UNFAIR CLAIMS SETTLEMENT PRACTICES ACT
KY. REV. STAT. ANN. §§ 304.12-230 (1984/1988).
Kentucky case law establishes there is no claim for bad faith in the absence of coverage. Absent a contractual obligation, there simply is no bad faith cause of action, either at common law or by statute. Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 100 (Ky. 2000). “[I]n the absence of a contractual obligation in an insurance policy for coverage, there can be no claim for bad faith.” Kentucky Nat’l Ins. Co. v. Shaffer, 155 S.W.3d 738, 742 (Ky. Ct. App. 2005), Motorists Mutual v. Glass, 996 S.W.2d 437 (Ky. 1999) deals with first- and third-party claims, discusses the history of both, and places all prior bad-faith cases in the perspective of that history.
FIRST PARTY BAD FAITH:
Claimants may also have a claim for violation of Kentucky’s Consumer Protection Act, KRS 367.110 et seq. The purchase of a policy is a service intended to be covered by the Act—Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819 (Ky. 1988)—but the failure to settle a claim is not, in and of itself, an unfair act contemplated by the Act. State Farm Fire & Casualty Ins. Co. v. Aulick, 781 S.W.2d 531 (Ky. App. 1989).
Whether a bad-faith claim arises under common law or under the UCSPA, the claimant must prove three elements to prevail: (1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Id. Technical violations of the UCSPA do not form the basis of a claim. There must also be “evidence sufficient to warrant punitive damages.” Id. That means the claimant must show that the insurer acted with an “evil motive,” or “reckless indifference to the rights of others.” Id. See also, Motorists Mut. v. Glass, supra 996 S.W.2d at 452: “[M]ere delay in payment does not amount to outrageous conduct absent some affirmative act of harassment or deception.”
Duty to settle: Although the insurer has a duty to its insured to settle claims within its policy limits when it can reasonably do so, that duty does not arise until a claimant makes a demand within the policy limits. There is no affirmative duty on the carrier to “seek out the claimant and offer settlement in order to avoid a charge of bad faith.” Davis v. Home Indem. Co., 659 S.W.2d 185, 189 (Ky. 1983).
Duty to defend: Under Cincinnati Ins. v. Vance, 730 S.W.2d 521 (Ky. 1987), an insurer may deny coverage and refuse to provide a defense. But if that denial is found to be wrongful in subsequent coverage litigation, the insurer becomes responsible for the entire amount of any verdict rendered against the insured without regard to policy limits.
The insurer may also be bound by any settlement agreement reached between the claimant and the insured, although it is not necessarily bound by the agreed-upon damages.
Since Vance most insurers defend under a reservation of rights unless their coverage position appears airtight. However, an insured is not required to accept a defense under reservation of rights. Medical Protective Co. v. Davis, 581 S.W.3d 25 (Ky. 1979).
Both insurers and individual adjusters have been sued for violations of the UCSPA. But Kentucky has never ruled on whether individual adjusters may be sued for common-law bad faith. Because of Kentucky’s stringent summary-judgment standard, many plaintiffs who sue out-of-state insurers will join adjusters who reside in Kentucky to destroy diversity.
Note, in the Eastern and Western federal districts regarding fraudulent joinder for defeating diversity jurisdiction. Under Sixth Circuit law, a defendant is fraudulently joined if there is no reasonable basis to predict that the state law would impose liability under the facts pleaded in the complaint. Alexander v. Elec. Data Sys. Corp., 13 F.3d 940, 949 (6th Cir. 1994). For representative cases see Lisk v. Laroque, 2008 U.S. Dist. LEXIS 4030 (W.D.Ky. 2008)(finding fraudulent joinder); Malone v. Cook, 2005 U.S. Dist LEXIS 24962 (W.D.Ky. 2005)(finding fraudulent joinder); Gibson v. Am. Mining Ins. Co., 2008 U.S. Dist. LEXIS 82205 (E.D.Ky. 2008)(rejecting fraudulent joinder argument).
Update: In Western Leasing, Inc. v. Acordia of Kentucky, Inc., 2010 Ky. App. LEXIS 81 (May 7, 2010), the court upheld the dismissal of an UCSPA claim against Acordia, who was the plaintiff’s agent for procuring insurance the plaintiff. The UCSPA was intended to regulate the conduct of insurance companies. The statute regulates the conduct only of persons who enter into contracts of insurance. Brokers do not actually enter into such contracts; they procure such contracts on behalf of their principals. A motion asking the Kentucky Supreme Court for discretionary review of Western Leasing is pending as of this writing.
Self-insured entities are not subject to claims for bad faith. Davidson v. American Freightways, Inc., 25 S.W.3d 94 (Ky. 2000).
Workers’ compensation carriers are not subject to statutory claims under the UCSPA or the Consumer Protection Act; workers are limited to the remedies available under the Workers’ Compensation Act, KRS Chapter 342.
Bifurcation—Trial courts are required to bifurcate bad-faith claims, trying them after the underlying claim is resolved, and only if it is resolved in favor of the claimant. Wittmer. In practice, some courts schedule the bad-faith case to follow the underlying case immediately, if necessary. Most will set the bad-faith case much later.
Bifurcation of Discovery—Wittmer does not speak to whether trial courts should hold discovery in abeyance pending the resolution of the underlying claims. The practice varies from jurisdiction to jurisdiction—and in those jurisdictions having more than one trial judge, from judge to judge. Some judges are convinced that allowing discovery to proceed while the underlying case is unresolved prejudices the insured (in a first-party case) and the insurer (in first- and third-party cases.)
THIRD-PARTY BAD FAITH:
Statutory bad-faith claims are subject to the same Wittmer elements set forth above. A claimant must show (1) that the insurer owed the claim; (2) that the insurer refused to pay the claim; and (3) that the refusal was without a reasonable basis, or with reckless disregard as to whether such a basis existed.
Third parties may also bring bad-faith claims via assignment. Grundy v. Manchester Ins. & Indem. Co., 425 S.W.2d 735, 737 (Ky. 1968). The insured may assign its claim after suffering an excess verdict, or before any verdict is rendered, if the insurer refuses to defend.
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.