Opinion ID: 802787
Heading Depth: 2
Heading Rank: 2

Heading: Bad-Faith Claims

Text: Pedicini challenges the district court’s determination that he cannot sustain his bad-faith claims under Kentucky law. We review the district court’s summary judgment determination de novo. See Jones, 296 F.3d at 423. Under Kentucky law, a plaintiff must establish three elements to succeed on 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 v. Jones, 864 S.W.2d 885, 890 (Ky. 1993) (internal quotation marks Nos. 10-6270/6301 Pedicini v. Life Ins. Co. of Ala. Page 9 omitted).3 Based on the resolution of the breach-of-contract claim, it is clear that LICOA had an obligation to pay Pedicini the full amount billed for the covered medical services. Thus, the first element of the test is satisfied. However, the underlying merits of an individual’s insurance claim are not dispositive with respect to a claim of bad faith. See Cowan v. Paul Revere Life Ins Co., 30 F. App’x 384, 388 (6th Cir. 2002) (unpublished opinion). Pedicini must also demonstrate the second and third elements of the test. The district court relied on Empire Fire & Marine Insurance Co. v. Simpsonville Wrecker Service, Inc., 880 S.W.2d 886, 891 (Ky. 1994), to find that Pedicini failed to establish the second element of the bad-faith test. In Empire Fire, the Kentucky Supreme Court held “that where there is a legitimate first-impression coverage question for purposes of Kentucky law and recognized authorities support the insurer’s position in denying coverage, the insured’s claim is fairly debatable as a matter of law and will not support a claim of bad faith.” Id. Pedicini argues that it is not Empire Fire, but Farmland Mutual Insurance Co. v. Johnson, 36 S.W.3d 368 (Ky. 2001), that controls the outcome in this case. In Johnson, the Kentucky Supreme Court held that an insurer that had allegedly conspired with appraisers to avoid paying the full amount of compensation due to an insured was not entitled to summary judgment on a bad-faith claim. Id. at 371-72. We agree with Pedicini that summary judgment for LICOA on the bad-faith claims is improper in this instance. An objective assessment of the legal landscape evidences that LICOA lacked a reasonable basis in law for disputing Pedicini’s claim to benefits according to his interpretation of “actual charges.” Under clearly established Kentucky law, ambiguous contractual terms are construed in favor of the insured. The term “actual charges” is “patently ambiguous,” Ward, 257 F. App’x at 625-27; the use of the term in the supplemental policy is hopelessly circular, as the term “actual charges” even appears within its own definition in the policy. Moreover, for twenty years prior to February 3 These requirements apply whether the bad-faith claim is based in common law or statute. Shepherd v. Unumprovident Corp., 381 F. Supp. 2d 608, 612 (E.D. Ky. 2005) (citing Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176, 178 (Ky. 1989)). Nos. 10-6270/6301 Pedicini v. Life Ins. Co. of Ala. Page 10 2001, LICOA had paid benefits equal to the amount billed by medical providers, inspiring expectations among its policyholders regarding the value of their benefits. In light of these facts, LICOA should have realized that unilaterally altering its definition of “actual charges” was likely to result in legal claims against it by its policyholders and that, under Kentucky law, LICOA would lack a reasonable basis for denying those policyholders relief. LICOA points to no legal authority contemporaneous with its February 2001 policy change suggesting otherwise. The opinions that LICOA cites as “recognized authorities” in support of its position all post-date February 2001 and thus could not have informed LICOA’s determination of the reasonableness of its action at that time. See Empire Fire, 880 S.W.2d at 889 (citing authority relied upon by the insurer as being in existence “as of the date of appellee’s loss”); Phelps, 245 F. App’x at 487 (same); Cowan, 30 F. App’x at 387 (same). As a result, it is difficult to see how LICOA can maintain that the proper resolution of its dispute with Pedicini is “fairly debatable as a matter of law.” Empire Fire, 880 S.W.2d at 889. Moreover, based on the facts pleaded by Pedicini, a reasonable jury could conclude that the third element of the bad-faith test is satisfied: that LICOA acted knowingly or in reckless disregard of the lack of legal basis for its interpretation. LICOA did not alter its benefit-payment practices in an open and transparent manner. Those currently receiving benefits learned of the change only upon receiving a decreased benefit payment after the change came into effect, and other policyholders not yet qualifying for the receipt of benefits, like Pedicini, did not learn of the change until years later when they became ill and eligible to receive benefits. As a result of the change, LICOA was able to transform its profitability from a loss of over two million dollars in calendar year 2000 to a profit of approximately one million and seven hundred thousand dollars in calendar year 2001. From these facts a reasonable jury could conclude that LICOA acted in bad faith by concealing changes in its benefit-payment practices to avoid the loss of premium payments essential to its profitability in calender year 2001. The Kentucky Supreme Court has found summary judgment on a bad-faith claim improper amidst similar allegations of deceit in furtherance of pecuniary gain. See Johnson, 36 S.W.3d at 372, 375 (denying summary judgment on bad-faith claim where Nos. 10-6270/6301 Pedicini v. Life Ins. Co. of Ala. Page 11 insurer allegedly conspired with appraisers to undervalue policyholder’s claim); see also Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276 (Ariz. 2000) (en banc) (denying summary judgment in favor of insurer where insurer allegedly refused to negotiate a reasonable settlement with insured, who ended up receiving an arbitration award more than six times greater than that offered by the insurer).4 Based on the foregoing, we conclude that sufficient factual disputes surround the bad-faith claims such that summary judgment for LICOA is improper. Accordingly, we reverse the district court’s grant of summary judgment in favor of LICOA on these badfaith claims and remand for further proceedings.