In a long-contested insurance bad-faith cause of action, the Kentucky Supreme Court has ruled that an insurance company delayed and continued to litigate despite having no legal foundation on which to base its case, only fulfilling its contractual obligations nine years after the covered accident. The case is Nichols v. Zurich Am. Ins. Co., 2021 Ky. LEXIS 354.
Insurer Zurich issued a commercial fleet policy to Miller Pipeline Corporation who employed James Nichols. The policy, when issued, provided $1,000,000 of UIM coverage.
Following the issuance of the policy, Nichols was severely injured in a car crash. For the next nearly three years, he and his counsel negotiated with Zurich over UIM coverage. During this time, no fewer than seven Zurich employees examined the terms and acknowledged that the policy included the UIM coverage with the above limits. Nichols relied on this representation in settling with the tortfeasor.
Three years after the accident Zurich advised Nichols' counsel that the policy did not include UIM coverage. Nichols requested a certified copy of the policy, which Zurich was initially unable to produce. Zurich ultimately produced an endorsement that was labled "effective 04/01/02″ but was created in September 2005.
The court found that the lower courts erred in holding that Zurich did not owe UIM coverage for the insureds losses and therefore had not acted in bad faith in raising this defense to coverage after years of acting like the claim was covered. In addition to holding that Zurich acted with reckless disregard in raising this defense, the court ruled that although Nichols had no right to the entire claim file, particular post-litigation documents, he was entitled to the internal Zurich documents relating to the insurer's initial denial of his claim.
"Given the extraordinary delay between Nichols' notice to Zurich and Zurich taking any action, as well as Zurich's failure to meaningfully engage with Nichols for years before it ever sought reformation, evidence of Zurich's initial analysis regarding its own liability is highly probative to Nichols' bad-faith suit."
Editor's Note: The court cautioned that Zurich's behavior in this case was an "extreme outlier" and the trial courts should be vigilant and cautious prior to admitting any post-litigation evidence. In this case, Zurich opted out of engaging in the settlement process so Nichols had no other remedy under procedural rules.