Good Faith/Bad Faith-When is the Line Crossed? M.

Austin Mehr

To prevail in a bad faith claim,1 the plaintiff must establish that the insurer (1) is obligated to pay the claim under the terms of the policy; (2) lacks a reasonable basis in law or in fact for denying the claim; and (3) either knew there was no reasonable basis for denying the claim or acted with reckless disregard. 2 Case law suggests that there must also be sufficient evidence of intentional conduct or reckless disregard of the rights of a claimant to warrant submitting punitive damages instructions to the jury. The essence of the question as to whether there are tortious elements justifying an award of punitive damages depends, first, on whether there is proof of bad faith and, second, whether the proof is sufficient for the jury to conclude that there was conduct that was outrageous because of the defendants evil motive or reckless indifference to the rights of others.3 Defendants will often cite the above statement, contained in Wittmer v. Jones, arguing to the trial judge that summary judgment is appropriate because the conduct simply is not outrageous. (Never mind that reckless indifference is the lesser, alternative standard.) But

importantly, the arguments for summary judgment rarely correctly set forth the standard for summary judgment. Instead, they sound more like a jury argument as to why the jury should find, as a factual matter, that the conduct does not manifest reckless disregard or intentional misconduct.

This is the generic term for Unfair Claim Settlement Practices Act violation claims, common law bad faith claims, and Consumer Protection Act claims regarding insurance.
2 3

Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993). Id.

The correct response to such a motion for summary judgment must address the following, as recently articulated by the Sixth Circuit: The issue of the defendants bad faith turns largely on the inferences to be drawn from the evidence regarding the defendants motive [in handling the claim].4 Different reasonable inferences, from a given particular fact, may be helpful to either party. This was illustrated in the case of Estate of Riddle v. Southern Farm Bureau Life

Insurance Co., where the Court described that the claims handler had gone through the file with a fine tooth comb.5 The Court noted, that the defendants heightened degree of scrutiny might raise an inference that the defendant sought to be as thorough and fair as possible.6 However, the Court continued, [i]t might just as easily [] raise an inference that the company was looking for reasons to deny coverage. Choosing between two reasonable inferences is the function of the jury.7 The Importance of Motive The Kentucky Supreme Court, in Wittmer v. Jones, discussed the role of an insurance companys motive. Although the Court in Wittmer did not see facts in that particular case which would establish the right to a trial on bad faith, the Court specifically noted that in another scenario, where the record established that an insurance company had operated arbitrarily and unreasonably, or from ulterior motives, a limited offer may be proof of bad faith.8 Again, this dicta in Wittmer, like the federal court cases cited, indicates that bad faith may certainly be
4 5 6 7 8

Estate of Riddle v. Southern Farm Bureau Life Ins. Co., 421 F.3d 400, 408 (6th Cir. 2005) (emphasis added). Id. Id. Id. Wittmer, 864 S.W.2d at 892.

proven circumstantially or by inference. The Sixth Circuit has recognized that the Kentucky Supreme Court appears to view the question of whether an insurers actions rise to the level of unlawful conduct to be a question of fact.9 Finding evidence of a possible ulterior motive was important in a recent Kentucky Court of Appeals decision. In Medical Protective Company v. Wiles, 2011 Ky. App. LEXIS 101, at *21 (Ky. Ct. App. June 17, 2011), the defendant argued that the plaintiff did not present any evidence of an evil motive or reckless indifference in either the amount or timing of the initial offer. Medical Protective argued that the investigation was neither too slow nor

insufficiently thorough, pointing to the actions its adjuster took during his investigation of the claim, which included: seeking independent medical advice, seeking accounting records for the Wiles alleged business loss, retaining an independent accountant to review the Wiles business loss claims, reviewing information submitted by the Wiles counsel, interviewing the tortfeasor-insured doctor regarding the incident, and retaining outside counsel to obtain medical and accounting records.10 Conversely, the Wileses contended that the investigation was inadequate and was geared toward saving money from the companys indemnity budget.11 The Wileses introduced evidence regarding the financial performance objectives evident in Medical Protectives employee reviews, which the Wileses argued created an atmosphere promoting delayed payment of claims.12 The late setting of a $1 million reserve, which occurred the day Medical

Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 531 (6th Cir. 2006). Id. Id. Id. at *21-22.

10 11 12

Protective closed its books for the year 2002, arguably established its manipulation of the situation to appear more profitable.13 The Kentucky Court of Appeals found that the twentyseven-month delay between Mrs. Wiless injury and the initial settlement offer, where fault was clear, could not be considered mere delay and that the evidence of Medical Protectives focus on the financial appearance of the company provided a basis to establish a questionable motive for the method of investigating claims in general and the timing of the settlement offer.14 Mere delay is not enough The Kentucky Supreme Court has cautioned insurance companies that coming up with an amount that is within the range of possibility is not an absolute defense to a bad faith case.15 To comply with their obligations under the statute, insurers should not force an insured to go [through] needless adversarial hoops to achieve [her] rights under the policy. [They] cannot lowball claims or delay claims hoping that the insured will settle for less.16 However, mere delay in payment does not amount to outrageous conduct absent

some affirmative act of harassment or deception . . . or evidence supporting a reasonable inference that the purpose of the delay was to extort a more favorable settlement or to deceive the insured with respect to the applicable coverage.17 Nor is the insurers below-policylimits offer considered evidence of bad faith per se, particularly where the claimants never

13 14 15

Id. at *22. Id. at *23.

Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368, 376 (Ky. 2000); cf. Wittmer, 864 S.W.2d at 892 (suggesting that a low offer might serve as evidence of bad faith).
16 17

Farmland Mut. Ins. Co., 36 S.W.3d at 376. Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 452-53 (Ky. 1997).

demanded payment of the policy limits or any other sum.18 In federal court, with its more relaxed standard for summary judgment, State Farm was granted summary judgment in Phelps v. State Farm by the U.S. District Court for the Western District of Kentucky with no discussion by the court regarding the testimony of either of Phelpss expert witnesses.19 The court concluded that all reasonable jurors would find that the delay in processing Phelpss claim was solely attributable to Phelpss own counsel and to the time reasonably needed for State Farms investigation. 20 The court also found that Phelps had failed to prove that an improper purposerather than a lack of evidencedrove State Farms allegedly low settlement offers.21 However, on appeal, the Sixth Circuit took a different view in a sharply divided 2-1 decision.22 First, the court noted that State Farms initial offer of $25,000 was just barely above the low end of both its own evaluation of the claim ($24,620 to $49,620) and the total amount shown in Phelpss documentation of medical and wage-loss costs ($22,620.22).23 The offer had failed to reasonably account for Phelpss pain and suffering, as well as future wage loss. 24 The court stated that an additional ground upon which a jury could reasonably find that State Farm exhibited bad faith was the extensive delay of nearly three years before Phelpss claim was

18 19

Id. at 453.

2010 U.S. Dist. LEXIS 88984, at *11-13 (W.D.K.Y. Aug. 26, 2010) (hereafter Phelps I), revd, Phelps v. State Farm, 2012 U.S. App. LEXIS 10612 (6th Cir. May 25, 2012) (hereafter Phelps II).
20 21 22 23 24

Phelps I, 2010 U.S. Dist. LEXIS 88984, at *11-13. Id. Phelps II, 2012 U.S. App. LEXIS 10612 (6th Cir. May 25, 2012). Id. at *19. Id.

settled.25 The court noted that several cases had determined that delays of substantially shorter length constitute more than mere delay and instead may serve as evidence of bad faith.26 Although the early months of the claims processfrom September 2003 through February 2004may have been attributed to the time needed for a reasonable investigation, a legitimate question [arose] as to whether the delay involved in obtaining records from Phelpss previous 1999 injury was reasonable.27 State Farm initially noted this former injury in its

February 11, 2004 log notes, but there [was] no evidence that records were requested from Phelps until September of that year.28 The six-and-a-half month delay simply went

unexplained, aside from the fact that the claims adjuster was replaced for the second time in the interim.29 This holding squarely places the affirmative duty to investigate upon the insurer,

consistent with the UCSPA. The Phelps II court noted that State Farms position that the information was necessary to evaluate Phelpss claim may also be construed as a delay tactic.30 Viewing the facts in the light most favorable to Phelps, the court concluded that the settlement package submitted in March of 2004 contained all of the information needed to settle her claim.31 The jury might thus infer that State Farm raised the prior-injury issue at this time in order to delay making a settlement
25 26

Id. at *20.

Id. at *20-21 (citing Medical Protective Co. v. Wiles, 2011 Ky. App. LEXIS 101 (Ky. Ct. App. June 17, 2011) (involving a delay of 27 months between the injury and the initial settlement offer); King v. Liberty Mut. Ins. Co., 54 F. Appx 833, 837-38 (6th Cir. 2003) (involving a delay of 18 months from the date of a follow-up inquiry about the settlement through the date that the company finally checked its purged files)).
27 28 29

Phelps II, at *21. Id.

Id. (citing King, 54 F. Appx at 837-38 (concluding that an 18-month delay for investigatory purposes was unreasonable)).
30 31

Phelps II, at *21-22. Id.

offer.32 This inference was strengthened by the fact that State Farm had access to databases reporting prior insurance claims and could have uncovered the existence of Phelpss 1999 injury well before receiving her allegedly deficient medical records.33 Likewise, the adjustors refusal to complete an initial valuation before receiving these recordson the ground that such an evaluation would be premature (despite the fact that settlements are often reached at premature stages in litigation)could also be considered a delay tactic.34 Opinions that reverse summary judgment often discuss reasonable inferences and possible motives. Thus, it becomes critical to develop this proof through discovery.

Lawyers as Witness or Advocatesor Both? Oftentimes the lawyer who handles the litigation for the claimant will also file a UCSPA claim, which can create issues when it becomes apparent that the lawyer would need to act as a witness at trial. A common way to avoid such a situation is to obtain co-counsel, thereby

resolving any issues that could possibly arise under SCR 3.130(3.7). That rule states: Lawyer as witness: (a) A lawyer shall not act as advocate at trial in which the lawyer is likely to be a necessary witness except where: (1) The testimony relates to an uncontested issue; (2) The testimony relates to the nature and value of legal services rendered in the case; or (3) Disqualification of the lawyer would work substantial hardship on the client.

32 33 34

Id. at *22. Id. Id.

(b) A lawyer may act as advocate in a trial in which another lawyer in the lawyers firm is likely to be called as a witness unless precluded from doing so by Rule 1.7 or Rule 1.9. Part (a) of the rule clearly allows the lawyer to act as a witness. It only precludes a lawyer from acting as advocate at trial if she is likely to be a witness and if none of the exceptions are met. It does not preclude her from being counsel of record. The issue of whether an attorney may represent a plaintiff in a personal injury action and then also represent that same plaintiff in a third-party bad faith action has been addressed by the Kentucky Supreme Court in Zurich Ins. Co. v. Knotts, 52 S.W.3d 555 (Ky. 2001). In that case, the defendant- insurer sought to call the plaintiffs attorney, who represented the plaintiff in the underlying case and continued to represent the plaintiff in the bad faith case, as a witness and moved to disqualify him as counsel on that basis.35 The Kentucky Supreme Court held that,

pursuant to SCR 3.130(3.7), a courts decision on a motion to disqualify requires a balancing of the interests of the client (and his right to choose counsel) and potential unfairness to the opposing party.36 In Zurich Ins. Co., the court ultimately held that, even though the plaintiffs attorney had submitted an affidavit in response to the defendants motion for summary judgment, that fact was insufficient to warrant the drastic measure of disqualifying counsel. 37 It is nearly always the case that underlying plaintiffs attorneys, who are involved in negotiations with insurers for at-fault defendants, have relevant information about settlement discussions and correspondingly the

35 36 37

Zurich Ins. Co., 52 S.W.3d at 557. Id. at 558.

Id. at 559-60. See also Commonwealth Orthopaedic Ctrs. V. Philadelphia Indem. Ins. Co., 2010 U.S. Dist. LEXIS 118089 (E.D. Ky. Nov. 3, 2010) (fact that plaintiffs attorneys deposition was taken and defendant wished to call her as witness did not warrant disqualifying counsel).

claims for violations of the UCSPA.38 witness.39

This does not preclude an attorney from acting as a

Certainly it can be very effective strategy to have the underlying lawyers testify in

accordance with their contemporaneous actions during the underlying case.40 Federal Rule of Evidence 701 allows this same type of testimony: Rule 701. Opinion Testimony By Lay Witness If a witness is not testifying as an expert, testimony in the form of an opinion is limited to one that is: (a) rationally based on the witnesss perception; (b) helpful to clearly understanding the witnesss testimony or to determining a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. According to the Kentucky Court of Appeals, the aforementioned type of testimony does not constitute expert opinion testimony, which would have been precluded. Rather, it provided an explanation for the actions of the witnesses in the underlying action. Nor [did the court] believe that the testimony was prejudicial so as to prevent Medical Protective from receiving a fair trial.41
The best approach may be to have the lawyer from the underlying claim testify about her actions and then take only a secondary role as trial counsel: not advocating, but handling other case management issues. Nothing would prevent the lawyer from acting in this role as well as the role of witness.

38

See Medical Protective Co. v. Wiles, 2011 Ky. App. LEXIS 101, at *24-26 (Ky. Ct. App. June 17, 2011) (noting that underlying attorneys for the Plaintiff offered testimony at trial where they were not acting as advocates).
39 40 41

Id. Id. at *24-26. Id. at 26.