Old Southern Life Insurance Co. v. Alabama Insurance Department
Docket: Civ. 5124
Court: Court of Civil Appeals of Alabama; May 14, 1986; Alabama; State Appellate Court
An appeal by Old Southern Life Insurance Company challenges the Montgomery County Circuit Court’s affirmation of the Alabama Insurance Department's order to recognize a $378,000 lawsuit settlement as a liability on its 1982 financial report. This liability stems from a fraud lawsuit filed by policyholder William Riddle, who had been misled by Old Southern’s agent regarding benefits of a Medicare supplement policy purchased in 1982. Following a jury award of $2,500,000 in February 1984, the settlement was reached in April 1984. The Department audited Old Southern for the period from January 1, 1980, to December 31, 1982, and included the settlement as a 1982 liability based on section 27-36-1 of the Alabama Insurance Code, which mandates inclusion of all unpaid losses and claims incurred up to the reporting date. Old Southern objected and sought a hearing, arguing that the liability should not be reflected until discovered in 1983 or 1984. The Department maintained that the liability was incurred in 1982 due to the misrepresentation and Riddle's hospitalization that year. The core issue on appeal is whether the Riddle claim qualifies as an incurred loss prior to December 31, 1982, under the relevant statute.
Terms not defined by the legislature will take their commonly accepted meanings. "To incur" is interpreted as becoming liable or subject to something, such as liabilities or penalties. The Department of Revenue asserts that the Riddle settlement is an unpaid claim or loss incurred before December 31, 1982, aligned with broad definitions of liability. Insurance examiners indicated that for hospitalization or accident insurance claims, the date of liability arises from the date of hospitalization or accident. In instances of bad faith refusal to pay claims, the date of occurrence is similarly linked to the hospitalization date. The courts view bad faith refusal as a form of fraud, thus the dates of occurrence for fraud claims should align with department policy, which is the date of hospitalization. A plaintiff must demonstrate damage to establish liability for deceit, and in Riddle's case, damages from misrepresentations occurred during the hospitalization in 1982, which also establishes Old Southern's liability. The Department conducts audits using a hindsight approach, often recognizing liabilities unknown to insurance companies at the time of financial reporting, a method employed by other states as well.
Henry Cooper, an examiner from the Mississippi Insurance Department, testified that the Department utilized the date of occurrence method to determine the date of incurred loss, specifically in the audit of Old Southern. He concluded that the reserve liability for the Riddle settlement was correctly established in 1982, as Old Southern’s agent made misrepresentations and Riddle was hospitalized that year. The Department adheres to a longstanding policy interpreting section 27-36-1, Code 1975, which mandates using the date of occurrence as the criterion for establishing reserve liability in hospital insurance policies. Court precedent dictates that interpretations by the enforcing administrative agency are given significant weight. The Department Commissioner’s order is presumed just and reasonable unless misapplied, based on contrary evidence, arbitrary, capricious, or obtained through fraud. The testimony supported the Commissioner’s order to record the $378,000 Riddle settlement as a reserve liability on Old Southern’s 1982 financial report, and although the Department had not previously addressed this specific scenario, it acted in accordance with established policy. The circuit court's judgment is affirmed, with one judge concurring and another dissenting.
