Down To Cases

The father told his daughter that, in his opinion, she had not caused all the damage listed on the repair estimates. Claiming that there was pre-existing damage to the rear of the auto, the family offered the driver of the damaged vehicle $300 to settle the matter, which she rejected.

Although the family did not want the claim submitted to their insurance company, the driver of the damaged car submitted it anyway, attaching the $1,502.14 repair estimate. The matter was referred 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 the matter. On the same day, the adjuster wrote a letter to the mother (apparently the first named insured) advising her that the carrier would close its file at her request but that she first would have to sign a "waiver of coverage" letter, which she did. At that point, the insurer apparently considered the matter closed.

Some time later, the driver of the damaged car informed the claims adjuster in a letter that her attempts to resolve the matter with the insureds had been unsuccessful. She demanded that the insurer immediately pay her $1,502.14. The adjuster's supervisor replied by letter that the mother of the insured family was responsible for the claim and that "we will not be making payment to you on behalf of our insured."

The driver of the damaged car retained an attorney, who sent a letter to the insurer demanding $1,502.14. The claims supervisor declined, stating the insured "is considered to be self-insured for the alleged accident." The attorney wrote again to the claims supervisor, advising her of numerous court decisions and treatises holding that agreements between an insurer and an insured to not pay a claim, entered into after a property damage loss has occurred, are not effective against innocent third-party claimants.

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

Sometime later, the father died and his daughter was appointed administrator of his estate. She revived the action against the insurer. In a subsequent trial, the court granted the insurer's motion for a directed verdict in its favor, dismissing the woman's complaint. The court found that the woman had not met the required burden of proof to show that the insurer had violated the Unfair Claims Practices Act. It also found that the insurer had a reasonable basis for denying the claim and that the woman could not recover any damages, including punitive damages, for the insurer's alleged bad faith because she had failed to prove compensatory damages. The woman appealed.

The appeals court noted that the state's Supreme Court, in another case, found that bad faith claims falling under the state's Unfair Claims Practices Act have three elements: "(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."

The appeals court said the plaintiff proved the first element because the insurer was obligated to pay the claim under the terms of its policy. Then the court moved on to the other elements.

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

The Unfair Claims Practices Act stated in part: "No insurance contract insuring against loss or damage...to the property of any person, shall be retroactively annulled by any agreement between the insurer and insured after the occurrence of any such...damage for which the insured may be liable, and any such annulment attempted shall be void." The appeals court said the statute prohibited the waiver of coverage agreement between the insurer and its insured and said the waiver did not constitute a reasonable basis for denying the claim.

The insurer said it did not rely on the waiver of coverage agreement to support its position. Rather, it asserted that the disagreement over the amount of damages the woman's car had sustained was a valid reason for denying the claim. The appeals court, however, found the waiver of coverage was the basis of the insurer's denial. It also said the insurer's argument overlooked the fact that the insurer had a statutory duty to attempt in good faith to negotiate a settlement, since its insured's liability was clear. Thus the appeals court found sufficient evidence supporting the second element of the woman's bad faith claim against the insurer.

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

According to the insurer, its counsel had no notes of his conversation with the adjuster and did not remember any of its details. The court found that regardless of whether the adjuster acted on her own or with the home-office counsel's advice, there was sufficient evidence 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. In short, said the court, the evidence the woman presented at trial was sufficient to support her bad faith claim and to overcome the insurer's motion for a directed verdict.

Another reason the trial court gave for granting the insurer's motion for a directed verdict was that the woman failed to prove compensatory damages and therefore was not entitled to recover punitive damages. The woman argued that she could have been awarded compensatory damages for mental anguish and for prejudgment interest while conceding that she did not make claims for such damages during the trial. But she maintained she was entitled to recover punitive damages, even in the absence of an award of compensatory 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 toward allowing punitive damages to be recovered even in the absence of a showing of actual or compensatory damages. The court noted that it was persuaded, as in another case the Kentucky Supreme Court had been, by the reasoning of a New Jersey case [Nappe vs. Anschelewitz, 97 NJ 37, 477 A.2nd 1224 (1984)] "that compensatory damages are not an essential element of an intentional tort committed willfully and without justification."

The insurer urged the appeals court to reject the principles concerning compensatory and punitive damages as set forth in Vinson because it involved a specific statute allowing the recovery of punitive damages, whereas the Unfair Claims Settlement Practices Act contained no similar provision. While the court said it understood the distinction between the facts in Vinson and those in the case before it, it couldn't overlook its own Supreme Court's statement that it was persuaded by the reasoning of the New Jersey Supreme Court in the Nappe case.

The appeals court held that the trial court should not have granted the insurer's motion for a directed verdict, even though the woman failed to present proof of compensatory damages. She had presented sufficient proof to support the three elements of a bad faith claim action, the court noted, and if that claim had been accepted by a jury, it would have demonstrated that a wrong had been committed against her. In short, the appeals court held that the trial court erred in granting a directed verdict in favor of the insurer, based on the woman's failure to show compensatory damages.

Another issue in the case was whether the woman was required to prove oppression or fraud. A Kentucky law providing a statutory right to recover punitive damages states in part that "a plaintiff shall recover punitive damages only upon proving, by clear and convincing evidence, that the defendant from whom such damages are sought acted toward the plaintiff with oppression, fraud or malice."

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

The appeals court said the woman's failure to sign her answers to interrogatories did not preclude her from seeking damages at trial. Her answers gave the insurer sufficient notice of the amount of damages at stake to enable it to make appropriate decisions concerning possible settlement or trial preparation, and strategy.

The insurer's next argument was that the trial court properly granted its motion for a directed verdict because no punitive damages could have been awarded to the woman, since the insurer was not liable for the acts of its claims adjuster. The insurer cited a Kentucky law stating that "in no case shall punitive damages be assessed against a principal or employer for the act of an agent or employee, unless such principal or employer authorized or ratified or should have anticipated the conduct in question." The insurer argued that its directors and principal officers had no knowledge of the adjuster's actions or reason to anticipate them.

In response, the woman referred to the adjuster's testimony at trial that, prior to drafting the waiver of coverage letter, she sought legal advice from the insurer's in-house counsel, who worked in the insurer's home office. The appeals court held that the testimony was sufficient to prove that the insurer authorized or ratified the adjuster's conduct.

The insurer next argued that the woman was not entitled to punitive damages because of a law stating that "a plaintiff shall recover punitive damages only upon proving, by clear and convincing evidence, that the defendant from whom such damages are sought acted toward the plaintiff with oppression, fraud or malice." The insurer said that since any actions on its part were against the woman's father, now deceased, and not her, punitive damages were precluded.

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

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 address is drenau@thepoint.net.