Kentucky: Supreme Court Affirms Dismissal of Third-Party Bad Faith Claim

October 19, 2016 | Insurance Coverage

The Kentucky Supreme Court, affirming a lower court decision, has ruled that a third-party bad faith claim against an insurance company had been properly rejected where the plaintiff had not produced evidence that the insurer had acted with reckless indifference to the plaintiff’s right to recover.

The Case

Samantha Hollaway alleged that she was in the passenger seat of her car, which Danny Bartlett was driving in a parking lot, when a vehicle owned and driven by Harry Sykes III collided with her car. Sykes’ contended that he was slowly backing out of a parking spot and was preparing to drive forward when Hollaway’s car struck the rear end of his vehicle. Sykes claimed that he could not have avoided the collision because Hollaway’s vehicle had been approaching him too quickly.

Hollaway sought compensation for both bodily injury and property damage from Sykes’ automobile insurer, Direct General Insurance Company of Mississippi, Inc.

Direct General apparently first concluded that its insured, Sykes, was liable for the accident, and it settled Hollaway’s property damage claim for $463.42. Direct General learned of the contradictory accounts for how the accident had been caused, and it offered Hollaway only $5,000 to settle her bodily injury claim.

Hollaway demanded $125,000. Direct General made no counteroffer and stood by its initial $5,000 offer to settle. Hollaway sued. Among other things, she asserted a third-party bad faith claim against Direct General under the Kentucky Unfair Claims Settlement Practices Act (the “KUCSPA”) on the theory that Direct General had failed to “reasonably evaluate, investigate, and negotiate a settlement of her bodily injury claim.”

The trial court granted summary judgment in favor of Direct General, the appellate court affirmed, and the case reached the Kentucky Supreme Court.

The Kentucky Supreme Court’s Decision

The court affirmed, concluding that Hollaway had failed to assert a colorable third-party bad faith claim against Direct General.

In its decision, the court explained that Kentucky law “still imposes a tall burden of proof on plaintiffs seeking to recover on a theory of bad faith.” It observed that, to succeed on her bad faith claim, Hollaway had to show that Direct General:

  1. Was obligated to pay her claim under the terms of the policy;
  2. Lacked a reasonable basis in law or fact for denying the claim; and
  3. Either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed.

The court added that proof of the third element required evidence that the insurer’s conduct had been “outrageous,” or that it had reflected “reckless indifference” to Hollaway’s rights.

Put differently, the court said that Hollaway “had to go beyond simply showing Direct General’s liability” and had to demonstrate that Direct General’s motive had been “recklessly indifferent to her right to recover.”

The court then agreed with the trial court that Hollaway had “failed to present a case that could possibly succeed at trial.”

It noted that Direct General had been unwilling to concede liability for the accident – particularly with regard to its own insured’s fault in causing the injuries Hollaway claimed to have sustained from the accident. The court then pointed out that because Direct General’s absolute duty to pay her claim had not been clearly established, “this alone would be enough” to deny her bad faith claim.

The court added, however, that Direct General also did not meet the “the malevolent intent required” to be susceptible for bad faith under Kentucky law. The court ruled that Hollaway had not offered “any proof of intentional misconduct” or proof to support her assertion that Direct General had never intended to negotiate with her fairly to reach a settlement for her claims.

The KUCSPA only require insurers “to negotiate reasonably with respect to claims” and does “not require them to acquiesce to a third party’s demands,” the court said. It concluded that Hollaway had “failed to present a colorable bad-faith claim” under the KUCSPA.

The case is Hollaway v. Direct General Ins. Co. of Mississippi, Inc., No. 2014-SC-000758-DG (Ky. Sept. 22, 2016).

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  • Robert Tugander

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