In Kentucky, an insurance company is not the only party that can be sued for its involvement in insurance bad faith. In fact, insurance adjusters can also be sued for their liability in practicing insurance bad faith. Two Kentucky circuit courts have refused to dismiss allegations made against insurance adjusters. The defendants in both cases attempted to rely on Davidson v. American Freightways, Inc., 25 S.W.3d 94 (Ky. 2000), to have the claims against the adjusters dismissed. However, Judge Daugherty of Jessamine Circuit Court's Division I ruled that "claims adjusters fall under the category of agents engaged in the business of insurance" so the claims against the adjuster were proper. See Marsh, et al. v. Starns, et al., Civil Action No. 17-CI-00042 (Jessamine Cir. Ct., Mar. 27, 2017). Fayette Circuit Court also previously refused to dismiss claims against an insurance adjuster.
Click to read the orders of both Courts: Marsh, et al. v. Starns, et al., Civil Action No. 17-CI-00042 (Jessamine Cir. Ct., Mar. 27, 2017) and Haskins v. Good, et al., Civil Action No. 15-CI-01122 (Fayette Cir. Ct., June 24, 2015).
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On January 31, 2017, Honorable Thomas D. Wingate, Franklin Circuit Court's Division II Judge, granted Plaintiff Lisa Warren's motion for partial summary judgment and denied Defendant Auto-Owners' motion for summary judgment. The Court held that Ms. Warren had satisfied the first prong of the test for a first-party bad faith claim as required in Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993) by proving the insurance company was obligated to pay her claim under the terms of her insurance policy. The Court disagreed with Auto-Owners' argument that an insurer's "obligation to pay its policyholders' claims only arises once all judicial remedies it chooses to pursue have been exhausted[.]" Instead, the Court held that such an interpretation of the Wittmer test "confounds the concepts of contractual obligations of an insurer and the insured[.]" Warren v. Auto-Owners Insurance Company, Civil Action No. 09-CI-910, at *5 (Franklin Cir. Ct., Jan. 31, 2017).
An insurance company cannot use litigation as a tactic to prevent its obligation to pay under a claim of insurance bad faith.
Click here to read Judge Wingate's full opinion.
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In Hollaway v. Direct General Ins. Co. of Miss., 497 S.W.3d 733 (Ky. 2016), the Kentucky Supreme Court addressed the first substantive insurance bad faith case to come before it in ten (10) years. In its decision, the Court affirmed a summary judgment granted by Fayette Chief Regional Circuit Judge Thomas Clark, who had found an absence of evidence of bad faith on the part of the insurer. The Court had no trouble agreeing with Judge Clark, who had found that liability for the disputed parking lot fender bender that gave rise to the claim was never reasonably clear. Without clearly proving liability for the accident, or the injuries stemming from it, the plaintiff could not prevail on a claim of bad faith, which requires that an insurer be obligated to pay under the terms of the policy. Hollaway stems from a low-impact auto collision in a parking lot. The trial judge noted:
Liability was clearly contested. Plaintiff and Defendant Sykes each gave different accounts of the accident and the cause of the accident. The only real item in which the parties agreed was that all parties were wearing seatbelts at the time of the minor impact. Hollaway v. Harry Sykes, et al., Civil Action No. 08-CI-02603 (Fayette Cir. Ct., April 29, 2013).
The claim notes indicate that a supervisor made a notation early on that there was “possible comparative negligence” as the insured vehicle driver backed out of a parking space when the claimant vehicle pulled into the parking space and collided with the insured vehicle. Fourteen (14) days later, the supervisor told the adjuster to listen to the recorded statements again. The adjuster did just that and made a note that there were “conflicting statements” and went on to conclude that he thought the $5,000 offer was a fair offer. Samantha Hollaway, who was a passenger, and her driver contended that they had stopped in the parking lot and were rammed by Mr. Sykes who was backing out of a parking space. However, defendant Harry Sykes who later testified in a deposition, had given a completely different version of the accident from Hollaway’s. Sykes claimed that he was only backing up for a second or two before the other car, coming around the corner too fast, hit his car. Defendant Sykes noted there was no damage to his car and stated that he was stopped after having backed out of the parking space and was about to move forward when the other car came around and hit him. Nevertheless, plaintiff’s bad faith counsel argued that Direct General had admitted fault simply because they paid the $463 of property damage. But the trial court and the appellate court recognized Direct General clearly had the right to dispute the liability for the bodily injury claim based upon solid conflicting evidence.
Hollaway’s answers to interrogatories are also instructive. She contended that Direct General had “accepted liability” on July 27, 2007 when it paid the small property damage claim and that it was a misrepresentation to make a note in its claim file worksheet listing “comparative negligence” as a factor contributing to the evaluation. Certainly, Section 1 of the Unfair Claims Settlement Practices Act (“UCSPA”), which prohibits misrepresenting pertinent facts, is not meant to impose liability on an insurance carrier for writing in the claim file its impressions – particularly when the impression of comparative fault in this case was well supported by its own insured’s recorded statement.
There are three (3) key takeaways from Hollaway. Most importantly, the Court rejected the idea that a claimant must prove an “evil motive” on the part of the insurance company. The phrase “evil motive” has been an oft-quoted line by insurers arguing that a plaintiff has failed to prove that the insurer acted with evil intent. The Court recognized that the standard in Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 452 (Ky. 1997), requiring either outrageous conduct or reckless indifference to the rights of others, also included this third potential mental state premised on an insurer’s “evil motive.” However, the Court specifically removed that standard because the use of the word “evil” evokes overly sinister connotations that, in the mind of the casual speaker, are not necessarily synonymous with “outrageous” or “recklessly indifferent.” Because of the confusion the Court feared continued reliance on the “evil motive” standard would cause future litigants, the Court removed “evil motive” from the analysis.
But be prepared for insurers to ignore the Court’s clear holding in Hollaway that limits the mental state standard to outrageous OR reckless disregard. Instead, insurers will cite to a sentence in the opinion stating: “Direct General does not meet the malevolent intent required under Wittmer to be susceptible for bad faith under Kentucky law.” Hollaway, 497 S.W.3d at 733 (referencing Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993)). This language was not meant to change the law by adding “malevolent” to the list of alternative mental states. Indeed, one (1) page earlier the decision took away the alternative “evil motive” standard. In fact, the Wittmer decision makes no mention of the word “malevolent.” Wittmer of course had repeated the same standard that was stated in Glass and which the Hollaway Court had just modified on the previous page of its opinion. This harkens back to one of the first discussions of the bad faith cause of action by the Kentucky Supreme Court in Federal Kemper Ins. Co. v. Hornback, 711 S.W.2d 844, 846 (Ky. 1986) (Liebson, J., dissenting) (adopted by Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176 (Ky. 1989)), where the “reckless disregard” standard was first discussed. The Court’s reliance on Wittmer, and the standard as stated in Wittmer and Glass, can only lead to the conclusion that the use of the adjective “malevolent” was just an attempt to collectively describe the two alternative mental state standards of outrageous or reckless indifference. (Granted, the Court’s use of the “malevolent” is confusing since that word is defined as evil.)
Second, the Court also seemed to dispel the notion that a bad faith claim could only lie if the claimant proved that liability for the accident was “beyond dispute.” While the Court of Appeals had applied a standard that liability must be “beyond dispute,” the Supreme Court noticeably did not use this “beyond dispute” standard in the analysis portion of its opinion. This is noteworthy because, in reciting the holding below, the Supreme Court twice makes reference to that phrase (putting it in quotes). However, the Supreme Court did not require that Hollaway prove liability beyond dispute. Instead, the Supreme Court held that Direct General’s “absolute duty to pay was not clearly established, and this alone would be enough to deny her bad faith claim under Wittmer.” Hollaway, 497 S.W.3d at 739.
Finally, the Court’s decision does confirm that liability (which needs to be reasonably clear) includes both liability for causing the accident and for causing the injury in a third party case. This is nothing new. The duty to indemnify the insured from tort liability can only be triggered if the insured’s conduct has, in fact, caused injury.
Given the facts of the Hollaway case, the Court’s decision to affirm the summary judgment is not surprising. What is important in Hollaway is that the Court reinforced the long-held “reckless indifference” standard while clarifying that seemingly higher standards of “evil motive” and “beyond dispute” are not required.Click Here To Read More