Opinion ID: 1472722
Heading Depth: 1
Heading Rank: 7

Heading: the ucspa claims.

Text: The common law cause of action premised upon an insurance company's bad faith refusal to settle a claim arose initially in the context of an insurer's failure to settle a liability claim against its own insured, which resulted in a verdict in excess of the insured's policy limits. E.g., State Farm Mutual Automobile Insurance Co. v. Marcum, Ky., 420 S.W.2d 113 (1967), overruled on other grounds, Manchester Insurance & Indemnity Co. v. Grundy, supra, at 500. In Manchester , we recognized that under the principle of privity of contract, the cause of action belonged only to the liability insured; but that the insured could assign it to the liability plaintiff in consideration for a release of the insured from any liability in excess of the policy limits. As assignee of the insured, the successful plaintiff could then bring the bad faith action in a derivative capacity against the insurer to recover the excess amount of the verdict. Punitive damages were not recoverable, because the action was considered to be one for breach of contract. This type of action is referred to as a third-party bad faith action. Mere negligent failure to settle within the policy limits or errors of judgment are insufficient to constitute bad faith. Harvin v. United States Fidelity & Guaranty Co., Ky., 428 S.W.2d 213, 215 (1968); American Surety Co. of N.Y. v. J.F. Schneider & Son, Inc., Ky., 307 S.W.2d 192, 195 (1957), overruled on other grounds, Manchester, supra, at 500. In Manchester, supra , the test for bad faith in a third-party action was stated as follows: Did the insurer's failure to settle expose the insured to an unreasonable risk of having a judgment rendered against him in excess of the policy limits? If the question is answered yes by the trial court after weighing and evaluating the various factors, then the insurer is guilty of bad faith. Id. at 501. The various factors to be considered in determining the existence of bad faith are (1) whether the plaintiff offered to settle for the policy limits or less, (2) whether the insured made a demand for settlement on the insurer, and (3) the probability of recovery and of a jury verdict which would exceed the policy limits. Id. at 500. In Kentucky, the common law tort of first-party bad faith had its genesis in Feathers v. State Farm Fire & Casualty Co., Ky.App., 667 S.W.2d 693 (1983), which was a claim against a homeowner's policy for a fire loss. Prior to Feathers , damages for breach of a first-party insurance contract were limited to the amount due under the contract. Deaton v. Allstate Insurance Co., Ky.App., 548 S.W.2d 162 (1977); General Accident Fire & Life Assurance Corp. v. Judd, Ky., 400 S.W.2d 685 (1966). Punitive damages could not be awarded because punitive damages ordinarily are not recoverable for a breach of contract. Judd, supra, at 688. In Feathers, supra , the Court of Appeals viewed the failure of an insurance company to settle a first-party claim in good faith as a tort, not a breach of contract. [T]he proceeds of the policy may not be withheld unless there is a substantial breach of the contract by the policyholder. Whether or not State Farm was justified in withholding and denying the payment of the losses will be resolved by trial. We simply say that if State Farm was not justified in its actions, then its conduct was tortious against the policyholder for which consequential and punitive damages may be presented to the fact finder. Id. at 696-97. Feathers subsequently was overruled by Federal Kemper Insurance Co. v. Hornback, Ky., 711 S.W.2d 844 (1986), which in turn was overruled by Curry v. Fireman's Fund Insurance Co., Ky., 784 S.W.2d 176 (1989). In Curry , we incorporated by reference the dissenting opinion of Justice Leibson in Federal Kemper . Curry, supra, at 178. In addition to common law third-party and first-party bad faith claims, we have recognized two statutory bad faith causes of action, both predicated upon 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, ... In Stevens v. Motorists Mutual Insurance Co., Ky., 759 S.W.2d 819 (1988), we held that the Consumer Protection Act provides an insured under a homeowner's policy with a remedy against the conduct of his insurance company, if such conduct constitutes an unlawful act as defined in KRS 367.170. In that case, a claim that the insurance company misrepresented the contents of an engineering report and terminated settlement when there apparently were reasonable grounds for a compromise was held to state a cause of action under the statute. More specifically, we held in State Farm Mutual Automobile Insurance Co. v. Reeder, Ky., 763 S.W.2d 116 (1988), that a violation of the UCSPA could create a private cause of action for a third-party claimant damaged as a result of the violation of one or more of its provisions. Reeder did not address the degree of proof necessary to prevail on such a claim. That issue awaited our decision in Wittmer v. Jones, supra . In Wittmer , we returned to Justice Leibson's dissenting opinion in Federal Kemper, supra , to determine what degree of proof was necessary to sustain a claim of bad faith. Of course, both Federal Kemper and Curry were common law first-party bad faith claims, whereas Wittmer was a statutory third-party bad faith claim. We held in Wittmer that the same principles apply to third-party claims as to first-party claims. Wittmer, supra, at 890. Those principles were enunciated as follows: [A]n insured must prove three elements in order to prevail against an insurance company for alleged refusal in bad faith to pay the insured's 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.... [A]n insurer is ... entitled to challenge a claim and litigate it if the claim is debatable on the law or the facts.