Insurer's agreement with insured to not pay loss leads tobad faith claim

The father told his daughter that, in his opinion, she had notcaused all the damage listed on the repair estimates. Claiming thatthere was pre-existing damage to the rear of the auto, the familyoffered the driver of the damaged vehicle $300 to settle thematter, which she rejected.

Although the family did not want the claim submitted to theirinsurance company, the driver of the damaged car submitted itanyway, attaching the $1,502.14 repair estimate. The matter wasreferred to a claims adjuster. According to the carrier's records,the adjuster received a call from the father of the insured family,reaffirming that they did not want the insurer involved in thematter. On the same day, the adjuster wrote a letter to the mother(apparently the first named insured) advising her that the carrierwould close its file at her request but that she first would haveto sign a "waiver of coverage" letter, which she did. At thatpoint, the insurer apparently considered the matter closed.

Some time later, the driver of the damaged car informed theclaims adjuster in a letter that her attempts to resolve the matterwith the insureds had been unsuccessful. She demanded that theinsurer immediately pay her $1,502.14. The adjuster's supervisorreplied by letter that the mother of the insured family wasresponsible for the claim and that "we will not be making paymentto you on behalf of our insured."

The driver of the damaged car retained an attorney, who sent aletter to the insurer demanding $1,502.14. The claims supervisordeclined, stating the insured "is considered to be self-insured forthe alleged accident." The attorney wrote again to the claimssupervisor, advising her of numerous court decisions and treatisesholding that agreements between an insurer and an insured to notpay a claim, entered into after a property damage loss hasoccurred, are not effective against innocent third-partyclaimants.

The owner of the damaged auto (the driver's father) filed acivil complaint against the insurer and the woman who had driveninto his car. The complaint asserted a property-damage claimagainst the woman as well as a bad faith claim against the insurerunder the state's Unfair Claims Settlement Practices Act. Theinsurer offered to settle the property claim against the insuredfor $1,258.64, which was refused. Subsequently, the insurer paid$1,502.14, the full amount of the highest repair estimate. Thefather's claim against the insurer remained pending.

Sometime later, the father died and his daughter was appointedadministrator of his estate. She revived the action against theinsurer. In a subsequent trial, the court granted the insurer'smotion for a directed verdict in its favor, dismissing the woman'scomplaint. The court found that the woman had not met the requiredburden of proof to show that the insurer had violated the UnfairClaims Practices Act. It also found that the insurer had areasonable basis for denying the claim and that the woman could notrecover any damages, including punitive damages, for the insurer'salleged bad faith because she had failed to prove compensatorydamages. The woman appealed.

The appeals court noted that the state's Supreme Court, inanother case, found that bad faith claims falling under the state'sUnfair Claims Practices Act have three elements: "(1) the insurermust be obligated to pay the claim under the terms of the policy,(2) the insurer must lack a reasonable basis in law or fact fordenying the claim, and (3) it must be shown that the insurer eitherknew there was no reasonable basis for denying the claim or actedwith reckless disregard for whether such a basis existed."

The appeals court said the plaintiff proved the first elementbecause the insurer was obligated to pay the claim under the termsof its policy. Then the court moved on to the other elements.

Until the woman's father filed the lawsuit, the court noted, theinsurer had refused to process her claim or otherwise deal with herbecause its insured had "waived coverage." The insurer continued totake this position even after the woman's attorney advised theinsurer that in his opinion it had no legal right to destroy therights of innocent third parties by mutual consent or agreement,once those rights have vested.

The Unfair Claims Practices Act stated in part: "No insurancecontract insuring against loss or damage...to the property of anyperson, shall be retroactively annulled by any agreement betweenthe insurer and insured after the occurrence of any such...damagefor which the insured may be liable, and any such annulmentattempted shall be void." The appeals court said the statuteprohibited the waiver of coverage agreement between the insurer andits insured and said the waiver did not constitute a reasonablebasis for denying the claim.

The insurer said it did not rely on the waiver of coverageagreement to support its position. Rather, it asserted that thedisagreement over the amount of damages the woman's car hadsustained was a valid reason for denying the claim. The appealscourt, however, found the waiver of coverage was the basis of theinsurer's denial. It also said the insurer's argument overlookedthe fact that the insurer had a statutory duty to attempt in goodfaith to negotiate a settlement, since its insured's liability wasclear. Thus the appeals court found sufficient evidence supportingthe second element of the woman's bad faith claim against theinsurer.

Turning to the third element, the court noted that the claimsadjuster testified that she proceeded with the waiver agreementafter seeking legal advice from the insurer's in-house counsel.

According to the insurer, its counsel had no notes of hisconversation with the adjuster and did not remember any of itsdetails. The court found that regardless of whether the adjusteracted on her own or with the home-office counsel's advice, therewas sufficient evidence that the insurer either knew there was noreasonable basis for denying the claim or acted with recklessdisregard for whether such a basis existed. In short, said thecourt, the evidence the woman presented at trial was sufficient tosupport her bad faith claim and to overcome the insurer's motionfor a directed verdict.

Another reason the trial court gave for granting the insurer'smotion for a directed verdict was that the woman failed to provecompensatory damages and therefore was not entitled to recoverpunitive damages. The woman argued that she could have been awardedcompensatory damages for mental anguish and for prejudgmentinterest while conceding that she did not make claims for suchdamages during the trial. But she maintained she was entitled torecover punitive damages, even in the absence of an award ofcompensatory damages, based on a recent Kentucky case,Commonwealth, Dept. of Agriculture vs. Vinson. [30 S.W.3d 162(2000)].

Furthermore, the appeals court noted the national trend towardallowing punitive damages to be recovered even in the absence of ashowing of actual or compensatory damages. The court noted that itwas persuaded, as in another case the Kentucky Supreme Court hadbeen, by the reasoning of a New Jersey case [Nappe vs.Anschelewitz, 97 NJ 37, 477 A.2nd 1224 (1984)] "that compensatorydamages are not an essential element of an intentional tortcommitted willfully and without justification."

The insurer urged the appeals court to reject the principlesconcerning compensatory and punitive damages as set forth in Vinsonbecause it involved a specific statute allowing the recovery ofpunitive damages, whereas the Unfair Claims Settlement PracticesAct contained no similar provision. While the court said itunderstood the distinction between the facts in Vinson and those inthe case before it, it couldn't overlook its own Supreme Court'sstatement that it was persuaded by the reasoning of the New JerseySupreme Court in the Nappe case.

The appeals court held that the trial court should not havegranted the insurer's motion for a directed verdict, even thoughthe woman failed to present proof of compensatory damages. She hadpresented sufficient proof to support the three elements of a badfaith claim action, the court noted, and if that claim had beenaccepted by a jury, it would have demonstrated that a wrong hadbeen committed against her. In short, the appeals court held thatthe trial court erred in granting a directed verdict in favor ofthe insurer, based on the woman's failure to show compensatorydamages.

Another issue in the case was whether the woman was required toprove oppression or fraud. A Kentucky law providing a statutoryright to recover punitive damages states in part that "a plaintiffshall recover punitive damages only upon proving, by clear andconvincing evidence, that the defendant from whom such damages aresought acted toward the plaintiff with oppression, fraud ormalice."

Although the law states that it "is applicable to all cases inwhich punitive damages are sought," the woman asserted that it wasnot applicable to bad faith claims, and the appeals court agreed.The insurer also argued that the woman hadn't signed herinterrogatories. Based on this defect and on two cited cases, theinsurer argued that the woman was prohibited from being awarded anydamages during the trial and that the trial court erred in notgranting its motion to dismiss the case for this reason alone. (Thetrial court offered to grant a mistrial because of the defect, butthe insurer declined the offer.)

The appeals court said the woman's failure to sign her answersto interrogatories did not preclude her from seeking damages attrial. Her answers gave the insurer sufficient notice of the amountof damages at stake to enable it to make appropriate decisionsconcerning possible settlement or trial preparation, andstrategy.

The insurer's next argument was that the trial court properlygranted its motion for a directed verdict because no punitivedamages could have been awarded to the woman, since the insurer wasnot liable for the acts of its claims adjuster. The insurer cited aKentucky law stating that "in no case shall punitive damages beassessed against a principal or employer for the act of an agent oremployee, unless such principal or employer authorized or ratifiedor should have anticipated the conduct in question." The insurerargued that its directors and principal officers had no knowledgeof the adjuster's actions or reason to anticipate them.

In response, the woman referred to the adjuster's testimony attrial that, prior to drafting the waiver of coverage letter, shesought legal advice from the insurer's in-house counsel, who workedin the insurer's home office. The appeals court held that thetestimony was sufficient to prove that the insurer authorized orratified the adjuster's conduct.

The insurer next argued that the woman was not entitled topunitive damages because of a law stating that "a plaintiff shallrecover punitive damages only upon proving, by clear and convincingevidence, that the defendant from whom such damages are soughtacted toward the plaintiff with oppression, fraud or malice." Theinsurer said that since any actions on its part were against thewoman's father, now deceased, and not her, punitive damages wereprecluded.

The appeals court noted that the insurer did not raise thisissue in its pre-hearing statement and had not filed any motion tosubmit this additional issue. Thus, the appeals court declined toconsider the argument, and it remanded the case for a new trial inwhich the woman would have the opportunity to pursue punitivedamages.

Thomas vs. Grange Mutual Casualty Co., No. 2003-CA-000449-MR(Ky. App. 06/04/2004) 2004.KY. 0000762 (www.versuslaw.com).

Readers may fax Don Renau at (502) 897-1533. His e-mail addressis [email protected].