Eventually, Ms. Hollaway demanded $125,000 in compensation from Direct General (or the policy limits). She provided the insurer with medical records, billing information, and formal documentation of wage loss after leaving her job. Direct General offered to settle her claim for $5,000. She rejected this, and again demanded $125,000 compensation for her injuries that allegedly were the result of the accident. Direct General made no counter-offer and stood by its initial $5,000 offer to settle.

Following the breakdown of settlement negotiations, Ms. Hollaway filed suit. Among other things, she asserted a third-party bad faith claim against Direct General under the KUCSPA on the theory that Direct General had failed to “reasonably evaluate, investigate, and negotiate a settlement of her bodily injury claim.”

Direct General moved for summary judgment, contending that it had not acted in bad faith because it had the right to insist that Ms. Hollaway prove her case that the insurer was liable before it had a duty to offer her any settlement. Direct General pointed to the disputed nature of how the accident had been caused, the lack of evidence that the accident had caused Ms. Hollaway's injuries, and Ms. Hollaway's preexisting injuries to the same area of her body where she allegedly had been injured from the accident.

For her part, Ms. Hollaway argued that Direct General had paid her $463.42 in property damage and had settled her bodily injury claim for $22,500, and that it had failed to “investigate, negotiate, and attempt to settle the claim in a fair and reasonable manner,” as insurers were directed to do under the KUCSPA.

The trial court granted summary judgment in favor of Direct General, primarily by finding that a legitimate dispute existed regarding who had been liable for the accident and what injuries to Ms. Hollaway had been caused by the accident. Because liability and causation were legitimately disputed, the trial court ruled, Direct General could not have acted in bad faith as a matter of law.

The court of appeals affirmed. It noted that the only evidence Ms. Hollaway had presented in support of her bad faith claim was the $463.42 settlement for property damage and the $22,500 settlement for her bodily injury claim from the accident. The panel concluded that, in Kentucky, a settlement was “not evidence of legal liability” and did not qualify as an “admission of fault.” Accordingly, the court of appeals held that liability was not “beyond dispute” and summary judgment in favor of Direct General had been proper.

The dispute reached the Kentucky Supreme Court, where Ms. Hollaway claimed that through Direct General's actions during the early stages of its investigation, and through offers to settle both her property and bodily injury claims, the insurer had admitted liability but had failed to promptly offer her a fair settlement for her claim. She contended, therefore, that the trial court had improperly entered summary judgment in favor of Direct General.

The KUCSPA

The KUCSPA prohibits:

misrepresenting pertinent facts or insurance policy provisions

failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies

and

refusing to pay claims without conducting a reasonable investigation based upon all available information

It also bars insurers from:

not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear

The Kentucky Supreme Court's Decision

The court affirmed.

In its decision, the court explained that Kentucky law imposed a “tall burden of proof” on plaintiffs seeking to recover on a theory of bad faith. To succeed on her third-party action, the court said, Ms. Hollaway had to show that Direct General was obligated to pay the claim under the terms of the policy; Direct General lacked a reasonable basis in law or fact for denying the claim; and that Direct General either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Proof of this third element, the court continued, required evidence that the insurer's conduct “was outrageous” or demonstrated “reckless indifference to the rights of others.”

Ms. Hollaway, the court continued, had to “go beyond simply showing Direct General's liability” and had to proffer evidence that the insurer's motive “was recklessly indifferent to her right to recover.” The court then found that Ms. Hollaway had failed to present a case that could possibly succeed at trial.

It observed that fault for the accident itself was “debatable,” adding that, under Kentucky law, settlements were not evidence of legal liability and did not qualify as admissions of fault.

More importantly, the court said, was the dispute between Ms. Hollaway and Direct General over the extent and severity of her alleged injuries from the accident. It found that Ms. Hollaway had not offered “any proof of intentional misconduct” but that, instead, she suggested that the process was a matter of interpretation, better fit for jury determination than summary judgment. Ms. Hollaway pointed to Direct General's lack of interest in her initial six-figure demand, and the insurer's preference of waiting until she returned to work to complete its investigation of her claim, but the court said that those points only invoked “speculation.” She offered “nothing to support the assertion that Direct General never intended to negotiate with her fairly to reach a settlement for her claims,” according to the court.

The KUCSPA required only that insurers “negotiate reasonably with respect to claims” and did not require them “to acquiesce to a third party's demands,” the court concluded.

The case is Hollaway v. Direct General Ins. Co. of Mississippi, Inc., No. 2014-SC-000758-DG (Ky. Sept. 22, 2016). Attorneys involved include: COUNSEL FOR APPELLANT: Matthew David Ellison, Fowler Bell, PLLC; COUNSEL FOR APPELLEE: Perry Adanick, Quinteros Prieto Wood & Boyer, P.A.; COUNSEL FOR AMICUS CURIAE, Ronald L. Green, Green, Chesnut & Hughes, PLLC., Mendel Austin Mehr, Mehr Fairbanks Trial Lawyers, PLLC.