral argument, the plaintiff conceded her claim for bad faith failure
to settle; that claim (Count 3) will be dismissed without further discussion. (Doc.
44 at 81-82). The remaining tortious failure to settle claims are addressed first,
followed by the abuse of process claim.
1.

Negligent and/or Wanton Failure to Settle

The Alabama Supreme Court has recognized claims for negligent failure to
settle in the context of first-party insurance claims. E.g. Waters, 73 So. 2d 524;
Hollis, 554 So. 2d 387. In its motion to dismiss, State Farm argues the plaintiff's
claims for refusing to settle fail as a matter of law because the plaintiff was not a
State Farm insured and the amended complaint depends on imposing duties only
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applicable in the first-party insurance setting. (Doc. 33 at 8-9). Specifically, State
Farm contends: (1) it did not assume any duties to Smith by protecting its
subrogation rights; and (2) to the extent the plaintiff bases State Farm's liability on
allegations regarding its handling of Voss's UIM claim, Alabama law does not
recognize claims for negligent or wanton claim handling.

(Id. at 9-13).

In

response, the plaintiff does not point to any Alabama law imposing duties on UIM
carriers to third-party tortfeasors;4 instead she argues State Farm's duties arise
under two interrelated principles: (1) the undertaking doctrine; and (2) the
foreseeability of the plaintiff's excess judgment. (Doc. 40 at 33-46). Each theory
is discussed in turn.
Regarding the undertaking doctrine, the plaintiff argues that by choosing to
thwart the plaintiff's settlement with Voss, State Farm assumed a duty to the
plaintiff under general principals of Alabama tort law. (Doc. 40 at 33-34). The
plaintiff further contends the extent of State Farm's duties should be determined by
insurance industry expert testimony. (Id. at 34). The plaintiff also notes she had
relinquished control of her legal defense to Nationwide. (Id. at 35-36). As the
plaintiff would have it, because State Farm prevented her from consummating the
settlement with Voss—which would have released the plaintiff from further

4

Indeed, the plaintiff notes there is no Alabama law precisely on point. (Doc. 40 at 35, 39).
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liability and the risk of an excess judgement—State Farm assumed the same duties
applicable in the first-party insurance context. (Id. at 36-37).
Regarding the foreseeability doctrine, the plaintiff relies on the general duty
of care under Alabama law: "every person owes every other person a duty imposed
by law to be careful not to hurt him." (Doc. 40 at 39) (quoting Taylor v. Smith, 892
So. 2d 887, 893 (Ala. 2004)). The plaintiff notes the key factor in finding a duty of
care is the foreseeability of harm and points to cases in which courts applying
Alabama law found a duty to seemingly unrelated third-parties. (Id. at 39-41)
(citing Taylor, 892 So. 2d 887 (physician administering methadone to patient who
used illicit drugs owed a duty to third-party driver injured in vehicle accident with
the intoxicated patient); Kelly v. M. Trigg Enter., 605 So. 2d 1185, 1190 (Ala.
1992) (retailer who sold pure ethyl chloride air-freshener to minor—who in turn
inhaled it as a "popper" and drove under its influence—owed duty to third-party
driver injured when minor caused accident); Bobo v. Tenn. Valley Auth., 855 F.3d
1294, 1304-07 (11th Cir. 2017) (employer had duty to protect foreseeable thirdparty plaintiffs from take-home asbestos exposure)).
Here, because Voss's medical damages were more than twenty times greater
than the plaintiff's liability limits, the plaintiff is correct that the danger of an
excess verdict was foreseeable. Because of the Lambert procedures and State
Farm's rejection of the proposed settlement with Voss, State Farm held the ultimate
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power to settle the case or force it to trial. Accordingly, the plaintiff claims State
Farm had the duty to investigate whether its subrogation interest had any value
before preserving its subrogation rights under Lambert. (Doc. 40 at 42). The
plaintiff describes this as a "hybrid" duty to tortfeasors requiring a UIM insurer to
"make a good faith determination of whether its 'subrogation claim' has any real
monetary value." (Id. at 44). If the subrogation claim is worthless, the UIM
insurer would owe a duty to the tortfeasor to abstain from invoking the Lambert
fronting process. (Id. at 44-45). If subrogation is possible, the UIM insurer would
have a duty to accept a settlement between its insured and the tortfeasor that would
protect the actual collectable subrogation interest, but no more. (Id. at 45). The
plaintiff proposes this new hybrid duty could be enforced through any of the claims
asserted here: negligent, wanton, or bad faith failure to settle.
The plaintiff's arguments suffer from several flaws. As noted in State Farm's
reply, the purpose of UIM insurance is to compensate a victim (like Voss) injured
by a tortfeasor (like the plaintiff) with insufficient liability insurance to make the
victim whole. Gulf Am. Fire & Cas. Co. v. Gowan, 218 So. 2d 688, 691 (Ala.
1969); ALA. CODE § 32-7-23.

UIM insurance is not meant to protect the

underinsured third-party tortfeasor from excess judgments resulting from their
tortious conduct or decisions regarding the amount of liability coverage to buy.
Neither is the fronting procedure set forth in Lambert concerned with protecting an
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underinsured tortfeasor from an excess judgment. Instead, Lambert addresses the
competing rights of UIM insurers' subrogation interests and their UIM insureds'
right to settle with a tortfeasor. 576 So. 2d at 167. In setting out the fronting
process in Lambert, the Alabama Supreme Court specifically noted it aimed to
maintain UIM insurers' subrogation rights and protect against any collusion
between UIM insureds and tortfeasors. Id.; See Ex parte State Farm Mut. Auto.
Ins. Co., 207 So. 3d 734, 736 (Ala. 2016). Absent from this analysis is any
concern regarding a third-party underinsured tortfeasor's finances.
The factual scenarios in the cases the plaintiff cites reinforce the conclusion
that neither the presence of UIM insurance nor the Lambert fronting procedure
supports a duty on the part of a UIM insurer to a third-party tortfeasor. (Doc. 40 at
39-41). The third-parties to whom duties were owed in Taylor, Kelly, and Bobo,
supra, were hapless souls struck by impaired drivers or unwittingly exposed to
asbestos carried home by others. These third-parties did nothing to cause their
injuries and could not have mitigated the unknown risks they faced. Here, the
amended complaint admits the plaintiff was speeding, talking on her cell phone,
and driving on the wrong side of the road when her vehicle struck Voss. The
plaintiff further alleges her liability was clear and her case was indefensible.
Unlike the unlucky victims in the cases cited by the plaintiff, the cause of the
plaintiff's damages (the excess judgment) was her own, admitted tortious conduct.
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The plaintiff's decision to carry the minimum liability coverage allowed by law
increased her exposure.
The amended complaint and response to the motion to dismiss skillfully
articulate the difficult position in which the plaintiff found herself after State Farm
rejected her proposed settlement with Voss. However, the plaintiff's proposed
remedy (the "hybrid duty") invites this court to rewrite well-established Alabama
law regarding the duties UIM insurers owe to third-party members of the general
population. This Erie-bound court will not will not impose on Alabama UIM
insurers novel third-party duties, no matter how compellingly argued. If the new
duties the plaintiff proposes are to come to fruition, they must flow from the
appropriate source: the legislature or the Alabama Supreme Court. Weaver v. G.D.
Searle & Co., 558 F. Supp. 720, 724 (N.D. Ala. 1983).
Absent the imposition of a new duty on State Farm to the plaintiff, all that
remains of her claims regarding State Farm's failure to settle stems from State
Farm's alleged failure to investigate Voss's UIM claim. There is no need to guess
how the Alabama Supreme Court would rule on claims derived from State Farm's
alleged negligent or wanton claim handling; it has repeatedly refused to recognize
these claims. Kervin v. S. Guar. Ins. Co., 667 So. 2d 704, 706 (Ala. 1995) (citing
Pate v. Rollison Logging Equip., Inc., 628 So. 2d 337 (Ala. 1993); Armstrong v.
Life Ins. Co. of Va., 454 So. 2d 1377, 1380 (Ala. 1984), overruled on other
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grounds, Hickox v. Stover, 551 So. 2d 259, 264 (Ala. 1989); Chavers v. Nat'l Sec.
Fire & Cas. Co., 405 So. 2d 1 (Ala. 1981); Calvert Fire Ins. Co. v. Green, 180 So.
2d 269 (Ala. 1965)).
For the foregoing reasons, the plaintiff's claims for bad faith, wanton failure
to settle, and negligent failure to settle against State Farm (Counts 1-3) are due to
be dismissed for failure to state a claim under Alabama law.
2.

Abuse of Process

A claim for abuse of process under Alabama law requires: (1) wrongful use
of judicial process; (2) the existence of an ulterior motive; and (3) malice. Triple J.
Cattle, Inc. v. Chambers, 621 So. 2d 1221, 1225 (Ala. 1993). In its motion to
dismiss, State Farm contends the Lambert fronting procedure is not the sort of
process giving rise to a claim for abuse of process. (Doc. 33 at 14). State Farm
also contends tort liability for abuse of process is inapplicable because it has
neither initiated nor participated in any litigation involving the plaintiff. (Doc. 43
at 8).
The parties cannot point to any Alabama cases specifically addressing
whether invocation of the Lambert fronting procedure can qualify as judicial
process giving rise to tort liability. The plaintiff points to a secondary source
Alabama courts have cited in analyzing other contours of abuse of process claims,
which notes: "the term 'process,' as used in the tort of abuse of process, is
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interpreted broadly and encompasses the entire range of activities and procedures
incident to the litigation process, including discovery proceedings, noticing of
depositions, and issuing of subpoenas." 1 Am. Jur. 2d Abuse of Process § 2
(footnotes omitted); (see Doc. 40 at 25). However, the following sentence in the
treatise notes other courts have found "'process' refers to the papers issued by a
court to bring a party or property within its jurisdiction, such as a writ of
attachment, the process used to initiate a civil action, or the process related to the
bringing of criminal charges."

1 Am. Jur. 2d Abuse of Process § 2.

More

importantly, the Eleventh Circuit has explicitly held "[i]n Alabama, an abuse of
process claim is proper only when the action results in the issuance of some form
of special process from the court, such as a writ of garnishment." Ramsey v. Leath,
706 F.2d 1166, 1169 (11th Cir. 1983); see id. at 1170.
Courts sitting in this district have concluded a plaintiff claiming abuse of
process "must allege 'that a suit had been legally filed for a proper purpose,' but
once filed, 'the process of the court . . . had been improperly used.'" Shuler v.
Duke, No. 16-0501-VEH, 2018 WL 2445685, at *10 (N.D. Ala. entered May 31,
2018) (quoting Ancora Corporation v. Stein, 445 F.2d 431, 433 (5th Cir. 1971));
Ray v. Calhoun Cty., No. 1:13-CV-1860-VEH, 2017 WL 4572290, at *6 (N.D.
Ala. entered Oct. 13, 2017) (dismissing abuse of process claim where plaintiff
alleged wrongful initiation of criminal charges, not any subsequent improperly
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issued special process). Moreover, courts in this district have repeatedly dismissed
abuse of process claims concerning conduct that occurred prior to initiation of
legal proceedings. Rondini v. Bunn, No. 17-1114-RDP, 2018 WL 317713, at *10
(N.D. Ala. entered Jan. 8, 2018) (dismissing abuse of process claim based on
conduct that occurred prior to initiation of threatened criminal proceedings.);
Union Ins. Co. v. Blakeney Palmer Co., No. 12-4072-RDP, 2014 WL 12597416, at
*2 (N.D. Ala. entered Apr. 17, 2014) ("[t]he key to a claim of abuse of process is a
wrongful act on the part of [the plaintiff] after she filed the declaratory judgment
action.") (emphasis added) (quoting Kizer v. Finch, 730 So. 2d 1197, 1200 (Ala.
Civ. App. 1998)); see Ray, 2017 WL 4572290, at *6.
Following the foregoing authority, the timing of events alleged here dooms
the plaintiff's abuse of process claim. The only affirmative action State Farm took
was its decision to invoke the Lambert fronting procedure. This decision occurred
before Voss filed the lawsuit against the plaintiff. Additionally, the plaintiff does
not allege State Farm's decision resulted in any special process being issued against
her. These deficiencies foreclose the plaintiff's abuse of process claim. Moreover,
the amended complaint plainly alleges State Farm did not initiate or participate in
any legal proceedings against the plaintiff.

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For the foregoing reasons, the plaintiff's claim for abuse of process against
State Farm (Count 4) is due to be dismissed for failure to state a claim under
Alabama law.
C.

Claims Against Both State Farm and Nationwide

Finally, the amended complaint asserts claims for outrage and civil
conspiracy against both defendants. Each claim is addressed in turn.
1.

Outrage

The amended complaint alleges State Farm and Nationwide purposefully
misused the fronting procedure to strip the plaintiff of liability protection,
gambling with her financial future in hopes of an unlikely defense verdict. (Doc.
27 at 30). The complaint also contends State Farm and Nationwide have an
agreement to never subrogate against each other's insureds. (Id.). Accordingly, the
complaint asserts the Lambert fronting procedure has evolved into a process which
allows liability insurers to present a de minimis defense, allows UIM insurers to
avoid the cost of litigation, and places an inordinate amount of risk on
underinsured tortfeasors. (Id.). The plaintiff also claims the defendants' conduct
caused her "emotional distress so severe that no reasonable person could be
expected to endure it." (Id.). While not specifically pled in the portion of the
complaint alleging outrage, other portions of the complaint describe the plaintiff's
"mental anguish, stress, annoyance, worry, and embarrassment" as a result of: (1)
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being sued for damages far exceeding her liability coverage; (2) enduring
discovery and trial; and (3) being subject to an $1,900,000 judgment and liable for
the amount exceeding available insurance proceeds. (Id. at 18).
A plaintiff pleading outrage must allege the defendant's conduct: "(1) was
intentional or reckless; (2) was extreme and outrageous; and (3) caused emotional
distress so severe that no reasonable person could be expected to endure it." Green
Tree Acceptance, Inc. v. Standridge, 565 So. 2d 38, 44 (Ala. 1990). The conduct
complained of must "be so extreme in degree as to go beyond all possible bounds
of decency and be regarded as atrocious and utterly intolerable in a civilized
society." Id.
Even assuming the defendants' alleged activities were sufficiently egregious
to constitute outrageous conduct, the plaintiff cannot show her emotional distress
was so severe that no reasonable person could be expected to endure it.
Standridge, 565 So. 2d at 44. The plaintiff's amended complaint acknowledges
she: (1) was speeding; (2) was talking on her cell phone; (3) crossed the centerline;
and (4) struck Voss, who was riding his bicycle in the oncoming lane. The
plaintiff also alleges her liability was clear and her case was indefensible. As a
result of the accident, Voss suffered life-threatening injuries, was comatose for
weeks, spent months receiving inpatient care, and underwent multiple brain
surgeries. Voss incurred over $725,000 in medical expenses and suffers from
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permanent brain damage as a result of the accident. An otherwise reasonable
person engaging in the conduct to which the plaintiff admits could—and probably
should—expect to endure the emotional distress associated with being sued and
subjected to discovery and trial.

A reasonable person with minimal liability

coverage could—and probably should—also expect to endure the emotional
distress associated with being pursued for damages exceeding her insurance limits
and being subject to a large excess judgment.
For the foregoing reasons, the plaintiff's claim for outrage against the
defendants (Count 8) is due to be dismissed for failure to state a claim under
Alabama law.
2.

Civil Conspiracy

The Alabama Supreme Court has held "[l]iability for civil conspiracy rests
upon the existence of an underlying wrong and if the underlying wrong provides
no cause of action, then neither does the conspiracy." Avis Rent A Car Sys., Inc. v.
Heilman, 876 So. 2d 1111, 1124 (Ala. 2003).

Because all of the plaintiff's

substantive claims are due to be dismissed, the claim for civil conspiracy (Count 9)
is due be dismissed for failure to state a claim under Alabama law.

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IV.

CONCLUSION
For all of the foregoing reasons, the defendants' motions to dismiss (Docs.

32, 33) are due to be granted in their entirety, and all of the claims presented in the
amended complaint are due to be dismissed for failure to state a claim.
A separate order will be entered.
DONE this 27th day of September, 2018.

______________________________
STACI G. CORNELIUS
U.S. MAGISTRATE JUDGE

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