Kentucky appeals court reverses $4.58M bad faith judgment
When an insurer has a reasonable basis to contest coverage, does the denial of a claim due to debatable underlying facts become a bad faith claim?
An appellate court in Kentucky has reversed a $4,583,472.39 bad faith judgment against an insurer relating to the insurer’s handling of a claim for benefits by a young woman who was injured while riding on a utility task vehicle (UTV).
The case
On Aug. 6, 2011, Haley Belt attended an event at the Shepherdsville, Ky., residence of Melissa and Patrick Kersnick. At the time, the Kersnicks’ son Zachary and Belt were minors. The day before the event, the Kersnicks had purchased the UTV, telling the seller it would be used in conjunction with their catering business, K-2 Catering, LLC.
Zachary Kersnick and other workers or volunteers for K-2 Catering attended the Aug. 6 event, which was a surprise party for Melissa Kersnick.
During the event, Zachary Kersnick received permission to give people rides on the UTV in the yard. However, allegedly without permission and with more passengers than he was permitted, he drove off the property onto a roadway and was involved in a wreck, flipping the UTV. Belt and another passenger were injured.
After the incident, Cincinnati Insurance Company (CIC), which had issued a commercial general liability insurance policy to K-2 Catering, and Hamilton Mutual Insurance Company/Employers Mutual Casualty Company (EMC), which had issued a homeowners’ insurance policy to the Kersnicks, were put on notice of claims that Belt and the other injured passenger were asserting.
Belt sued K-2 Catering and the Kersnicks. She also sued CIC and EMC for bad faith and for violations of the Kentucky Unfair Claims Settlement Practices Act (KUCSPA) and the Kentucky Consumer Protection Act (KCPA), claiming that the insurers had failed to reasonably investigate her claims, failed to respond to her claims in a reasonable and timely fashion, failed to make a fair and equitable offer to settle her claims, and acted recklessly with regard to whether a basis to contest coverage existed.
The trial court found that coverage existed for Ms. Belt’s claims against the Kersnicks as to CIC and EMC, as well as for her claims against K-2 Catering as to CIC.
Belt settled her claims against EMC.
A jury subsequently found in favor of Belt on her claim that CIC had violated the KUSCPA and awarded her $1,040,000 in compensatory damages for emotional pain and suffering and mental anguish, $43,472.39 in litigation costs for CIC’s bad faith, and $3,500,000 in punitive damages based on its finding that CIC had acted in reckless or wanton disregard for Belt’s, K-2 Catering’s, and the Kersnicks’ rights.
The trial court denied CIC’s post-trial motions, and CIC appealed.
The appellate court’s decision
The appellate court reversed.
In its decision, the appellate court explained that, under Kentucky law, an insured must prove three elements to prevail against an insurance company for alleged refusal in bad faith to pay the insured’s claim:
- The insurer must be obligated to pay the claim under the terms of the policy;
- The insurer must lack a reasonable basis in law or fact for denying the claim; and
- 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.
The appellate court then found that the trial court had erred as a matter of law in failing to grant CIC a directed verdict on the issue of coverage.
In the appellate court’s opinion, Belt failed to establish that CIC was obligated to pay her claim because CIC had a reasonable basis to contest coverage due to the fairly debatable factual disputes related to Zachary Kersnick (whether he was in the course and scope of his employment as a volunteer for K-2 Catering) and the Kersnicks (whether they were performing duties as managers of K-2 Catering).
The appellate court found that CIC’s obligation to pay Belt’s claim did not arise with any certainty until the trial court issued its opinion in the coverage action, after which CIC paid Belt the policy limits. The appellate court specifically rejected Belt’s arguments that CIC’s obligation was clear in 2011.
Accordingly, the appellate court held that the trial court should have granted a directed verdict to CIC on the issue of coverage and dismissed Belt’s claim for bad faith. It then reversed the trial verdict and judgment and the order denying CIC’s post-trial motions. It also remanded the case for dismissal of Belt’s bad faith claim.
The case is Cincinnati Ins. Co. v. Belt, No. 2017-ca-000155-mR (Ky. Ct. App. April 5, 2019).
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