Opinion ID: 2981451
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Heading: Kentucky law’s bad faith standard

Text: Kentucky law imposes a three-part test for bad faith claims: (1) [T]he 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 v. Jones, 864 S.W.2d 885, 890 (Ky. 1993). “[I]n order to survive a motion for summary judgment, a plaintiff in a bad faith action must come forward with evidence, sufficient to defeat a -5- No. 11-5965 Nat’l Sur. Corp. v. Hartford Cas. Ins. Co. directed verdict at trial, which reveals some act of conscious wrongdoing or recklessness on the part of the insurer.” Matt v. Liberty Mut. Ins. Co., 798 F. Supp. 429, 434 (W.D. Ky. 1991). Kentucky’s standard is high. Plaintiffs alleging bad faith must “prove . . . conduct . . . of such an arbitrary and reprehensible nature as to constitute bad faith.” Winburn v. Liberty Mut. Ins. Co., 8 F. Supp.2d 644, 647 (E.D. Ky. 1998) (quoting Matt, 798 F.Supp. at 433). Bad faith “is not simply bad judgment. It is not merely negligence. It imports a dishonest purpose of some moral obliquity. It implies conscious doing of wrong. . . . It partakes of the nature of fraud.” Matt, 798 F. Supp. at 433. The Kentucky Court of Appeals reaffirmed the high evidentiary threshold in bad faith actions against insurers in United Servs. Automobile Ass’n v. Bult, 183 S.W.3d 181 (Ky. Ct. App. 2003). Bult identified Wittmer as the definitive case governing bad faith actions, id. at 186, and noted that for a bad faith claim to proceed to a jury, evidence sufficient to support an award of punitive damages against the insurer must exist. Id. The “[e]vidence must demonstrate that an insurer has engaged in outrageous conduct toward its insured. Furthermore, the conduct must be driven by evil motives or by an indifference to its insureds’ rights.” Id. Unless a plaintiff demonstrates this twopart standard, the claim fails. “Absent such evidence of egregious behavior, the tort claim predicated on bad faith may not proceed to a jury.” Id. Insurer errors fail to meet this exacting standard. “Evidence of mere negligence or failure to pay a claim in timely fashion will not suffice to support a claim for bad faith. Inadvertence, sloppiness, or tardiness will not suffice; instead, the element of malice or flagrant malfeasance must be shown.” Id. (emphasis added). In Bult, the court concluded that despite the insurer’s failure to follow a “better” claims handling process, the insurer’s actions -6- No. 11-5965 Nat’l Sur. Corp. v. Hartford Cas. Ins. Co. did not “give rise to any reasonable inference that [the insurer] was motivated by evil design or reckless disregard for the rights of [the insureds].” Id. at 187–88. B. Hartford’s conduct falls short of Kentucky’s bad faith standard National must show that Hartford “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. As the district court ably noted, “the evidence National cites is, at best, evidence of ‘mere negligence . . . . [i]nadvertance, sloppiness, or tardiness.’” We agree. National’s briefing skews Kentucky’s bad faith standard and erroneously relies on gross negligence to prove its bad faith claim. While National correctly points out that a bad faith claim requires evidence sufficient to justify punitive damages, it errs by simply equating acts of gross negligence with those motivated by conscious wrongdoing or reckless disregard toward Sufix. Our inquiry is to determine whether Hartford’s actions constitute “outrageous conduct . . . driven by evil motives or an indifference to [the] insureds’ rights.” Bult, 183 S.W.3d at 186. First, National claimed that “Hartford had information in its file that Sufix faced $1.6 million in exposure, but it responded to the demand with a lowball offer of $75,000.” In response to Cook’s attorney’s demand of $1 million (Sufix’s policy limit), Hartford began negotiations with a low offer. National points to no evidence that Hartford “lowballed” Cook because of evil motives or an indifference to Sufix. In hindsight, settling Cook’s case for less than 20% of the final judgment -7- No. 11-5965 Nat’l Sur. Corp. v. Hartford Cas. Ins. Co. appears wise. But National fails to provide evidence that an “evil design” or an indifference to Sufix’s rights motivated Hartford’s failure to settle for Sufix’s policy limits during initial settlement negotiations. Second, National alleges that Hartford failed to timely notify Sufix of the potential of an excess verdict. Again, National provides no evidence that “evil motives” or “indifference” to Sufix’s rights caused Hartford’s delay in notifying Sufix. After negotiations with Cook’s counsel broke down, Hartford notified Sufix of the possibility of an excess verdict. In light of the actions Hartford took on Sufix’s behalf, National cannot show that Hartford acted with conscious wrongdoing or reckless indifference by notifying Sufix of the potential for an excess verdict after pretrial negotiations ended. Furthermore, Sufix—not Hartford—had a contractual duty to notify National of the excess verdict’s possibility. National’s next two allegations fault Hartford’s claim-handling process but provide no evidence that “evil motives or . . . an indifference to [Sufix’s] rights” drove Hartford’s conduct. Bult, 183 S.W.3d at 186. National claims that Hartford knew of an excess carrier’s existence, yet failed to use this information to benefit Sufix. National also targets as “grossly negligent” National’s alleged failure to conduct an independent investigation and evaluate punitive damages. Each argument suggests that Hartford should have handled Sufix’s claim differently but not that Hartford acted with a consciousness of wrongdoing or reckless disregard toward Sufix. -8- No. 11-5965 Nat’l Sur. Corp. v. Hartford Cas. Ins. Co. National’s final argument, that public policy requires Hartford be held liable for failing to effect a prompt, fair, and equitable settlement of Sufix’s claim, also lacks the requisite bad faith attributes. Absent evidence that Hartford acted maliciously or with reckless indifference toward Sufix, we have no grounds to disagree with the district court’s opinion.