Opinion ID: 800999
Heading Depth: 3
Heading Rank: 2

Heading: Kentucky's Unfair Claims Settlement Practices Act

Text: Kentucky's UCSPA is intended to protect the public from unfair trade practices and fraud, State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky.1988), and imposes what is generally known as the duty of good faith and fair dealing owed by an insurer to an insured, Knotts v. Zurich Ins. Co., 197 S.W.3d 512, 515 (Ky.2006). The UCSPA fundamentally requires that a good faith attempt be made to effectuate a prompt, fair and equitable settlement. Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 454 (Ky.1999); accord Coomer v. Phelps, 172 S.W.3d 389, 395 (Ky.2005). Moreover, the UCSPA should be liberally construed so as to effectuate its purpose. Reeder, 763 S.W.2d at 118. Insurances companies are prohibited by the UCSPA from engaging in 14 specific unfair practices. Ky.Rev.Stat. § 304.12-230. Phelps alleges that State Farm violated the following subsections: (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; (4) Refusing to pay claims without conducting a reasonable investigation based upon all available information;. . . (6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear; [and] (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; Id. § 304.12-230. An insurance company's violation of the UCSPA creates a private cause of action both for the named insured and for those who have claims against named insureds, and the same standards govern both types of cases. Motorists Mut., 996 S.W.2d at 452; see also King v. Liberty Mut. Ins. Co., 54 Fed.Appx. 833, 836 (6th Cir.2003). In order to state a claim under the UCSPA, Phelps must meet a high threshold standard that requires evidence of intentional misconduct or reckless disregard of the rights of an insured or a claimant by the insurance company that would support an award of punitive damages. Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky.1993) (describing this standard as that of outrageous conduct by the insurance company); United Services Auto. Ass'n v. Bult, 183 S.W.3d 181, 186 (Ky.Ct. App.2003) (describing the threshold showing as high indeed). After meeting this initial showing, Phelps must establish the following three elements of a bad-faith claim: (1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Wittmer, 864 S.W.2d at 890 (internal quotation marks omitted); accord Motorists Mut., 996 S.W.2d at 452; Med. Protective Co. v. Wiles, ___ S.W.3d ___, ___, 2011 WL 2420011, at  (Ky.Ct.App. Oct. 21, 2011). Oddly, the second and third elements of this test depend on evidence similar to the threshold inquiry. King, 54 Fed.Appx. at 838. The appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable. Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368, 376 (Ky.2000) (internal quotation marks omitted). Evidence about problematic settlement behavior during litigation may be considered as part of this inquiry. Knotts, 197 S.W.3d at 517, 522-23 (internal quotation marks omitted). The Kentucky Supreme Court has cautioned insurance companies that coming up with an amount that is within the range of possibility is not an absolute defense to a bad faith case. Farmland Mut., 36 S.W.3d at 376 (internal quotation marks omitted); cf. Wittmer, 864 S.W.2d at 892 (suggesting that a low offer might serve as evidence of bad faith). To comply with their obligations under the statute, insurers should not force an insured to go [through] needless adversarial hoops to achieve [her] rights under the policy. [They] cannot lowball claims or delay claims hoping that the insured will settle for less. Farmland Mut., 36 S.W.3d at 376 (internal quotation marks omitted). But mere delay in payment does not amount to outrageous conduct absent some affirmative act of harassment or deception. . . . or evidence supporting a reasonable inference that the purpose of the delay was to extort a more favorable settlement or to deceive the insured with respect to the applicable coverage. Motorists Mut., 996 S.W.2d at 452-53 (citation omitted). Nor is the insurer's below-policy-limits offer considered evidence of bad faith per se, particularly where the claimants never demanded payment of the policy limits or any other sum. Id. at 453 (emphasis omitted); see also Coomer, 172 S.W.3d at 395 (noting that the UCSPA does not require that settlement offers always provide wholly accurate or complete compensation for an injury). And an insurer may refuse a demand exceeding the policy limits without running afoul of the UCSPA. Motorists Mut., 996 S.W.2d at 453. In addition, an insurer is entitled to challenge a claim through litigation if the claim is fairly debatable, Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv., Inc., 880 S.W.2d 886, 889-90 (Ky.Ct. App.1994), on either the law or the facts. Wittmer, 864 S.W.2d at 890 (internal quotation marks omitted). The Kentucky Supreme Court revisited the definition of fairly debatable in Farmland Mutual, which clarified that  Empire Fire does not stand for the proposition . . . that a disputed factual matter requires dismissal of a bad faith claim as a matter of law and explained that the existence of jury issues on the [underlying] contract claim does not preclude the bad faith claim. Farmland Mut., 36 S.W.3d at 375. It distinguished Empire Fire as a case involving unresolved legal questions about the insurer's liability. Id. Farmland Mutual then held that although elements of a claim may be `fairly debatable,' an insurer must debate the matter fairly and still is obligated under the KUSCPA to investigate, negotiate, and attempt to settle the claim in a fair and reasonable manner. Id. Whether a claim may be considered fairly debatable is a question of fact for the jury. Id. at 376. Finally, we note that our dissenting colleague's disagreement with the reversal of summary judgment in this case is primarily based on the intentional misconduct or reckless disregard standard for bad faith set forth in Wittmer, 864 S.W.2d at 890. We acknowledge that the Kentucky cases still recognize Wittmer's punitive-damages standard despite the Kentucky Supreme Court's later pronouncement that the appropriate inquiry is whether . . . the insurer acted unreasonably, Farmland Mut., 36 S.W.3d at 375 (internal quotation marks omitted). See, e.g., Wiles, ___ S.W.3d at ___ - ___, 2011 WL 2420011, at -9. This strikes us as confusing because a claim will obviously meet Farmland's lower standard of unreasonableness if it has first met Wittmer's higher standard of reckless disregard. Wittmer's threshold inquiry thus appears to render superfluous the merits inquiry into an insurance company's alleged bad faith. In any event, this seems to be the current state of Kentucky law. But even after acknowledging that Phelps has to meet Wittmer's higher threshold standard, we believe that the facts here would allow reasonable jurors to so find. This is not to say that they mustor even that they willfind for Phelps, but simply that we believe that the district court erred in concluding that no reasonable juror could find that Phelps has met this standard based on the analysis set forth in Part II.C. below.