Insurance is a necessary evil. The law requires it in some circumstances and if you want to purchase a home, a condidtion of the loan or mortgage is to purchase an insurance policy. The purpose is to protect you and those who have an interest in the property. You expect that in exchange for the monthly payment of your premiums, your insurance coverage will be there when you need it, especially when your insurance company tells you its "Like a Good Neighbor," "You’re in Good Hands" and it is "On Your Side." These slogans expressed every day by State Farm, Allstate and Nationwide Insurance Companies are not always lived up to. So what happens when your insurance company does not live up to its advertised slogan?
When an insurance company fails to fulfill its obligations to its insured, the insurance company acts in “bad faith.” If the breach of the obligation is directly against the insured, its is known as first party bad faith because the insured is a party to the insurance contract. For example, the insured's house burned down but for no justifiable reason, the insurance company denies the claim.
It is known as third party bad faith when a party is responsible for damages to another person and the liable person's insurance company refuses to negotiate with the injured party. For example, an insured rear-ends another person and causes bodily injury. The insurance company for the insured person refuses to value the claim and negotiate with the injured person to arrive at a reasonable settlement.
States like Kentucky also have statutory bad faith where the state's legislature has passed a law setting forth certain acts by insurance companies that are prohibited. Kentucky's statutory bad faith law is known as the Unfair Claims Settlement Practices Act. When an insurance company commits third party bad faith, it may ultimately risk its own insured's well being by subjecting their insured to an excess verdict. An excess verdict is a judgment against the insured that exceeds the amount of coverage of the insured's insurance policy. Thus the insurance company's actions failed to protect its insured and could be construed as a first party bad faith claim.
The Kentucky Unfair Claims Settlement Practices Act (KUCSPA) is codified in KRS §304.12-230. There are several acts that may be considered “unfair practices.” The KUCSPA provides, that “it is an unfair claims settlement practice” to:
1. Misrepresent pertinent facts or insurance policy provisions relating to the coverage at issue;
2. Fail to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;
3. Fail to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;
4. Refuse to pay claims without conducting a reasonable investigation based upon all available information;
5. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed
6. Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably
clear;
7. Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the
amounts ultimately recovered in actions brought by such insureds;
8. Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;
9. Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of the insured;
10. Making claims payments to insureds or beneficiaries not accompanied by statement setting forth the coverage under which the
payments are being made;
11. Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose
of compelling them to accept settlements or compromises less than the amount awarded in arbitration;
12. Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either to submit a preliminary
claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain
substantially the same information;
13. Failing to promptly settle claims, where liability has become reasonably clear, under one (1) portion of the insurance policy coverage in
order to influence settlements under other portions of the insurance policy coverage;
14. Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for
denial of a claim or for the offer of a compromise settlement;
15. Failing to comply with the decision of an independent review entity to provide coverage for a covered person as a result of an external
review in accordance with KRS 304.17A-621, 304.17A-623, and 304.17A-625;
16. Knowingly and willfully failing to comply with the provisions of KRS 304.17A-714 when collecting claim overpayments from providers;
or
17. Knowingly and willfully failing to comply with the provisions of KRS 304.17A-708 on resolution of payment errors and retroactive denial
of claims.
The 17 Paragraphs outline a statutory bad faith case under Kentucky law. The facts of the case are important and are necessary to show a violation of any one, if not multiple portions of the statute.
Bad Faith or violations of the KUCSPA are not easy cases. The Kentucky Supreme Court has ruled that to prove bad faith whether it is common law bad faith or a violation of KUCSPA, the plaintiff must show the following:
1. The insurance company must be obligated to pay the claim under the terms of the policy;
2. The insurance company must lack a reasonable basis in law or fact for denying the claim; and
3. The insurance company either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether
such a basis existed. (See, Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993))
Recently, the Kentucky Supreme Court upheld a $3.425 million verdict against Indiana Insurance Company despite the insurance company defending its insured and paying the claim thus showing bad faith can still be found even where the insurer substantially performs as required. Indiana Insurance Co. v. Demetre¸ 527 S.W.3d 12 (2017). In this case, James Demetre owned a parcel of land where a gas station once stood. Mr. Demetre increased his insurance coverage with Indiana Insurance in 2008 to cover the property. The insurance agent knew that the property had once been a gas station, but did not inform the underwriters, who issued a policy for residential real property. Soon after he obtained the insurance, a neighbor began complaining of health issues relating to the property and filed suit against Mr. Demetre.
Indiana Insurance believed the neighbor's claim was without merit and it also did not agree that the policy covered the claim because it was not really residentisal real property. However, Indiana Insurance represented Demetre under what is called a “reservation of rights.” This is where the insurance company agrees to provide legal representation for the insured but may not pay the claim if the insured does not prevail at trial. Despite the reservation of rights and providing legal counsel to represent its insured, Indiana Insurance did very little to defend the claim against Demetre.
Indiana Insurance focused most of its efforts in a cross claim against Demetre accusing him of violatind the policy or failing to disclose crucial information to the sgent. Despite this fight, Indiana Insurance ultimately settled the claim that the neighbor brought against Demetre for $165,000. Despite its representation of Demetre and paying the claim, Demetre sued Indiana Insurance for bad faith for breach of his insurance contract and was awarded $2.5 million in punitive damages and $925,000 in compensatory damages for emotional distress.
Another major take from this case was Demetre did not have medical testimony to support his claim that he suffered emotional distress. Kentucky's highest court held that expert testimony is not necessary to substantiate damages for emotional distress in a bad faith case. So, it is clear in Kentucky that an isurance company may challenge its insured if it feels it has been taken advantage of and it can choose to sue its insured in court. However, if it chooses to represent the insured under a reservations of rights, the insurance company must provide an ethical and zealous representation of the insured. Here Indiana Insurance did not.
on to the above, bad faith claims are often accompanied by claims for breach of contract, fraud, and violations of the Kentucky Consumer Protection Act. Sometimes, cases involve multiple insurance carriers and/or companies working on behalf of insurance carriers (such as excess insurance providers or third party administrators).
Though insurance agents are not traditional parties to “bad faith” cases based upon the handling of a claim, insurance agents and/or brokers are responsible for complying with legal and contractual duties. Insurance agents are liable for errors and omissions and for any breaches of “fiduciary duties”. Insurance agents owe “fiduciary duties” of integrity, honesty, full disclosure, loyalty, and good faith. Agents must take time to understand your financial needs and the products they sell. Insurance agents have an interest in the success of the insurance company they represent. But, insurance agents are also obligated to protect your interests. If your insurance agent puts the interests of the insurance company above your interests, your insurance agent can be liable for breaching their promise to protect you.
Long and short, insurance companies make money by holding onto their money. Without “bad faith” law and other law regulating unfair insurance practices, there would be no way to enforce the promises insurance companies make in exchange for your money. You pay for a service, and you deserve to get what you pay for.
If an insurance company failed to fulfill its promise in handling your claim, contact the law office of DeCamillis & Mattingly, PLLC at (502) 589-2822. Help us make sure insurance companies keep their promises.