A decision by a federal district court in Kentucky rejecting bad faith and fraud claims brought against a homeowner's insurance carrier highlights the kinds of allegations that, if absent, can help to doom a bad faith action against an insurance company – but that, if present, might permit bad faith claims to withstand an insurer's motion to dismiss.
The Case
Anita Frasure alleged that she contacted State Farm Fire & Casualty Company agent Mitchell Jackson's office in 2015 regarding a homeowners' insurance policy for her mobile home. She asserted that, in a transaction conducted entirely by telephone and fax, during which the only document transmitted to Ms. Frasure was a blank signature sheet, she purchased a policy.
Ms. Frasure asserted that, after her repeated requests, Mr. Jackson's office faxed a copy of the policy declarations page to the holder of Ms. Frasure's mortgage. Ms. Frasure contended that she never received a copy of the policy, and that the mortgage holder failed to notice that the policy was for renters insurance as opposed to homeowners' insurance.
In May 2016, a tornado caused wind, water, and hail damage to Ms. Frasure's home. Ms. Frasure filed an insurance claim, which State Farm denied on the ground that Ms. Frasure's policy did not cover property damage.
Ms. Frasure's complaint to the Kentucky Department of Insurance went unresolved, and Ms. Frasure sued State Farm.
Ms. Frasure asserted three bad faith claims: violations of the Kentucky Unfair Claims Settlement Practices Act and Kentucky Consumer Protection Act and breach of the covenant of good faith and fair dealing.
State Farm moved to dismiss Ms. Frasure's bad faith and fraud claims, as well as her claim for punitive damages.
The District Court's Decision
The district court granted State Farm's motion, finding that Ms. Frasure's bad faith and fraud claims did not “satisfy the pleading requirements of Rule 8” of the Federal Rules of Civil Procedure.
In its decision, the district court first said that bad faith claims under the Kentucky Unfair Claims Settlement Practices Act (“KUCSPA”), Ky. Rev. Stat. § 304.12-230(9), the Kentucky Consumer Protection Act (“KCPA”), Ky. Rev. Stat. § 367.170, and Kentucky common law were governed by the same three-factor test:
(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.
It then found that the first factor of the three factors – the obligation to pay – had not been adequately pleaded by Ms. Frasure.
The district court reasoned that Ms. Frasure's complaint revealed “no contractual obligation to pay on State Farm's part,” adding that Ms. Frasure did not dispute that the renters policy imposed no obligation on State Farm to pay her claim.
Accordingly, the district court dismissed Ms. Frasure's bad faith claims under the KUCSPA, the KCPA, and Kentucky common law.
The district court next addressed Ms. Frasure's fraudulent misrepresentation claim, which, it noted, required:
(1) a material misrepresentation; (2) which is false; (3) known to be false or made recklessly; (4) made with inducement to be acted upon; (5) acted in reliance thereon; and (6) causing injury.
In the district court's view, Ms. Frasure's allegation that “State Farm materially misrepresented that the terms of the policy were what [she] had requested, coverage of her mobile home,” was a “conclusory assertion” that was not supported by sufficient facts to withstand State Farm's motion.
The district court concluded that, in the absence of any viable underlying claims, Ms. Frasure also could not pursue punitive damages.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].