TN. Tennessee Decision relies upon Kentucky Decision (Knotts v. Zurich Ins. Co., 197 S.W.3d 512 (Ky.2006) to conclude insurer’s duty of good faith continues into litigation

Here is a link to an article posted at Property Insurance Coverage Law Blog by Brandee Bower

From Property Insurance Coverage Law Blog, Merlin Law Group:

Litigation does not end the continuing duty of good faith

In a recent case in Tennessee, homeowners suffered a fire loss and filed a claim with their insurance company, Anpac.1 The insurance company investigated the loss and found that the homeowners intentionally set the fire and denied coverage. It then filed a declaratory judgment action. The homeowners filed counterclaims for breach of contract, unfair claims practices and bad faith. They alleged that the insurance company ignored evidence that showed they did not set the fire. In Tennessee, a statute allows insureds to seek a penalty of up to 25% of the total liability where a claim is denied in bad faith.2 When an insurance company refuses to pay a claim within 60 days of a demand, it must pay an additional 25% if the refusal was not in good faith and caused the insureds additional damages.

Insurers have a duty to act in good faith and no law or statute indicates this is severed by litigation. The trial court looked to rulings from appellate courts in other states: Kentucky Supreme Court (holding that duties of fair dealing did not end after litigation commenced,3 and an insurer’s refusal to settle after liability became clear is basis of bad faith4); Supreme Court of California (litigation did not terminate the duty of good faith because it did not end the contractual relationship5); Montana Supreme Court (insurers duty of fair dealing and not to withhold payment of valid claims does not end when a Complaint is filed6); Arizona Court of Appeals (failure of insurer to investigate while declaratory judgment action was pending could be basis of breach of good faith7); and the Georgia Court of Appeals (litigation does not end duty to reasonably investigate8).

After reviewing holdings in these jurisdictions, the court found that the insurance company had a good faith duty to consider evidence that came to light during the litigation, and if that evidence made clear that the homeowner did not destroy their home and that they were due payment under the policy, it should have paid their claims.

Case Notes: Of bad faith and duties to defend, investigate and indemnify – Demetre vs. Indiana Insurance Co., COA Published, Jan. 30, 2015

Bad faith synonyms in a non-legal context should help provide context for this delict.

Bad faith synonyms in a non-legal context should help provide context for this delict. Screen capture from Thesaurus.com.

Is a reservation of rights and providing the insured counsel, a defense to statutory and contractual bad faith claims?  The Court of Appeals basically said – nope, it ain’t.  The following opinion by Judge Thompson provides not only a tight and succinct analysis of bad faith law, with a little bit of history Justice Leibson’s dissent in Federal Kemper, but one of the best explanations I have read on how emotional damages in the Osborne v. Keeney, 399 S.W.3d 1 (Ky. 2012) decision fit in to all of this.

The COA referenced the crux of Indiana’s defense – “Indiana Insurance argues it cannot be liable as a matter of law under any theories advanced because it provided defense counsel to Demetre and indemnification in compliance with the insurance policy provisions. To the extent it relies solely on its satisfaction of the express policy provisions, Indiana Insurance’s argument misses the mark. This is not a breach of contract action but is premised on three theories of bad faith, two based on statutory law and one on common law.”

Please look closely at the bad faith analysis and how Indiana Insurance Company treated its insured poorly by its conduct upon filing the claim by Demetre and its lack of investigation into the claim while hiding under a reservation of rights.  Briefly, “We have previously held an insurer cannot shield itself from its own bad faith actions by retaining legal counsel for its insured. “[I]t remains ultimately responsible for its own non-delegable statutory duty to properly investigate claims -19-and adjust them in harmony with the terms and conditions of its policy.” Hamilton Mut. Ins. Co. of Cincinnati v. Buttery, 220 S.W.3d 287, 294 (Ky.App. 2007). It was the conduct of Indiana Insurance, not the adequacy of Schenkel’s representation, that evidenced bad faith.”

However, I wish to highlight for you the emotional damages analysis of Osborne v. Keeney, 399 S.W.3d 1 (Ky. 2012) in the context of this decision.  No experts needed if the mental anguish and anxiety are damages from the cause of action, but experts ARE needed if the mental anguish and anxiety is an element of proof in the cause of action.  That makes a lot of sense to me.

The question is whether the heightened proof requirements in Osborne extends to bad faith claims under the Unfair Claims Settlement Practices Act where damages for mental anguish and anxiety have been traditionally permitted without an impact and without expert testimony. As noted in FB Ins. Co. v. Jones, 864 S.W.2d 926, 929 (Ky.App. 1993), the Unfair Claims Settlement Practices Act prohibits behavior that is egregious. Consequently, damages are available as permitted by KRS 446.070 which states: “A person injured by the violation of any statute may recover from the offender such damages as he sustained by reason of the violation, although a penalty or forfeiture is imposed for such violation.” In FB Insurance, the Court held those damages include damages for anxiety and mental anguish in claims pursuant to KRS 304.12-230. FB Insurance, 864 S.W.2d at 929.

In Motorists Mutual Ins. Co. v. Glass, 996 S.W.2d 437, 454 (Ky. 1997), the Court not only confirmed that damages for anxiety and mental anguish are recoverable in statutory bad faith claims, but it also set forth the proof required: 1 Indiana Insurance cites unpublished federal decisions applying Osborne in contexts other than statutory bad faith claims. We are not bound by those decisions predicting how Kentucky appellate courts would rule and do not find them persuasive on a factual basis. -26-“[E]ntitlement to such damages requires either direct or circumstantial evidence from which the jury could infer that anxiety or mental anguish in fact occurred.” Id.

Although written in the context of a violation of the Kentucky Civil Rights Act, our Supreme Court has distinguished between statutory actions where emotional distress damages are recoverable and the elements of the tort of IIED which requires the distress be severe. In Childers Oil Co., Inc. v. Adkins, 256 S.W.3d 19, 28 (Ky. 2008), the Court expressly rejected any requirement that the plaintiff prove her emotional distress was severe. It pointed out the action was not filed as an IIED claim but was an action under the Kentucky Civil Rights Act. It held the plaintiff’s testimony alone supported an award for anxiety and mental anguish and, because such damages were permissible, the question was simply whether the damages were excessive. Id.

Osborne did not alter the law cited. A claim brought under the Unfair Claims Settlement Practices Act is not a NIED or an IIED claim; it is a claim under the Act for compensatory damages, which include damages for emotional distress. In other words, emotional pain and suffering, stress, worry, anxiety or mental anguish are not elements of the cause of action but are consequences of the insurer’s violation of the Act for which the insured is entitled to be compensated.

THE INDIANA INSURANCE COMPANY VS. DEMETRE (JAMES)
OPINION AFFIRMING
THOMPSON (PRESIDING JUDGE) COMBS (CONCURS) AND STUMBO (CONCURS)
2013-CA-000338-MR TO BE PUBLISHED

DEFENSES: No bad faith when no underlying insurance policy (Murphy vs. Travelers, COA NPO 1/17/2014)

Insurance. Torts. Unfair Claims Settlement Practices Act. 
Murphy  vs. Travelers Cas. and Surety Co.
COA, NPO 1/17/2014
Here the COA stated the obvious and affirmed the dismissal of a claim of violation of the Unfair Claims Settlement Practices Act because the underlying insurance policy had lapsed and was not in force at the time of the alleged conduct.  Or as stated much better than I

The courts of this Commonwealth have continually held that absent a contractual obligation, i.e., an insurance policy, there can be no bad faith cause of action and no violation of the UCSPA. See Davidson v. American Freightways, Inc., 25 S.W.3d 94 (Ky. 2000); Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993); Kentucky Nat. Ins. Co. v. Shaffer, 155 S.W.3d 738 (Ky. App. 2004). We are bound by those decisions.

Causes of Action: UCSPA, Actual damages not include attorney fees (policy language reviewed)

From Excel v. Liberty Mutual, COA, NPO, 5/6/2011

Next, Exel contends the trial court erred by finding that it failed to present evidence to support a finding that Liberty’s actions caused actual damage or injury to Exel. Specifically, Exel alleges it suffered compensable damages in the form of attorney fees in regards to the underlying action, the expenses associated with Exel’s attorney’s time spent assisting Liberty in its defense of Exel, the loss of coverage under its policy with Liberty, and its increased loss experience resulting from Liberty’s settlement with Borden. We disagree.

The goal of compensatory or actual damages is to compensate a plaintiff for injuries and make the plaintiff whole by awarding a monetary amount to equal the wrong by the defendant. Jackson v. Tullar, 285 S.W.3d 290, 297-98 (Ky.App. 2007). Here, Exel’s claims of damages do not specifically allege any compensable injuries to support its claim of bad faith. The insurance policy with Liberty held by Exel contained no provision permitting Exel to recover attorney fees in such an instance. See Glass, 996 S.W.2d at 455 (absent a written agreement or statute, parties are generally not allowed to recover attorney fees) (citation omitted). Further, Exel failed to provide any evidence of the expenses incurred by its general counsel while assisting Liberty in its defense of Exel besides the counsel’s salary paid by Exel, which would have been paid despite Liberty’s actions. In addition, Exel’s claim that it incurred actual injury as a result of its policy limit being exhausted is also without merit. Exel suffered no actual injury as a result of Liberty paying out the policy limit because it defense costs were entirely paid by either Liberty or Great American. Lastly, Exel did not provide any evidence that it suffered an increased loss expectancy or that an increased loss expectancy could be attributed to Liberty’s actions which are alleged to be in bad faith. Accordingly, the trial court did not err by granting Liberty’s motion for summary judgment.

Causes of Action: UCSPA, Actual Damages required to get punitives

From Excel v. Liberty Mutual, COA, NPO, 5/6/2011

On appeal, Exel first argues that the trial court erred by granting Liberty’s motion for summary judgment because proof of actual damages is not necessary to sustain a claim of bad faith. We disagree.

To establish a private cause of action for a claim of bad faith under the UCSPA, one cannot rely merely upon a “technical violation” of the UCSPA. Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993). Indeed, “a condition precedent to bringing a statutory bad faith action is that the claimant was damaged by reason of the violation of the statute.” Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 452 (Ky. 1997). Absent actual damage, there can be no cause of action premised upon an allegation of bad faith under the UCSPA. Id. at 454. (citation omitted).

Exel directs this court to Commonwealth Dept. of Agric. v. Vinson, 30 S.W.3d 162 (Ky. 2000), in which the Kentucky Supreme Court stated,
“compensatory damages are not an essential element of an intentional tort[.]” Id. at 166. In Vinson, the Department of Agriculture (Department) was sued by former employees who alleged bad faith under KRS 61.103(2), which specifically provides for the right to file a civil action for punitive damages independently of one for compensatory relief. The Department argued the statute should be interpreted in accordance with Kentucky common law, thereby requiring actual compensatory damages before a party is entitled to punitive damages. In reconciling the statute with the common law, the Court noted, “[w]here the plaintiff has suffered an injury for which compensatory damages, though nominal in amount may be awarded, the jury may in a proper case, award punitive damages as well.” Id. (emphasis added). Under the facts of Vinson, the Court found there to be a possibility of compensatory damages, although none were addressed by the claimants.

We find Vinson to be factually different from the instant case. Here, the UCSPA contains no provision permitting a claim for punitive damages absent a showing of compensatory damages, or absent a showing that the claimant was injured by actions that violated the statute. Rather, case law suggests that in order for a claimant to succeed on a claim of bad faith, they must allege actual injury. Thus we conclude that in order for Exel to defeat Liberty’s motion for summary judgment, it must allege injuries on which compensatory damages may be awarded.