Appellate Law

Alabama Supreme Court Provides Detailed Look at Reasonable Reliance Standard

In AmerUs Life Ins. Co. v. Smith, the Alabama Supreme Court reversed a $6,500,000 verdict in favor of the plaintiff on his fraud claim and provided a helpful discussion of the reasonable reliance standard.   

In AmerUs, the Smiths sued AmerUs Life Insurance Company alleging fraud in connection with the sale of a life insurance policy.  Mr. Smith purchased the policy through an agent named Carl Jeffrey, who was a parishoner at Smith's church.  Smith alleged that certain restrictions on the policy premiums, benefits, and insurance term were misrepresented by Jeffrey, even though written documents provided at the time the policy was sold (as well as subsequently), fully explained these terms.   

The primary issue on appeal was whether Mr. Smith could have reasonably relied on Jeffrey's representations.  After quoting Foremost Insurance Co. v. Parham, 551 So.2d 259 (Ala. 1989), in which the court rejected the justifiable reliance standard in favor of the reasonable reliance standard, the court discussed the reasonable reliance standard in circumstances in which the plaintiff received documents in connection with the transaction:

The return to the reasonable-reliance standard imposes again on a plaintiff a general duty...to read the documents received in connection with a particular transaction...together with a duty to inquire and investigate....Foremost ended the era of 'ostrichisism' that had been heralded in when this Court adopted the justifiable reliance standard...and it foreclosed the right of a person to blindly rely on an agent's oral representations or silence to the exclusion of written disclosures in a policy.

(internal citations omitted).

The court further stated that when reviewing a plaintiff's actions pursuant to the reasonable-reliance standard, a plaintiff who is capable of reading documents, but who does not read them or investigate facts that should provoke inquiry, has not reasonably relied upon a defendant's oral representations that contradict the written terms in the documents.  An exception to this general rule exists, however, in circumstances where a special relationship exists.

Applying these principles to the case before it, the court ruled that Smith's reliance was not reasonable as a matter of law.  He had numerous documents in his possession which explained the policy limitations and restrictions, but simply failed to read them. As a result, Smith had taken no precautions to safeguard his own interests, as is required under Alabama law. 

Because no reasonable person could read the documents and not be put on inquiry as to the existence of inconsistencies in the agent's representations and the policy terms, Smith's reliance was unreasonable as a matter of law and AmerUs was entitled to judgment as a matter of law.  

For her part, Chief Justice Cobb dissented, writing that the pastor-parishoner relationship between Smith and Jeffrey constituted a "special relationship" which constituted an exception to the reasonable reliance standard.  

Full post as published by Alabama Appellate Watch on September 24, 2008 (boomark / email).