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Smith v. Nationwide Mutual Insurance Co.

United States District Court, N.D. Alabama, Southern Division

September 27, 2018

DONNA SMITH, Plaintiff,



         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.


         "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 allegations,' but it demands more than an unadorned, the defendant-unlawfully-harmed-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).


         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 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).

         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.).

         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 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 post-judgment 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).

         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 21-22). 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 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).


         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 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 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 ...

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