Matthew Ellison Summary – Significant Kentucky Court Of Appeals Decision On Bad Faith

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matthew-ellison-fowlerLadies and gentlemen, this is an important appellate opinion rendered January 30, 2015, by the Kentucky Court of Appeals, in a "to be published" case, relating to insurer bad faith under the Kentucky Unfair Claims Settlement Practices Act.

http://opinions.kycourts.net/coa/2013-CA-000338.pdf

There are two significant legal matters that are addressed by this opinion.

1. This Court limits the Osborne requirement that an emotional damages claim must be supported by scientific or medical evidence (a testifying expert) of serious or severe emotional distress by the plaintiff. The Court of Appeals limits Osborne to only common-law tort claims, and not statutory claims; in particular, this Court held that a KUCSPA-based claimant does not need scientific or medical testimony to support a claim of emotional distress. Therefore, there is at least one panel which feels that a bad-faith claimant need not have an expert medical/psychological witness to testify as to damages. This holding is contrary to some unpublished opinions of federal courts in Kentucky that have taken up Osborne-scope issues.

2. This Court again declines to adopt a blanket immunization for insurers who defend insureds under reservation of rights, then choose to pursue declaratory judgment actions seeking a legal determination that coverage is not afforded. However, it is clear from reading the factual recitation that there are a number of things that, in hindsight, could have been handled differently, to avoid the type of "abusive" dec action/action adverse to an insured that Guaranty National warns about:

a. An insurer can never make it appear that they are mounting an investigation/defense of liability claims whose quality depends on the insurer's belief as to coverage. Regardless of whether the conduct alleged in this case was true, an insurer must undertake its investigation/defense of claims where coverage is questionable, exactly as it does where coverage is not an issue. The 182-day period where the assigned adjuster did nothing — after the insurer noted the existence of a coverage issue — gave the appearance that the insurer didn't take the investigation/defense seriously because it didn't believe it owed coverage (when, in fact, this may not have been true).

b. An insurer should never have the same adjuster handling the liability/claim file as does the coverage/bad faith file. Never, ever. It gives the appearance that despite the retention of defense counsel (in this case, one who I have worked with before), that the insurer's conduct is still motivated by getting an outcome that leaves its insured hung out to dry.

c. The record does not reflect what the result of the insurer's "investigation" was regarding whether the insured had prior notice of the loss. I see no recitation in the case where the insurer's investigation turned up any evidence suggesting that the insured knew of the loss when the property was insured. Particularly in small/moderate losses, the risk/reward of pursuing an uncertain "no coverage" theory must be weighed by the insurer.

d. The evidentiary linchpin in this case seems to be from the Plaintiff's perspective, the cross-claim filed by the insurer seeking a sharing of liability from the insured based upon the "time on the loss" theory. The insurer rep testified at trial that at the time the cross-claim was filed, there was no evidence suggesting that a factual basis existed for this theory. If an insurer is going to take action adverse to its insured (dec action, cross-claim, etc.), it needs to have some sort of factual foundation to do so.

e. It calls into question whether a cross-claim is really ever a good idea, particularly in this case where the insurer was seeking financial compensation directly from its insured (as mentioned above, without any real factual basis). A better strategy is to make sure that another insurer is the pocket from whom you are seeking recovery, not your own insured. This is where just because you can do something, legally speaking, doesn't necessarily mean that you should — especially if you don't succeed.

This summary was written by Fowler Bell PLLC attorney

Matthew Ellison.