Opinion ID: 795624
Heading Depth: 4
Heading Rank: 3

Heading: Rawe's Claims under the Kentucky Unfair Claims Settlement Practices Act

Text: 32 We next consider Rawe's allegations that Liberty Mutual's actions in response to her attempts to recover under Haggard's bodily injury policy as well as her parents' UIM policy violated the KUCSPA. Rawe argues that the district court erred in granting judgment as a matter of law to Liberty Mutual on Count I of her complaint, which contains her claims under the KUCSPA. Upon review, we reverse the grant of judgment on the pleadings to Liberty Mutual on Rawe's third-party KUCSPA claims, and affirm the grant of judgment on the pleadings on Rawe's first-party KUCSPA claims. 33 The KUCSPA creates both first-and third-party obligations to settle insurance claims in good faith. The KUCSPA imposes what is generally known as the duty of good faith and fair dealing owed by an insurer to an insured or to another person bringing a claim under an insurance policy. Knotts v. Zurich Ins. Co., 197 S.W.3d 512, 515 (Ky.2006) (citing KY. REV. STAT. ANN. § 304.12-230). The KUCSPA is intended to protect the public from unfair trade practices and fraud. It should be liberally construed so as to effectuate its purpose. Reeder, 763 S.W.2d at 118. The KUCSPA proscribes a list of [fifteen] particular acts and practices that it deems unfair claims settlement practices. Knotts, 197 S.W.3d at 515. Rawe alleges in her complaint that Liberty Mutual violated five subsections of the Act by: 34 (2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; 35 (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; 36 (4) Refusing to pay claims without conducting a reasonable investigation based upon all available information; 37 ... 38 (6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear; and 39 (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. 40 See KY. REV. STAT. ANN. § 304.12-230(2)-(4), (6)-(7); J.A. at 25-26 (Compl. at ¶¶ 62-74) (citing these particular provisions of the KUCSPA). In order to prove either a first- or third-party bad-faith claim under the KUCSPA, Rawe must establish three elements demonstrating that Liberty Mutual refused in bad faith to pay her claim: 41 (1) the insurer must be obligated to pay the claim under the terms of the policy; 42 (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and 43 (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 facts. 44 Glass, 996 S.W.2d at 452 (internal quotation marks omitted). Because Rawe is seeking punitive damages for Liberty Mutual's alleged violation of the KUCSPA in addition to compensatory damages, J.A. at 30-31 (Compl. at ¶¶ 96-100), she must plead sufficient evidence of intentional misconduct or reckless disregard of the rights of an insured claimant to warrant submitting the right to award punitive damages to the jury. Cobb King, 54 Fed. Appx. at 837 (quoting Wittmer, 864 S.W.2d at 890). Regardless of which type of damages is sought, a plaintiff cannot bring a private cause of action for a mere `technical violation' of the [K]UCSPA, but rather a condition precedent to bringing a statutory bad faith action is that the claimant was damaged by reason of the violation of the statute. Glass, 996 S.W.2d at 452 (quoting Wittmer, 864 S.W.2d at 890). 45
46 Rawe's third-party KUCSPA claims allege that Liberty Mutual's unwillingness promptly to pay her claim of $100,000, the policy limit under Haggard's bodily injury policy, violated the KUCSPA. J.A. at 17-21 (Compl. at ¶¶ 11-37). The Supreme Court of Kentucky first held in Reeder that the KUCSPA created a private right of action for a third-party plaintiff harmed as a result of violations of the Act. Reeder, 763 S.W.2d at 118. In considering Rawe's third-party KUCSPA claim, the district court correctly recognized the validity of a third-party bad-faith claim as established in Reeder, but concluded that Rawe could not maintain a cause of action because, even assuming Rawe's factual allegations to be true, the pleadings do not support the conclusion that Liberty Mutual acted with the necessary level of culpability. J.A. at 47-48 (Order at 12-13). 47 Upon review, we cannot conclude that Liberty Mutual was entitled to judgment as a matter of law on Rawe's third-party KUCSPA claims. When considering Liberty Mutual's motion for judgment on the pleadings, we must construe the complaint in the light most favorable to the plaintiff, and accept all of the complaint's factual allegations as true. Ziegler, 249 F.3d at 512. Under this standard, Liberty Mutual has failed to show that Rawe undoubtedly can prove no set of facts in support of [her] claim that would entitle [her] to relief. Id. On the contrary, Rawe's complaint alleges violations of several subsections of the KUCSPA, as well as factual allegations about lengthy delays in paying the bodily-injury-policy limits and additional demands for further documentation of Rawe's injuries that had previously been provided, such that a reasonable jury could conclude that Liberty Mutual's settlement behavior during the negotiation of the bodily-injury-policy claim constituted unfair claims settlement practices. Rawe has also alleged that she was harmed as a result of Liberty Mutual's alleged violations of the KUCSPA. J.A. at 30-31 (Compl. at ¶¶ 99-100). 48 We further conclude that a reasonable jury could find that the facts as alleged by Rawe, which include having to wait nearly two years to receive an offer of the bodily-injury-policy limit despite having provided Liberty Mutual with documentation of her permanent brain injuries and medical expenses, constituted reckless indifference to her rights to recover as a claimant who both parties agreed was harmed by Haggard, whom Liberty Mutual insured. See Glass, 996 S.W.2d at 452. We therefore cannot conclude that Liberty Mutual is entitled to judgment on the pleadings on Rawe's third-party KUCSPA claims. As we read Wittmer, Glass, and the Supreme Court of Kentucky's most recent decision in Knotts, Rawe's pleadings are sufficient to defeat Liberty Mutual's motion for judgment on the pleadings. We reverse the district court's dismissal of Rawe's third-party KUCSPA claims and remand these claims to the district court for further consideration. 49
50 Rawe's first-party bad-faith claims stem from her allegations that Liberty Mutual's refusal to pay promptly her the policy limits under the UIM policy violated the KUCSPA. For the reasoning expressed in section (II)(B)(1)(a) of this opinion, we affirm the district court's grant of judgment to Liberty Mutual on Rawe's first-party KUCSPA claims based upon Liberty Mutual's alleged conduct pertaining to the UIM policy that predate the filing of her complaint in her first lawsuit to recover under the UIM policy in October 2003. As explained above, our analysis in Kane counsels us to conclude that these claims are barred by claim preclusion. Rawe could have brought her KUCSPA claims based upon Liberty Mutual's alleged settlement behavior occurring before she filed her initial complaint when she filed suit to enforce the terms of the UIM policy. The final judgment on the merits in that case precludes the parties or their privies from relitigating issues that were or could have been raised in that action. Federated Dep't Stores, 452 U.S. at 398, 101 S.Ct. 2424. 51 Rawe alleges additional first-party KUCSPA claims against Liberty Mutual, however, based upon its alleged conduct that occurred after she filed her first lawsuit in October 2003. J.A. at 23-26 (Compl. at ¶¶ 53-75). For the reasons we explained in (II)(B)(1)(b), these claims are not barred by claim preclusion. The Supreme Court of Kentucky's recent decision in Knotts also breathes new life into Rawe's claims based upon Liberty Mutual's alleged settlement misconduct occurring after she instigated litigation. Knotts held that the KUCSPA continues to apply to an insurer so long as a[n] [insurance] claim is in play. As such, we hold that [the KUCSPA] applies both before and during litigation. Knotts, 197 S.W.3d at 517. The Supreme Court of Kentucky explained that if the KUCSPA: 52 were not applicable once litigation commenced, insurance companies would have the perverse incentive to spur injured parties toward litigation, whereupon the insurance company would be shielded from any claim of bad faith. Such a reading would undermine the statute's fundamental purpose by allowing insurance companies to engage in whatever sort of practice — fair or unfair — they see fit to employ. The remedial nature of the statute requires that we attempt to effectuate its purpose, which, in a situation like this one, requires applying the statute to conduct occurring after the commencement of litigation of a tort action. 53 Id. We note that our previous resolution of this issue in Torres v. American Employers Insurance Co., 151 Fed.Appx. 402409 (6th Cir.2005) (unpublished opinion), which relied upon the now-reversed decision of Kentucky Court of Appeals in Knotts v. Zurich Insurance Co., No.2002-CA-001846-MR, 2004 Ky.App. LEXIS 22, at  (Ky.Ct.App.2004), to conclude that the KUCSPA does not apply to alleged settlement misconduct after litigation has commenced, is no longer good law after the Kentucky Supreme Court's decision in Knotts. 54 Despite the Supreme Court of Kentucky's holding in Knotts, Liberty Mutual urges us to affirm the district court's grant of judgment on the pleadings because Liberty Mutual argues that its actions occurring after litigation commenced that Rawe alleges violated the KUCSPA are inadmissible to prove bad faith because that complained-of conduct is litigation conduct. Liberty Mutual is correct that the Supreme Court of Kentucky's recent decision in Knotts also adopted an absolute prohibition on the introduction of evidence of litigation conduct as proof of an insurer's bad faith, as the Supreme Court of Kentucky reasoned that the Rules of Civil Procedure provide adequate remedies for any wrongdoing that may occur within the context of the litigation itself. Knotts, 197 S.W.3d at 522. Knotts, however, was careful to distinguish the evidence of an insurer's settlement behavior during litigation, which it held was permitted as evidence of bad faith, from an insurer's other litigation conduct. The court explained that the distinguishing feature is that the Rules of Civil Procedure provide remedies for the latter. 6 In reasoning that the KUCSPA was unnecessary to remedy litigation conduct, the Supreme Court of Kentucky stated in Knotts that [w]e are confident that the remedies provided by the Rules of Civil Procedure for any wrongdoing that may occur within the context of the litigation itself render unnecessary the introduction of evidence of litigation conduct. Id. 55 We must now determine whether Liberty Mutual's alleged conduct after Rawe initiated litigation that Rawe complains violated the KUCSPA constitutes improper settlement behavior, in which case it may be considered evidence to support her KUCSPA claim, or whether it is improper litigation conduct inadmissible to prove bad faith under the KUCSPA. We may grant Liberty Mutual's Rule 12(c) motion only if, taking all of Rawe's well-pleaded allegations as true, Liberty Mutual is nevertheless clearly entitled to judgment on these claims. Southern Ohio Bank, 479 F.2d at 480. For the following reasons, we conclude that Liberty Mutual is entitled to judgment on the pleadings on Rawe's first-party KUCSPA claims based upon Liberty Mutual's failure to comply with the March 2004 judgment until Rawe signed an additional release of all future claims. 56 While at first glance this complained-of conduct may appear to be settlement behavior akin to offering an unreasonably low settlement amount, Knotts's requirement that we use the Rules of Civil Procedure as the litmus test for inadmissible litigation conduct counsels us to conclude that Liberty Mutual's failure to pay the March 2004 judgment amount in the first lawsuit unless Rawe waived additional claims is litigation conduct, which Knotts deems inadmissible to prove bad faith. When confronted by Liberty Mutual's inequitable and illegal refusal to pay Rawe the $45,000 as due under the March 2004 judgment, Rawe turned, as she should have, to Federal Rule of Civil Procedure 69 to force Liberty Mutual to execute the judgment. J.A. at 226-27 (Mot. for Issuance of Writ of Exec.). The Federal Rules of Civil Procedure provided Rawe with a remedy, as Liberty Mutual then complied with the judgment. These circumstances are therefore a quintessential example of the sort of bad litigation conduct that the Rules of Civil Procedure adequately remedy, and that Knotts therefore deems inadmissible to prove bad faith. Knotts, 197 S.W.3d at 522-23. 57 As it appears from the complaint that Rawe has not alleged any additional settlement behavior to support her first-party bad-faith claim under the KUCSPA, we affirm the district court's grant of judgment to Liberty Mutual on Rawe's first-party bad-faith claims under the KUCSPA. Rawe's claims based upon Liberty Mutual's alleged settlement conducted that occurred prior the filing of Rawe's complaint in the first lawsuit are barred by claim preclusion. Liberty Mutual's failure to comply with the March 2004 judgment was remedied by Rawe's reliance on the Federal Rules of Civil Procedure, and therefore under Knotts, Rawe's KUCSPA claims based upon this behavior are insufficient as a matter of law to prove her bad-faith claim under the KUCSPA. We affirm the dismissal of Rawe's first-party bad-faith claims under the KUCSPA. 58