The Alabama Municipal Insurance Corp. has dropped its defense of the city of Fairhope and Mayor Tim Kant in the multi-million dollar “Dyas triangle” lawsuit and is no longer paying legal fees in the case, according to court documents filed last week.

Fairhope’s liability insurance carrier sued the city and Kant July 7, alleging that plaintiffs’ claims in the two-year old federal lawsuit are not covered by the AMIC policy, and that the company is not obligated to pay legal fees for defense of the case or any monetary damages from verdicts against the defendants.

In their answer to the AMIC lawsuit filed Friday in county circuit court, the city and Kant claim they are covered by the policy and also countersued, alleging the insurance company’s denial of coverage and withdrawal of their defense constituted the tort of bad faith. The defendants seek to recover punitive damages, as well as past attorney’s fees of $255,000, and current and future attorney's fees for defense of the Dyas lawsuit, as well as fees and costs in the AMIC lawsuit.

“AMIC advised the (city and Kant) on July 8, 2010, that it was withdrawing its defense of the Insureds in the (Dyas case),” the defendant’s Aug. 27 answer stated. “This was two years after issuing a reservation of rights letter to the City and without notice from AMIC during the interim of any coverage issues. AMIC further instructed (the city’s) counsel that it would no longer pay any defense costs and that statements for legal fees and costs of defense should be submitted only to (the city) and not to AMIC.”

The Dyas case was filed in April 2008 by members of the Dyas family, claiming the city and Kant thwarted their efforts to develop property at the intersection of U.S. Highway 98 and Veterans Drive, while allowing a similar mixed-use project nearby. A jury trial is scheduled for February in federal court in Mobile. The defendants stated in their Friday court filing that plaintiffs are seeking damages of more than $5 million in the Dyas case.

The city and Kant have been defended in the Dyas lawsuit by Caine O’Rear and attorneys in the Hand Arendall law firm. Because the attorneys’ hourly rates are more than the rate allowed by AMIC, an arrangement was reached for the city and AMIC to share in the payment of those legal fees, according to city staff and O’Rear.

As of mid-July, the city had paid $472,454 to the firm in the Dyas litigation, according to records obtained by the Fairhope Courier. By mid-August, 34 depositions had been taken in the case, according to information provided by O’Rear.

The AMIC lawsuit was served on Kant in his capacity as mayor and as an individual, according to the complaint. But the mayor did not inform City Council President Lonnie Mixon or Councilman Rick Kingrea, the council’s legal liaison, that the case had been filed, Mixon and Kingrea said.

The first the public learned about the AMIC lawsuit was at the Aug. 23 council meeting, when Kingrea asked about the status of the case. City Attorney Marion “Tut” Wynne gave a brief update and stated the defendants had been granted a two-week extension by which to file their answer no later than Aug. 27.

Wynne also said the Hand Arendall law firm, which had been defending the city and Kant in the Dyas lawsuit, would be assisting in defense of the AMIC case. The council was also not informed that the firm had been hired to defend the case, Mixon said.

The defendants’ answer filed Friday provided additional details on the funding of the defense of the lawsuit, information which the Courier has sought through numerous public records requests, with mixed results, since late June. At no time while the Courier was requesting that information, and had received responses from the city and O’Rear after the AMIC lawsuit had been filed, was any mention made of that lawsuit, or that the company had withdrawn their defense of the case or stopped paying legal fees.

The defendants’ Aug. 27 answer stated that, at times, since the beginning of the litigation, AMIC has refused to pay legal fees, totaling the $255,000 they are now seeking to recover through their counterclaim.

“AMIC, through its own conduct and that of its third-party audit service (LSS), engaged in a pattern and practice of demonstrating greater concern for its own monetary interests than concern for the financial risks facing (the city) in the underlying action,” the defendants alleged. “AMIC arbitrarily and improperly utilized its case-handling procedures and unilaterally refused to pay for legitimate legal services in a manner designed to restrict the independent judgment of (the city’s) attorneys in their representation of (the city).”

Neither Kant nor O’Rear could be reached to comment on this story, and Scott Speagle, AMIC’s attorney, said he will not comment on the case.

The AMIC lawsuit has been assigned to Presiding Judge James A. Reid, who has previously served as Fairhope’s city judge and city attorney. No court hearings have yet been set in the case, according to city staff.