Court Opinion

ID: 9620581
Source: CourtListenerOpinion
Date Created: 2023-08-22 05:44:17.489405+00
Date Added: 2024-06-11T13:29:02.426900
License: Public Domain

WINTERSHEIMER, Justice,
dissenting.
I must respectfully dissent from the majority opinion because an insurance company must continue to abide by the Unfair Claims Settlement Practices Act, KRS 304.12-230 even after a lawsuit has been filed against its insured.
We recognize that the majority opinion does reverse the Court of Appeals. However, the majority does not go far enough in reversing and as such the result is of very limited value, if any, to these appellants or any others who may share the same general problem. Any conduct engaged in by the insurer may form the basis of a bad faith claim.
This is a case of first impression in Kentucky. The major issue is whether the Act regulates only the pre-litigation claims adjusting process. Stated differently, whether an insurance company can be guilty of bad faith conduct after a lawsuit has been filed against its insured. Other related questions are whether Kentucky or federal case law supports a continuing duty of good faith after the filing of a lawsuit; whether other jurisdictions recognize such a duty; whether the construction by the Court of Appeals of the word “claim” is contrary to its common usage; and, whether a rule relating to post-litigation conduct violates the separation of powers.
*528Lloyd Knotts, a self-employed construction contractor, suffered serious and permanent injuries as a result of a fall from a 30-foot high platform while working on the premises of Lawson-Mardon, Inc. At the time of the accident, Lawson-Mardon was insured under a policy of general liability insurance issued by the Zurich Insurance Company. Knotts incurred significant medical and hospital expenses because of his severe injuries for which he did not have available health insurance. Zurich refused to assist Knotts with payment of any of his medical expenses and thereby prevented him from obtaining necessary medical care. As a result of the denial of assistance, Knotts proceeded with the filing of a lawsuit against the insured, Lawson-Mardon, Inc., approximately two months after the accident. The jury awarded damages totaling $1,202,104.29, which was reduced by 20% for comparative fault, resulting in a judgment of $961,683.44 for Lloyd Knotts and $20,000.00 for his wife, Jackie Knotts, for her loss of consortium. The judgment was appealed to the Court of Appeals which affirmed the jury verdict.
The Knottses then began the present litigation, alleging continued bad faith conduct by Zurich after the filing of the lawsuit. The circuit judge granted summary judgment in favor of Zurich, holding that the statute upon which the claim was based did not apply to behavior that occurred after litigation commenced. The Court of Appeals affirmed and this Court accepted discretionary review.
I. UCSPA
The Kentucky Unfair Claims Settlement Practices Act, KRS 304.12-230, is almost a verbatim adoption of the 1971 version of the model act formulated by the National Association of Insurance Commissioners entitled “An Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance.” Davidson v. American Freightways, Inc., 25 S.W.3d 94, 96 (Ky.2000). This model act has been adopted in one form or another in all 50 states and all territories. Id. at 96-97. The UCSPA is intended to protect the public from unfair trade practices and fraud, and it should be liberally construed so as to effectuate its purpose. State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky.1988).
The statute is remedial legislation and should be broadly interpreted so as to accomplish its intended purpose, that is, to make certain that insurance companies deal fairly with their insureds and third party claimants throughout the claim handling process. There is nothing that is contained in the statute which terminates the responsibility of an insurance company to act in good faith, even though a lawsuit has been filed against its insured. The company still has an obligation to exercise good faith in an attempt to complete a prompt, fair and equitable settlement of the claim in which liability against its insured has become reasonably clear. KRS 304.12-230(6).
It should be abundantly clear that this continuing responsibility of good faith throughout the pendency of the claim is separate and distinct from the obligations imposed on the insured and their counsel under the civil rules of procedure once litigation begins. It should also be observed that the UCSPA is not intended to interfere with the exercise of an attorney’s zealous, independent, professional judgment in the defense of a client. An attorney retained by an insurance company to defend an insured is ethically required to independently and vigorously defend the interest of the insured.
Counsel employed by the insurance company to defend its insureds cannot compel *529the company to act in good faith once a lawsuit has been filed against the insured. They are paid for their services by the insurance company, and their involvement in the litigation is dependent on the selection process of the insurance company. Counsel for the insurance company has no authority to control the conduct of the company, which is not a party to the litigation. In this case, Zurich had distributed a litigation manual outlining how counsel had to defend its insureds.
There has long been a policy in Kentucky that insurance companies should work diligently to fairly settle claims so as to avoid filing of a lawsuit. However, if the company is not subject to the Unfair Claims Settlement Practices Act, a company could have an incentive to make litigation, rather than settlement, realizing that nothing they did after the date of filing could constitute bad faith. This would violate the fiduciary relationship that exists between an insurer and its insured. Cf. Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176 (Ky.1989).
The alleged bad faith by Zurich in violation of the Act does not involve litigation conduct of the parties or their counsel. The Knottses are not basing their bad faith claims against Zurich on the litigation tactics or strategies used by the insured, Lawson-Mardon, or its attorneys in the matter in which they defended that company. Instead, it is based solely on the manner in which Zurich failed to process, evaluate and extend a fair and reasonable settlement offer based on information available to it regarding both liability and damage issues throughout the entire course of its handling of the claim against its insured.
An insurance company can be guilty of bad faith conduct in the manner in which it continues to handle a claim against its insured even after a lawsuit has been filed against the insured. The rules of civil procedure do not have any applicability to the conduct of an insurance company in its handling of the claim and the insurance company is not a party to the litigation. The Act and industry standards govern the manner in which insurance companies handle claims against its insured, both pri- or to and subsequent to the litigation. The practical effect of this decision would be to allow an insurance company to insulate itself from any bad faith conduct merely because a lawsuit has been filed.
II. Kentucky Case Law
Although this is an issue of first impression in Kentucky, decisions rendered by federal courts in both the Eastern and Western Districts applying Kentucky law support the contention that the insurance company has a duty of good faith which continues past the filing of a bad faith complaint against the insurer. Cf. Graham v. Gallant Ins. Group, 60 F.Supp.2d 632 (W.D.Ky.1999) and Cobb King v. Liberty Mut. Ins. Co., 54 Fed.Appx. 883 (6th Cir.2003). It should also be noted that Motorists Mutual Insurance Co. v. Glass, 996 S.W.2d 437 (Ky.1997), held that the same principles apply to third-party claims as to first party claims. Kentucky has refused to make any type of distinction regarding the nature of proof that must be presented to establish a third-party bad faith claim as opposed to a first party claim. Any rebanee on the case of Torres v. American Employers Ins. Co., 151 Fed.Appx. 402 (6th Cir.2005), is unpersuasive. A reading of the Torres opinion indicates that the court was relying on the Court of Appeals in this case, even though that opinion was not a final decision.
III. Other Jurisdictions
There is general acceptance by many other jurisdictions that the duty of an in*530surer to use good faith is a continuing responsibility that does not end simply because litigation has begun. White v. Western Title Ins. Co., 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309 (1985), is considered as the seminal case establishing that insurance companies have a continuing duty to a policyholder throughout litigation. In White, supra, the California Supreme Court authorized the admission of evidence of unreasonably low settlement offers made during trial to establish that the insurance company had acted in bad faith.
The Supreme Court of West Virginia has considered the question in Barefield v. DPIC Companies, Inc., 215 W.Va. 544, 600 S.E.2d 256 (2004) and held that “the conduct of an insurance company or other person in the business of insurance during the pendency of a lawsuit may support a cause of action under West Virginia Trade Practices Act.” Both the West Virginia Act and the Kentucky Act are based on model legislation promulgated by the National Association of Insurance Commissioners.
IV. “Claim”
The word “claim” is not specifically defined anywhere within the Act. Consequently, the word must be construed according to its common usage. KRS 446.080(4); Alliant Health System v. Ky. Unemployment Ins. Comm’n, 912 S.W.2d 452 (Ky.App.1995). The word “claim” has many meanings, including “a demand for something as due; an assertion of a right to something.” II Oxford English Dictionary 451 (1970); “a demand for something due or believed to be due.” Merriam-Webster’s Collegiate Dictionary 210 (10th Ed., 2001); and, “a demand for compensation, benefits, or payment (as ... one made under an insurance policy upon the happening of the contingency against which it is issued).” Webster’s Third New International Dictionary 414 (1970). The common usage of “claim” also includes “cause of action.” Kyriss v. Aetna Life & Casualty Co., 624 F.Supp. 1130 (D.Mont.1986).
The legislature’s repeated use of the word “claim” in the Act indicates an intent to impose duties upon those in the business of insurance to deal fairly with persons asserting a right or demanding something that is believed to be rightfully due under an insurance policy. Barefield, supra. A lawsuit or litigation is simply a means of asserting a right or demanding something by using the judicial process. Barefield.
“Settlement” is commonly understood to mean the ending of a dispute by a final decision or agreement. See Webster’s II New Riverside University Dictionary 1068 (1988). The plain literal meaning of settlement in no way inhibits the Act from extending the duty of an insurer to act in good faith and with fair dealing beyond the commencement of litigation. It is obvious that a settlement can occur at any time before or after litigation which would include the finality on appeal.
There is no language in the Act that limits the applicability to pre-complaint behavior. If the legislature had intended that the statute should not apply to the conduct of an insurance company after suit had been filed, it Could have easily provided definite language to that effect. It did not. The courts are not entitled to add language to existing statutes. The statute clearly does not apply just to claims adjusting. After all, the statute prohibits “unfair claims settlement practices” not “unfair claims adjustment practices.”
VI. Constitutional Concerns
The Court of Appeals concluded that the Separation of Powers Doctrine announced in Sections 27 and 28 of the Kentucky *531Constitution would prohibit legislation from regulating post-litigation conduct because Section 116 of the Constitution grants this Court sole authority to regulate the conduct of attorneys. This holding demonstrates a fundamental misconception of the majority rule, as well as the statute involved. The majority of courts that have examined this issue have unanimously recognized that juries cannot pass judgment on the conduct of attorneys and thus cannot be permitted to censure an insurer for engaging in zealous advocacy. The allegations in this matter do not focus on the conduct undertaken by the defendant insurer on the advice of counsel; rather they indicate that claims handlers disregarded the advice of counsel to the benefit of the insurer and in contravention of the Act. It is the behavior of the agents and employees of the insurance company that is the subject of the Act, not the conduct of attorneys who are engaged in the litigation. The adoption of a rule relating to the post-litigation behavior of an insurance company does not violate the provisions on separation of powers in the Kentucky Constitution.
The clear and unambiguous language of KRS 304.12-230, its remedial nature and the legislative intent underlying the statute, all indicate that it is the duty of an insurer to exercise good faith and fair dealing and that the duty continues and does not end simply because litigation has begun. The Act was intended to protect the public from unfair trade practices and fraud and because of the nature of settlement negotiations the duty of good faith exists pre-litigation, during trial and post-litigation until the matter is finally resolved.
The decision of the Court of Appeals should be reversed and this case remanded to the circuit court with directions to vacate the summary judgment.
SCOTT, J. joins.