FARMLAND MUTUAL INSURANCE COMPANY V. LEMUEL JOHNSON, VIRGINIA JOHNSON; and A. L. JOHNSON DISTRIBUTION, INC.
Annotate this Case
Download PDF
AS MODIFIED: FEBRUARY 22,200l
RENDERED: OCTOBER 26,200O
TO BE PUBLISHED
1998-SC-0938-D
FARMLAND MUTUAL
INSURANCE COMPANY
V.
APPELLANT
ON APPEAL FROM THE COURT OF APPEALS
NO. 97-CA-1212
SIMPSON CIRCUIT COURT NO. 93-Cl-0136
LEMUEL JOHNSON, VIRGINIA
JOHNSON; and A. L. JOHNSON
DISTRIBUTION, INC.
APPELLEES
OPINION OF THE COURT BY CHIEF JUSTICE LAMBERT
AFFIRMING
This litigation arises out of a disputed fire insurance claim. The insured
stipulated that the amount of the loss was fairly debatable, and the insurer contends
that a claim against it for bad faith under the Kentucky Unfair Claims Settlement
Practices Act (“KUCSPA”) is thereby foreclosed. This and a multiplicity of other issues
are raised in this appeal from a judgment upon a jury verdict awarding the plaintiffs
punitive damages of $2 million for bad faith and violations and violations of the
KUCSPA.
building was insured by Farmland Mutual Insurance Company. The pertinent policy
provisions of the insurance contract were:
I. PROPERTY INSURANCE
d. LOSS SETTLEMENT CLAUSE
1. Real Property and Business Property
We will determine the value of covered property in the event of loss or
damage at the actual cash value as of the time of the loss or damage. We
will not pay more for loss or damage than the least of:
(b) The cost to repair or replace the lost or damaged property with similar
property intended to perform the same function when replacement with
identical property is impossible or unnecessary;
(d)‘The value of the damaged property.
VI. POLICY DEFINITIONS
THE FOLLOWING DEFINITIONS ARE MADE A PART OF THIS POLICY
...
2. Actual cash value means the replacement cost of the property damaged
or destroyed at time of loss, less depreciation.
(emphasis added).
After the fire, Farmland retained Crawford and Company to adjust the
claim. Crawford and Company assigned the case to its adjuster, Richard Shields. A
dispute soon arose between the parties as to whether the premises should be repaired
or completely re-built, and there was also a disagreement regarding the value of the
loss. On behalf of Farmland, Shields took the position that the structure could be
repaired and that the actual cash value of the property was the cost of repair less
depreciation. He made only one offer, $168,993.18,
to settle the claim. The Johnsons
insisted that repairing the building with reasonable assurance of structural integrity
would cost more than to rebuild it, and they also maintained that Shields’ offer was too
low.
-2-
After failing to reach an agreement with Farmland on the value of the
property, the Johnsons filed a complaint in Simpson Circuit Court against Farmland,
Crawford and Company, and Shields, alleging breach of the insurance contract and
violations of the Kentucky Unfair Claims Settlement Practices Act. The Johnsons’ basic
theory of the case was that Shields had misrepresented a pertinent contract provision,
resulting in a significantly decreased amount of recovery under the insurance contract,
and that he had also conspired with Paul Davis Systems (“PDS”), a fire restoration
contracting service, to create a repair estimate that Shields knew was too low.
The trial court ordered severance that the breach of contract and bad faith
claims. In the breach of contract trial, which is not at issue here, the jury found that the
cost of repairing the building exceeded the replacement cost and awarded the Johnsons
$213,810 as the “actual cash value” of the premises. This amount represented what
the jury believed to be the replacement cost, $251,541, minus depreciation. Thus, the
“actual cash value” awarded was approximately $45,000 more than the only offer
Shields had made to the Johnsons. Farmland appealed from that judgment, and the
Johnsons took a cross-appeal. The Court of Appeals affirmed the judgment of the
Simpson Circuit Court.
Thereafter, the bad faith claim was tried. The Johnsons alleged that
Farmland committed four violations of the KUCSPA: (1) misrepresentation of pertinent
policy provisions,’ (2) failure to conduct a reasonable investigation,2 (3) failure to
’ KRS 304.12-230( 1).
2 KRS 304.12-230(4).
-3-
attempt to bring about a fair and equitable settlement of the claim,3 and (4) compelling
the insureds to initiate litigation by offering an amount substantially less than the amount
ultimately recovered.4
The Johnsons moved for summary judgment on the first issue, i.e.,
whether Shields misrepresented the policy provisions. From the record it was
undisputed that Shields claimed that “actual cash value” meant the cost of repair less
depreciation. Yet in fact the contract expressly stated that “actual cash value” was the
cost of replacement less depreciation. The trial court thus granted the Johnsons’
motion for partial summary judgment.
At trial on the remaining issues, the following evidence was presented.
Two days after the fire, Shields met Johnson at the fire site. Shortly after Shields
arrival, an employee of PDS also arrived. Johnson told Shields that he did not intend to
rebuild the building as it had been. Thus Shields knew that it would be a cash
adjustment, and that the value of the claim would never be tested in the marketplace. A
few days later, Larry Smtth. a local building contractor, went to the fire site to prepare an
estimate for Johnson. When Smith arrived at the fire site, a PDS employee arrived and
said to Smith, “You guys are wasting your time. I’ve already got this job.” Smith
immediately went to Johnson to ask if the PDS employee’s statement was true. At this
time, Johnson began to suspect collusion between Shields and PDS.
About one month after the fire, Shields left a phone message for Johnson
offering to settle the clarm for $168,993.18.
It was later learned that this offer was
based on the cost to repair the damaged property, less a deduction for depreciation.
3 KRS 304.1 Z-230(6).
4 KRS 304.12-230(7).
-4-
Shields first testified that he had based this one and only offer on his own repair
estimate, but on cross examination he admitted that he had based the offer on the PDS
repair estimate even though he knew it was too low. Shields’ repair estimate was
$220,000, and the PDS repair estimate was $203,000. Moreover, Shields testified that
he was familiar with a prototype of the Johnsons’ policy, but that he had never obtained
a copy of the policy at issue from Farmland.
Farmland had made its own internal appraisal of the building two months
before the fire. Yet Shields never asked Farmland about the appraisal, and Linda
Dombkowski, who managed the claim for Farmland, never told Shields that she had it.
Johnson thought that the appraisal represented the fair value of the claim. Farmland
objected to the introduction of the appraisal, and the amount of the appraisal was
excluded from evidence. However, the fact that the appraisal existed, the fact that
Shields never asked about any appraisal by Farmland, and the fact that Dombkowski
never pointed out the company’s own appraisal to Shields were put before the jury.
On June 3, 1992, the Johnsons met with Shields in Louisville. Mr.
Johnson told Shields that he thought the cost of adequate repairs would exceed the
cost to demolish and replace the building. Johnson insisted that the claim should be
adjusted based on the replacement cost of the building less depreciation, under
subparagraph (C)( 1 )(d), rather than repair cost, under subparagraph (C)( 1 )(b).
Nevertheless, at the Louisville meeting Shields reiterated Farmland’s first and only offer
of $168,993.18. Mr. Johnson insisted that a structural engineer be retained.
Shields retained Bill Mitchell, a structural engineer. Johnson hired his own
structural engineer. Shields never asked Mitchell or PDS to determine whether the cost
to repair would exceed the cost to replace, less depreciation, nor did he attempt to do
-5
so himself. Mitchell rendered his report in July 1992. After Shields received Mitchell’s
report, he refused to provide a copy to Johnson unless and until Johnson was in a
position to exchange engineering reports. After receiving a letter from the Johnsons’
attorney, Shield’s agreed to send a copy of Mitchell’s report to Johnson. The opening
paragraph of the report stated,
To limit cost, compensation to Structural Integrity, Inc. (SII)
does not provide for removal of floor, ceiling, or wall
coverings. The detailed examination of every structural
member, even where visible, is also beyond the scope of
Sll’s authorized work. . . [T]he purpose of this inspection is
to provide Sll’s opinion concerning the conditions observed
based on a limited visual examination.
On the basis of Mitchell’s inspection, Shields advised Johnson that the “previous offer .
. still stands.”
On August 3, 1992, Shields wrote Johnson as follows:
We would like to have a reply from you within a week so that
we can bring the claim to a conclusion and repairs can
begin. Additional damages that occur as a result of delay in
beginning repairs or additional loss of income as a result are
not covered under the policy.
Upon receipt of this letter, Johnson began demolishing the building in order to resume
business, which occurred on September 18, 1992. On September 28, 1992, Shields
restated Farmland’s offer and requested a response from Johnson. On September 30,
1992, Shields was told that Johnson had not completed his own investigation and could
neither accept nor reject Farmland’s offer at that time.
On October 28, 1992, Johnson informed Shields in a letter that his
consultants, a structural engineer and a building contractor, had confirmed his opinion
that repair cost would exceed replacement cost, which the building contractor had
-6-
estimated would be $304,444.5
Johnson also informed Shields that he was willing to
compromise the entire claim for $260,000.6
Without seeing any documentation from
Johnson’s consultants, Shields replied, “We feel that an accurate assessment was
made of the loss” and restated Farmland’s offer of $168,993.18 “made under the policy
loss settlement clause, No. Cl b, based on the cost of repairing the damaged property.”
This offer, as stated above, included a deduction for depreciation.
On November 9, 1992, Shields requested written reports from Johnson’s
consultants. At that time, Johnson had only received verbal reports to save expenses.
He immediately requested written reports from his consultants, yet there was a delay in
providing the reports to. Shields. On December 10, 1992, Shields wrote Johnson asking
about the reports and the Johnsons’ attorney responded on December 15, 1992. There
was no further contact between the parties until March 10, 1993, when Shields again
inquired about the reports and reiterated Farmland’s offer of $168,993.13, “based on the
actual cost to repair the building, less applicable depreciation.”
On April 6, 1993, copies of the reports were sent to Shields, and on April
20, 1993, Shields admitted that they “reflected some amount of hidden damage that
was not visible to us, and that will be taken into consideration.” Yet, on May 21, 1993,
Shields restated Farmland’s offer of $168,993.13.
The Johnsons soon commenced
litigation.
5 At the contract trial, the Johnsons proved that the replacement cost of the
building was $304,440. They asserted that this amount should be decreased by
depreciation of $45,666.60 for an actual cash value award of $258,777.40.
6 Thus, subtracting the undisputed amount for content ($5606.37) and debris
removal ($4,320.00), Johnson’s offer for the building and equipment was $250,073.63.
At trial, Johnson claimed that he was prepared to reduce this amount further if Farmland
had increased its offer at all.
-7-
At trial of the bad faith claims, upon the foregoing evidence, the trial court
submitted the case to the jury on special interrogatories that reflected the necessary
elements required by the test adopted by this Court in Currv v. Fireman’s Fund
Insurance Companv.’ The jury found that Farmland had violated the three remaining
provisions of the KUCSPA, and that it lacked a reasonable basis in law or fact for its
conduct, and that it either knew there was no reasonable basis for its conduct or acted
with reckless disregard thereof. The jury awarded the Johnsons $71 ,013.47 in
compensatory damages, including attorneys fees and nontaxable litigation expenses. It
also assessed two million dollars in punitive damages against Farmland. The jury also
awarded $1,100,000 in damages against Crawford and Company and its adjuster,
Shields, but this claim has been settled and is not pending on appeal.
Farmland appealed the judgment of the Simpson Circuit Court, and the
Court of Appeals rejected all of Farmland’s claims of error, except for the trial court’s
award of pre-judgment interest. The result was that the judgment was largely affirmed.
Since the Johnsons agreed with Farmland that the trial court used the wrong basis for
computing prejudgment interest, that issue is not presented on this appeal.
Farmland’s first claim is that the bad faith claim should have been
dismissed as a matter of law because Mr. Johnson stipulated that reasonable persons
could have different opinions as to the value of the loss and whether the damaged
’ Ky., 784 S.W.2d 176, 178 (1989)(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); Wittmer v. Jones, Ky, 864 S.W.2d 885, 890 (1993);
Federal Kemper Insurance Company v. Hornback, Ky., 711 S.W.2d 844, 846-847
(1986)(Leibson, J., dissenting).
-8-
structure should be repaired or replaced. In support of its contention, Farmland relies
on Emoire Fire and Marine Ins. Co. v. Simosonville Wrecker Service. lnc.,8 which states,
[I]f a particular claim is “fairly debatable,” the insurer is
entitled to debate that claim regardless of whether the
debate concerns a matter of fact or one of law . . [A]n
insurer is entitled to challenge a claim which is fairly
debatable on the law or the facts. Thus, pursuant to Curry, it
is clear that for purposes of Kentucky law, a tort claim for a
bad faith refusal to pay must first be tested to determine
whether the insurer’s refusal to pay involves a claim which
was fairly debatable as to either the law or the facts. If a
genuine dispute does exist as to the state of the law
governing the coverage question, the insured’s claim is fairly
debatable and the tort claim for bad faith based upon the
insurer’s refusal to pay the claim may not be maintained.g
Based upon this view, Farmland contends, it was entitled to engage in such a debate,
and it was entitled to a directed verdict as a matter of law.
While the above quotation appears to support Farmland’s position, in fact
it does not. In Emoire Fire, the insured sought reimbursement for loss occurring to
cargo when the cargo, but not the vehicle carrying the cargo, struck a highway
overpass. The insurer refused to pay the claim because the insured did not have allrisk cargo insurance coverage, but only limited insurance coverage for collisions
between the insured vehicle and other vehicles and objects.” The Court of Appeals, in
deciding whether a bad faith cause of action could be maintained against the insurer,
noted that the issue of cargo collision coverage had not yet been addressed by
Kentucky courts yet that the majority of other jurisdictions held that no coverage existed
if the insured’s cargo but not the carrier’s vehicle struck another object such as an
8 Ky. App., 880 S.W.Zd 886 (1994).
’ Id. at 889-890 (citations omitted).
lo Id. at 887.
-9-
overpass.”
Thus, the Court of Appeals held, the insurance company’s refusal to pay
was based upon a legitimate dispute regarding the status of the law, and the trial court
should have granted a directed verdict on the bad faith claim.‘2
Empire Fire is thus distinguishable from the instant case, as it dealt with
an insured’s right to bring a bad faith case against its insurer when recovery, if any,
under the insurance contract was dependent upon a legal issue of first impression in
Kentucky courts. There is no such unresolved legal issue here. Moreover, Empire Fire
does not stand for the proposition, suggested by Farmland, that a disputed factual
matter requires dismissal of a bad faith claim as a matter of law. Although “an insurer is
. . entitled to challenge a claim and litigate it if the claim is fairly debatable on the law
or the facts,“13 the existence of jury issues on the contract claim does not preclude the
bad faith claim.14
.
Farmland’s position thus reflects an erroneous interpretation of the “fairly
debatable” language. Although matters regarding investigation and payment of a claim
may be “fairly debatable,” an insurer is not thereby relieved from its duty to comply with
the mandates of the KUCSPA. Although there may be differing opinions as to the value
of the loss and as to the merits of replacing or repairing the damaged structure, an
insurance company still is obligated under the KUCSPA to investigate, negotiate, and
” Id. at 888-889.
I2 Id. at 890-891.
l3 See Guarantee National Ins. Co. v. George, Ky., 953 S.W.2d 946, 949 (1997);
Kentuckv Farm Bureau Mutual Ins. Co v. Troxell, Ky., 959 S.W.2d 82 (1997); Motorists
Mutual Ins. Co. v. Glass, Ky., 996 S.W.2d 437, 454 (1999).
I4 Federal Kemoer Ins. Co. v. Hornback, Ky., 711 S.W.2d 844, 847-848 (1986)
(Leibson, J., dissenting); Curry v. Fireman’s Fund Ins. Co., Ky., 784 S.W.2d 176, 178
(1989)(adopting dissent from Federal Kemper, supra).
-lO-
attempt to settle the claim in a fair and reasonable manner. In other words, although
elements of a claim may be “fairly debatable,” an insurer must debate the matter fairly.
As a result, Farmland was not entitled to dismissal of the bad faith claim as a matter of
law.
The view expressed here is fully supported by a recent decision of the
Supreme Court of Arizona, Zilisch v. State Farm,15 in which the “fairly debatable”
concept was analyzed. Among other things, the Court held that whether a claim or the
amount of a claim is fairly debatable is a question of fact for the jury and that the fact of
a disputed amount does not relieve the insurer of its duty to handle the claim fairly. As
stated therein,
But coming up with an amount that is within the range of
possibility is not an absolute defense to a bad faith case.
The carrier has an obligation to immediately conduct an
adequate investigation, act reasonably in evaluating the
claim, and act promptly in paying a legitimate claim. It
should do nothing that jeopardizes the insured’s security
under the policy. It should not force an insured to go
needless adversarial hoops to achieve its rights under the
policy. It cannot lowball claims or delay claims hoping that
the insured will settle for less. Equal consideration of the
insured requires more than that. The court of appeals
therefore erred in concluding that fair debatability is both the
beginning and the end of the analysis. . .16
Summarizing its view of the law with respect to first party bad faith claims, the Court
said:
The appropriate inquiry is whether there is sufficient
evidence from which reasonable jurors could conclude that
in the investigation, evaluation, and processing of the claim,
l5 995 P.2d 276 (Ariz. 2000).
” Id. at 280.
-ll-
the insurer acted unreasonably and either knew or was
conscious of the fact that its conduct was unreasonable.17
Farmland’s second claim of error involves the misrepresentation claim
upon which the trial court granted the Johnsons’ motion for partial summary judgment.
As stated above, the relevant contract provision stated, “Actual cash value means the
replacement cost of the property damaged or destroyed at time of loss, less
depreciation.” Shields, however, based Farmland’s only offer upon the cost to repair
the building, with depreciation deducted. The trial court agreed with the Johnsons’
contention that the plain language of the policy made it clear that there were no genuine
issues of material fact as to whether Farmland had misrepresented the policy provisions
by insisting that depreciation be deducted from the cost of repairs if the claim were to be
adjusted under subsection l(C)(l)(b) of the policy.
Farmland now offers several reasons why it believes summary judgment
was improvidently granted. First, Farmland contends that the misrepresentation, if any,
of the policy language was only a “technical violation” or “mere negligence” on the
agent’s part, and this will not support a bad faith cause of action.‘* Farmland further
contends that the contractual provision at issue was not unambiguous but was open to
another interpretation, as three of its witnesses so testified at trial, and one, Michael
Breen, testified upon avowal. Such supporting evidence, Farmland notes, should have
precluded summary judgment on the issue. Farmland further argues that there is no
Kentucky case interpreting the policy language, and thus this is an issue of first
impression as in Emnire Fire.
I7 ld (citations omitted).
‘* Wittmer, Ky., 864 S.W.2d 885, 890 (1993).
-12-
In response, the Johnsons first point out that the partial summary
judgment was entered four months before the bad faith trial began. None of Farmland’s
witnesses were presented while the motion for summary judgment was pending. Thus,
the Johnsons maintain, there had been a complete adjudication of this issue long before
the trial at which Farmland’s witnesses testified regarding interpretation of the contract,
and this evidence presented at the trial has no bearing on the validity of a previously
granted partial summary judgment. Moreover, shortly before trial, Farmland requested
that the trial court reconsider the partial summary judgment, but the trial court declined
to modify it. The Johnsons submit that denial of the motion was within the trial court’s
discretion, and they further note that Farmland did not assert denial of the motion for
reconsideration as error on this appeal.
Regardless, an examination of the merits of Farmland’s claim indicates
that it must fail. The only question on the motion for partial summary judgment was
whether there was a genuine issue as to any material fact as to the application of the
three-part bad faith test to the misrepresentation claim.
As to the first part, whether there was misrepresentation, in the breach of
contract trial there was a lengthy argument on the instructions as to whether
depreciation was to be deducted from repair cost under subparagraph 1 (C)l(b) of the
policy if the jury determined that repair cost was less than replacement cost. The trial
court found that the policy language was not ambiguous and that the plain language of
subparagraph (b) did not call for a depreciation deduction. The trial court thus ruled that
if the jury found that repair cost was less than replacement cost, the amount awarded to
the Johnsons would be the repair cost found by the jury, without a reduction for
depreciation. The trial court’s instructions were affirmed in the appeal of the contract
-13-
trial judgment and thus became the law of the case for purposes of the bad faith trial.
As such, in the bad faith proceedings, it had been established, as a matter of law, that
Farmland misrepresented the policy by asserting that depreciation should be deducted
from repair cost under subsection 1 (C)l(b).
As to the second part of the bad faith test, there was no genuine issue of
fact as to whether there was a reasonable basis in law or fact for Farmland’s deducting
depreciation from repair cost. The meaning and legal effect of the policy language are
questions of law for the trial co~rt,‘~ and the trial court properly found that the policy
language was not ambiguous. The policy clearly states that actual cash value means
replacement cost less depreciation, yet Farmland claims that it could mean repair less
depreciation because the additional contractual language “property damaged or
destroyed” implies that some property will need to be repaired, as it is only damaged,
whereas only the destroyed property will need to be replaced. This creative effort to
subvert the plain language of the policy, however, is unpersuasive.
As to the third requirement for a bad faith claim, since the policy was
unambiguous, the trial court found that Farmland either knew that there was no
reasonable basis in fact for making the misrepresentation or acted with reckless
disregard thereof. The trial court noted its belief that the law requires an insurance
company to know what its policy says, and it recognized the distinction between
knowing what the policy says and knowing how to apply the policy language to a given
set of facts. We agree. Uncertainty as to application of insurance policy provisions,
such as the coverage issue in Emoire Fire, is a reasonable and legitimate reason for an
” Moraanfield National Bank v. Damien Elder and Sons, Ky., 836 S.W.2d 893,
895 (1992).
-14-
insurance company to litigate a claim. Here, there was no such legal uncertainty, but
blatant misrepresentation, made either intentionally or with reckless indifference to the
rights of the Johnsons. Thus, Farmland’s claim must fail.
Farmland’s third claim is that the trial court erred in overruling its motion
for summary judgment based upon the Johnsons’ alleged failure to overcome the socalled “directed verdict test.” In support of this claim, Farmland maintains that if
reasonable persons could differ on a question of fact on the underlying contract claim,
then the insurer is entitled to judgment as a matter of law on the bad faith claim. Thus,
continues Farmland’s argument, since the trial court did not grant a directed verdict in
favor of the Johnsons on the underlying contract claim, there can be no finding of bad
faith regardless of Farmland’s conduct in handling the claim. This argument is closely
akin to Farmland’s first claim of error based upon the “fairly debatable” language. As
stated in our earlier discussron thereof, this view is not supported by Kentucky law and
likewise must fail.
Farmland’s fourth claim is that the trial court erred by excluding the
testimony of its proffered wrtnesses Andrew Byler and Michael Breen. The latter,
Michael Breen, has been a practrcing attorney in Kentucky since 1983. His focus is on
litigation, and he has wntten a book on bad faith law in this Commonwealth entitled, Bad
Faith Law in Kentuckv A P~!mer
By avowal, Breen testified that in his opinion, giving
consideration to the terms and provisions of the policy as those terms are applied within
the industry, Farmland’s Interpretation of its policy regarding the taking of depreciation
from repair costs was reasonable. He further testified that Farmland made a timely and
reasonable settlement offer and also a reasonable basis for the settlement offer it made.
In refusing to admit Breen’s testimony, the trial court found that Breen had no
-15-
I
experience working in the insurance industry, no experience adjusting claims from the
insurance company’s perspective, and no experience supervising the adjustment of
insurance claims. With regard to fire claims, Breen had no experience investigating fire
claims and had practiced only one fire case as an attorney.
Andrew Byler was the principal contractor of the fire-damaged structure
when it was originally built. Byler testified at the contract claim trial that he could have
completely rebuilt the building for $182,724. This testimony was entered into the record
of the bad faith trial by avowal. The trial court excluded Byler’s testimony because it
was directed solely at the value of the Johnson’s claim, and this value had been fully
adjudicated during the first trial.
KRE 702, which governs the admission of expert testimony, provides,
If scientific, technical, or other specialized knowledge will
assist the trier of fact to understand the evidence or to
determine a fact in issue, a witness qualified as an expert by
knowledge, skill, training, or education, may testify thereto in
the form of an opinion or otherwise.
Application of KRE 702 is addressed to the sound discretion of the trial co~r-t.~~ An
abuse of discretion occurs when a “trial judge’s decision [is] arbitrary, unreasonable,
unfair, or unsupported by sound legal principles.“*’ A trial court’s ruling on the
qualifications of an expert should not be overturned unless the ruling is clearly
erroneous.”
*’ Ford v. Commonwealth, Ky., 665 S.W.2d 304, 309 (1983).
*’ Goodyear Tire and Rubber Co. v. Thompson, Ky., 11 S.W.3d 575, 581 (2000).
** Commonwealth v. Rose, Ky., 725 S.W.2d 588, 590 (1987) (overruled on other
grounds by Commonwealth v. Craiq, Ky., 783 S.W.2d 387, 389 (1990)..
-16-
In Goodvear Tire and Rubber Co. v. Thomoson,23
this Court recently
revisited the applicability of KRE 702 to expert testimony of a technical nature and held
that it applies broadly to matters coming within the parameters of the rule. We also held
that trial courts had broad discretion to determine whether proffered expert witnesses
were qualified. A proper summary of our holding is as follows:
KRE gives the trial court the discretionary authority,
reviewable for its abuse, to determine the admissibility of
expert testimony in light of the particular facts and
circumstances of the particular case. The discretion given to
a trial court in determining the admissibility of expert
testimony is ‘discretion to choose among reasonable means
of excluding expertise that is fausse and junky.“‘24
Based upon this standard of review, the trial court’s refusal to admit the testimony of
Byler and Breen did not constitute an abuse of discretion. In this case, Breen was
found not to be qualified as an expert based upon a paucity of experience in adjusting
fire damage claims.25
Moreover, Byler’s testimony was not relevant to the issues in the
bad faith trial, although it was relevant in the first trial, and in that forum had been duly
admitted. The trial court’s exclusion of this evidence was thus not arbitrary or unfair, but
was based upon sound legal principles and well within its discretion.26
Farmland’s fifth claim is that the trial court committed reversible error by
excluding certain evidence regarding the Johnsons’ conduct during the course of
23 Ky., 11 S.W.3d 575, 581 (2000).
24 Id. at 583.
25 Compare the experience of the proffered expert witness in Goodyear with the
experience possessed by Breen. Despite possessing what appeared to be abundant
experience, this Court affirmed exclusion of the proffered expert testimony in Goodyear,
relying on trial court discretion.
26 Commonwealth v. Enalish, Ky., 993 S.W.2d 941, 945 (1999).
-17-
I
’
negotiation of the claim. The evidence to which Farmland refers is the Johnsons’ initial
claim as to the value of the loss and their initial position at the first trial on the underlying
contract regarding the value of the loss. As aforementioned, the amount the Johnsons
claimed was owed to them by Farmland exceeded the amount ultimately awarded by
the jury on the contract claim. Farmland contends that because of this disparity, the
Johnsons ‘opened the door’ to inclusion at trial of all demands regarding the value of the
loss that were made by the Johnsons. Farmland concludes this argument by asserting
that the duty of good faith imposed on the parties to an insurance contract is a “two-way
street,” with the implication being that the Johnsons’ demands in excess of the amount
awarded demonstrate that they did not deal in good faith with Farmland.
In response. the Johnsons point out two significant facts. First, the trial
court did not exclude the evidence at issue, but limited its scope. The evidence was
admitted for the specific purpose of showing how the Johnsons’ conduct influenced and
reflected upon the state of mind of the defendants. Second, with regard to Farmland’s
“two-way street” argument the propriety of the Johnsons’ conduct was litigated at the
first trial. There, the trial court submitted to the jury all of Farmland’s claims regarding
the Johnsons’ violatlon5 of the contract terms, but the Johnsons prevailed nevertheless.
Thus, Farmland’s claim must fall
Farmland s sixth claim of error is that the KUCSPA is contrary to $j 59 and
5 60 of the Constitutron of Kentucky, which prohibit the enactment of special legislation.
In support of its assertron that the KUCSPA is unconstitutional, Farmland argues that if
an insured is afforded a right and remedy under the KUCSPA, then it follows that an
insurer should be afforded the same right and remedy in order to avoid the prohibition
against special legislation. Although the duties of good faith imposed by an insurance
-18-
contract are reciprocal, as Farmland points out, the KUCSPA does not afford reciprocal
rights and remedies.*’ Farmland also implies that since certain features of the Workers’
Compensation Act have been construed to be outside the scope of the KUCSPA, with
the result that workers’ compensation insurers are subject to different rules than other
insurers, then the KUCSPA amounts to impermissible special legislation.
This Court recently reiterated the two-part standard for determining
whether a statute is unconstitutional special legislation. A legislative act does not
constitute “special legislation” if: 1) it applies equally to all in a class, and 2) it has
distinct and natural reasons inducing and supporting the classification.*’ With regard to
the first factor, this Court has stated, “A general law relates to persons or things as a
class, whereas a special law relates to particular persons or things of a class.“*’ With
regard to what constitutes a permissible classification, this Court has stated,
“Classifications based upon reasonable and natural distinctions that relate logically to
the purpose of the Act do not violate Section 59 of the Kentucky Constitution.“30
The KUCSPA is part of a large statutory scheme entitled, the “Insurance
Code.” The Insurance Code regulates the insurance industry, and an insurance
company derives its right to do business in Kentucky from the Code. The Code and the
KUCSPA within it relate to a class encompassing all insurance companies doing
*’ The term “person” in KRS 304.12-220 specifically exempts an insured.
** Waaaoner v. Waqaoner, Ky., 846 S.W.2d 704,707 (1992) cert. denied 510
U.S. 932, 114 S.Ct. 346, 126 L.Ed.2d 310 (1993); citing Schoo v. Rose, Ky., 270
S.W.2d 940, 941 (1954).
*’ Wasaoner at 706 (citing Johnson v. Commonwealth, 291 Ky. 829, 165 S.W.2d
820 (1942)).
3o Waaaoner at 707 (citing Klina v. Gear-v, Ky., 667 S.W.2d 379 (1984)).
-19-
business in Kentucky that are regulated by the Kentucky Insurance Commissioner.31
Thus, the statute does not relate to only particular persons or things in that class.
Insofar as the exclusion of the insureds from the scope of KUCSPA is
concerned, the legislative decision to exclude the insured from the class is reasonable
and natural. One reason for this distinction is that the insured is not in the insurance
business. A second reason is that a bad faith action is based upon the fiduciary duty
owed by an insurance company to its insured based upon the insurance contract.32
The
KUCSPA is designed to “protect the public from unfair trade practices and fraud.“33
Furthermore, the disparate bargaining positions of an insured and an insurer following a
loss are sufficient to justify treating the insureds as a different class for purposes of
inclusion within the scope of the act.
We are not persuaded that this Court’s holding in Windchv v. Friend34 and
the Court of Appeals’ holding in General Accident Insurance Comoanv v. Blank35 lend
support to Farmland’s claim. Workers’ compensation insurance is different from other
forms of liability insurance. The KUCSPA is part of the Insurance Code, whereas the
Workers’ Compensation Act is part of the labor and human rights statutes. Moreover,
31 See General Accident Insurance Co. v. Blank, Ky.App., 873 S.W.Zd 580
(1993).
32 See Federal Kemper, 711 S.W.2d 844 (1986)(Leibson, J., dissenting);
Feathers v. State Farm Fire and Casualtv Co., Ky. App., 667 S.W.2d 693, 696 (1983)
(overruled by Federal Kemper, Ky., 711 S.W.2d 844, 845 (1986) (overruled by m).
33 State Farm Mutual Automobile Ins. Co. v. Reeder, Ky., 763 S.W.2d 116, 118
(1988).
34 Ky., 920 S.W.2d 57 (1996)(the Special Fund could not be subjected to the
penalties of the KUCSPA).
35 Ky. App., 873 S.W.2d 580, 582 (1993)(workers’ compensation insurance
carriers not subject to the KUCSPA).
-2o-
different commissioners supervise the different areas of insurance and labor, and
different regulations have been adopted for each.
Farmland’s seventh claim is that the trial court erred by not instructing the
jury in accordance with KRS 411.184(2), a provision of the Kentucky punitive damages
statute.36
In support of this claim, Farmland contends that the instructions do not
accurately “mirror” the statute, as it believes the requirement to be.37 Such precise
reflection, however, is not required. KRS 411.184(5) states, “This statute is applicable
to all cases in which punitive damages are sought and supersedes any and all existing
statutory or judicial law insofar as such law is inconsistent with the provisions of this
statute”(emphasis
added). This provision does not mandate that the instruction be an
exact replica of the language of KRS 411.184(2), but states only that KRS 411.184(2)
takes precedence over any existing inconsistent law
36 In Williams v. Wilson, Ky., 972 S.W.2d 260, 262-265 (1998) this Court
declared KRS 411.184(1)(c) unconstitutional as a violation of the jural rights doctrine.
For an award of punitive damages, KRS 411.184(1 )(c) required a determination that the
defendant acted with “flagrant indifference to the rights of the plaintiff and with a
subjective awareness that such conduct will result in human death or bodily harm.” T’he
holding was based upon the new statutory standard’s departure from the traditional
common law standard that permitted a jury to impose punitive damages upon a finding
of gross negligence.
Williams also held that the constitutionality of KRS 411.184(2) was not properly
before the Court. Farmland’s objection to the instructions here relate to this latter
provision, KRS 411.184(2), which has not been held unconstitutional and the
constitutionality of which has not been challenged in this case. KRS 411.184(2)
provides: “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.”
As this appeal was practiced without any challenge to the constitutionality of KRS
411.184(2) and statutes are presumed to be constitutional, to the extent it applies here,
KRS 411.184(2) would have the same dignity as any other statute.
37 See Sora v. Purvis, Ky., 487 S.W.2d 943, 945 (1972)(“lt is fundamental that an
instruction based on a statute should encompass the wording of a statute so far as
possible”).
-21-
KRS 411 .I 84 became effective July 15, 1988, before this Court’s decision
in Curry3’ adopting the three-part test for a bad faith claim from the dissent in Federal
Kemper.3g This Court has continued to recognize the validity of this standard.40
The
bad faith instructions given here were entirely consistent with Wittmer v. Jones4’ and
Currv v. Fireman’s Fund4* and were presented by means of special interrogatories.43
38 Ky., 784 S.W.2d 176, 177-78 (1989).
3g Ky., 7 1 1 S.W.2d 844, 846-849 (1986)(Leibson, J., dissenting).
4o Wittmer v. Jones, Ky., 864 S.W.2d 885, 890 (1993); Guarantv National Ins. Co.
v. Georoe, Ky., 953 S.W.2d 946, 948-949 (1997); see a/so Emoire Fire and Marine Ins.
Co. v. Simosonville Wrecker Service. Inc., Ky.App., 880 S.W.2d 886, 888 (1994).
4’ Ky., 864 S.W.2d 885 (1993).
42 Ky., 784 S.W.2d 176 (1989).
43
The jury answered nine Interrogatories relatrng to Farmland’s rnvestrgation. whether it attempted a farr and equitable
settlement, and whether the Johnsons were required to institute litigatron. The interrogatories propounded and the unanrmous
answers from the jury are as follows
INSTRUCTION NO. 4
(INVESTIGATION)
PLEASE ANSWER THE FOLLOWING.
Do you believe, from the evidence presented in this case, that the defendants conducted a reasonable rnvestigatron
based upon all available information?
Yes
(CHECK ONLY ONE)
__
No J
INSTRUCTION NO 5
(INVESTIGATION)
PLEASE ANSWER THE FOLLOWING:
Do you believe, from the evidence presented in this case, that the defendants had a reasonable basis In fact for believing
that they had conducted a reasonable investigation, based upon all available information7
(CHECK ONLY ONE)
No J
Yes INSTRUCTION NO. 6
(INVESTIGATION)
PLEASE ANSWER THE FOLLOWING:
Do you believe, from the evidence presented in this case, that the defendants knew there was no reasonable bass in fact
for bekeving that they had conducted a reasonable investigation, based upon all available information, or that the defendants acted
with reckless disregard for whether such a basis exrsted?
(CHECK ONLY ONE)
Yes J
No-
INSTRUCTION NO. 7
(FAIR AND EQUITABLE SETTLEMENT)
(continued...)
-22-
The findings of fact which emerge from the court’s interrogatories reveal
the jury’s belief that Farmland knowingly or recklessly failed in its duty to investigate,
knowingly or recklessly failed to attempt a good faith settlement, and knowingly or
recklessly compelled the Johnsons to initiate litigation to recover amounts due them
under the policy. While the interrogatories submitted were based on the WittmeKurry
factors, to the extent applicable, the findings required by the interrogatories are more
PLEASE ANSWER THE FOLLOWING:
Do you belreve, from the evrdence presented In this case, that the defendants attempted In good faith to effectuate a farr
and equrtable settlement of the claim, after liabrlrty had become reasonably clear?
(CHECK ONLY ONE)
Yes
No J
__
INSTRUCTION NO. 8
(FAIR AND EQUITABLE SETTLEMENT)
PLEASE ANSWER THE FOLLOWING:
Do you believe, from the evidence presented in thus case, that the defendants had a reasonable basrs In fact for belrevrng
that they had attempted to effectuate a fair and equitable settlement of the claim?
(CHECK ONLY ONE)
Yes ___
No J--
INSTRUCTION NO. 9
(FAIR AND EQUITABLE SETTLEMENT)
PLEASE ANSWER THE FOLLOWING:
Do you believe, from the evidence presented in this case, that the defendants knew there was no reasonable bass in fact
for believing that they had attempted to effect a fair and equitable settlement of the clarm. or that the defendants acted with reckless
disregard for whether such a basis existed’
(CHECK ONLY ONE)
Yes J
No-
INSTRUCTION NO. 10
(COMPEL TO INSTITUTE LITIGATION)
PLEASE ANSWER THE FOLLOWING:
Do you believe, from the evidence presented in this case, that the defendants compelled the plaintiffs to instttute litigation
to recover amounts due under the subject policy by offering substantially less than the amounts which were ultimately recovered7
(CHECK ONLY ONE)
Yes J
N o - - -
INSTRUCTION NO. 11
(COMPEL TO INSTITUTE LITIGATION)
Do you believe, from the evidence presented in this case, that the defendants had a reasonable basis in fact
for believing that, by their conduct, they were not compelling the plaintiffs to institute litigation to recover amounts due
under the subject policy by offering substantially less than the amounts which were ultimately recovered?
(CHECK ONLY ONE)
Yes ___
N o
-23-
J
than sufficient to satisfy KRS 411.184(2). An examination of the findings of the jury in
this case leaves no doubt as to its belief that Farmland acted in an oppressive,
fraudulent or malicious manner.
Farmland also asserts other claims of error regarding the jury instructions
These claims have been examined and found to be without merit. They will not be
addressed herein.
Farmland’s eighth claim of error relates to Andrew Byler’s excluded
testimony, which was placed in the record by avowal. Farmland contends that it should
have been permitted to present Byler’s testimony in the bad faith trial to show that even
under a replacement analysis, Farmland’s offer to the Johnson’s was fair and was made
in good faith.
Byler was allowed to testify at the first trial where the issue was how much
was due under the policy. On the issue of bad faith, however, Byler’s testimony was
irrelevant because it had no bearing on Farmland’s conduct prior to litigation. It appears
that Byler’s estimate was not procured until after litigation was initiated, as his name did
not surface in this case until October 31, 1994, when he was designated as a trial
witness more than a year after suit was filed. Thus, Farmland did not have Byler’s
replacement estimate at the time Shields made the offer to the Johnsons, and the offer
could not have been based upon any information received from Byler. Byler’s testimony
was relevant to the contract claim, but not to the bad faith claim because the information
sought to be admitted did not influence Farmland’s handling of the claim.
Farmland’s ninth and final claim of error is that the jury’s verdict awarding
two million dollars in punitive damages is preposterous -- that it shocks the conscience
and thus should not be permitted to stand. In support of this contention, Farmland
-24-
asserts that there was an insufficient relationship between the amount of the award and
the facts upon which the award was based to justify such an amount.
A reviewing court, however, may not substitute its judgment for that of the
jury as to the appropriate amount of exemplary damages.44
The question of whether a
jury’s verdict is excessive is within the trial court’s discretion, and an award will be
overturned only if there has been an abuse of discretion.45
In this case, there was no
such abuse. The purpose of punitive damages is to punish an entity for engaging in
impermissible conduct.46
At trial, the Johnsons presented a detailed argument
explaining, amongst other things, that only one out of one hundred insureds would have
had the motivation and financial strength to litigate a disputed insurance claim rather
than settling the case, and that any punitive damage award of less than $4,455,000
made it statistically more profitable for Farmland and Shields to deal with other insureds
in the same manner they dealt with the Johnsons rather than in a fair manner. The two
million dollars awarded by the jury was significantly less than that which it was argued
would have an adequate deterrent effect. Thus, the trial court did not abuse its
discretion in allowing the verdict to stand, and the verdict should not be overturned. The
evidence against Farmland revealed a course of deception and indifference which
would reasonably cause a jury to inflict such punishment as would be required to deter
such conduct in the future.
44 Hanson v. American National Bank and Trust Company, Ky., 865 S.W.2d 302,
311 (1993).
45 Davis v. Graviss, Ky., 672 S.W.2d 928, 932 -933 (1984).
46 See KRS 411 .I 84(l)(f)(punitive damages are “awarded against a person to
punish and to discourage him and others from similar conduct in the future”).
-25-
For the foregoing reasons, the judgment of the Court of Appeals is
affirmed.
Johnstone, Stumbo and Wintersheimer, JJ., concur. Cooper, J., files a
dissenting opinion in which Graves, J., joins, and in which Keller, J., joins only as it
pertains to the exclusion of the testimony of the witness, Byler. Graves, J., files a
dissenting opinion in which Cooper, J., joins only as to Part II and Part III.
COUNSEL FOR APPELLANT:
Matthew J. Baker
Matthew P. Cook
COLE, MOORE & BAKER
921 College Street
P. 0. Box 10240
Bowling Green, KY 42102-7240
COUNSEL FOR APPELLEES:
Roy Lee Steers, Jr.
STEERS & STEERS
P. 0. Box 447
Franklin, KY 421350447
-26-
AS MODIFIED: FEBRUARY 22,200l
RENDERED: OCTOBER 26,200O
TO BE PUBLISHED
1998-SC-0938-DG
FARMLAND MUTUAL
INSURANCE COMPANY
V.
APPELLANT
ON REVIEW FROM THE COURT OF APPEALS
NO. 97-CA-1212
SIMPSON CIRCUIT COURT NO. 93-Cl-0136
LEMUEL JOHNSON; VIRGINIA JOHNSON;
AND A. L. JOHNSON DISTRIBUTION, INC.
APPELLEES
DISSENTING OPINION BY JUSTICE COOPER
I agree with Justice Graves that the trial court erred in failing to instruct the jury in
accordance with KRS 411.184(2) and abused his discretion in finding the witness,
Michael Breen, insufficiently qualified to render expert testimony on the issue of bad
faith.’ I write separately because I believe the trial court also erred in excluding the
testimony of Andrew Byler.
’ Contrary to the assertion in the majority opinion, slip op. at 18 note 25, the
testimony of the proposed expert in Goodyear Tire and Rubber Co. v. Thompson, Ky.,
11 S.W.3d 575 (2000) was not suppressed because of any deficiency in the witness’s
credentials, but because the subject matter of his proposed testimony did not satisfy the
test for scientific reliability established in Daubert v. Merrell Dow Pharmaceuticals, 509
U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) and Kumho Tire Co. v. Carmichael,
526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999).
One of the bases for the finding of bad faith in this case was a violation of KRS
304.12-230(6), i.e., failure to attempt in good faith to effectuate a prompt, fair and
equitable settlement of the claim. Farmland’s claims adjuster offered the Johnsons
$168,993.18 to settle their claim. The jury in the contract trial found that the Johnsons
were entitled to $213,810.00, representing a replacement cost of $251,541 .OO, less
depreciation. Byler was the principal contractor of the structure when it was originally
built. He was prepared to testify in the bad faith trial that he could have rebuilt the
building from the slab up for $182,724.00.
The majority opinion asserts that Byler’s testimony was irrelevant to the issue of
bad faith, but does not explain why. The trial court held that Byler’s testimony was
irrelevant because the actual replacement cost of the building had already been
established in the contract trial. While I agree that the actual replacement cost of the
building was not the ultimate issue in the bad faith trial, whether Farmland’s settlement
offer of $168,993.18 was fair and equitable was the ultimate issue, and Byler’s proposed
testimony was entirely relevant to that determination. The fact that the jury in the
contract trial accepted neither Byler’s replacement cost estimate of $168,993.18 nor
Johnsons’ expert’s replacement cost estimate of $304,440.00, but instead found the
replacement cost to be $251,541 .OO does not automatically mean that Farmland’s
settlement offer was made in bad faith. After subtracting depreciation as required by
the insurance contract, the jury’s verdict in the contract trial was $213,810.00. If the
same amount of depreciation is subtracted from Byler’s replacement cost estimate, that
estimate would have supported a settlement offer of $144,993.00, or $24,000.00 less
than Farmland’s offer.
-2-
Evidence that the contractor who actually built the original building could have
replaced it for $24,000.00 less than Farmland’s gross settlement offer before
depreciation was highly relevant to a determination of whether Farmland’s offer was a
fair and equitable attempt to settle the claim. The exclusion of that evidence was
prejudicial error.
The majority opinion essentially holds that the reasonableness of a settlement
offer is measured only by hindsight, i.e., only against the ultimate verdict and not by the
facts available to the insurer at the time the offer was made; and if the settlement offer
does not equal or exceed the ultimate verdict, it is ioso facto made in bad faith and the
claimants are entitled to punitive damages. That, of course, is a significant departure
from the holding in Wittmer v. Jones, Ky., 864 S.W.Zd 885 (1993) that bad faith occurs
only when the insurer’s conduct is “outrageous, because of the defendant’s evil motive
or his reckless indifference to the rights of others.” Id. at 890 (quoting Federal Kemoer
Ins. Co. v. Hornback. Ky 711 S.W.Zd 844, 848 (1986 ) (Leibson, J., dissenting ) and
Restatement (Second) Torts $ 909(Z) (1979)).
Accordingly. I drssvnt
Graves, J.. joins th+. clssent. Keller, J., joins this dissent only as it pertains to
the exclusion of the testlnlon~ of the witness, Byler.
-3-
I
RENDERED: OCTOBER 26,200O
TO BE PUBLISHED
98-SC-0938-D
FARMLAND MUTUAL
INSURANCE COMPANY
V.
APPELLANT
APPEAL FROM COURT OF APPEALS
NO. 97-CA-001212
LEMUEL JOHNSON, VlRGlNlA
JOHNSON; and A.L. JOHNSON
DISTRIBUTION, INC.
APPELLEES
DISSENTING OPINION BY JUSTICE GRAVES
Respectfully, I dissent.
In mid-March 1992, Appellant issued an insurance policy to Appellees. which
covered. among other things, fire loss. One month later, the covered property was
damaged by arson and Appellees made a claim under the policy. Appellant retained
Crawford & Company as adjusters and Crawford assigned Richard Shields to the case.
The parties eventually disputed the value of the loss and whether the property could be
reasonably repaired or had to be rebuilt from the ground up. In the first trial, the jury
ultimately awarded Appellee $213,810.00 as the actual cash value of the premises. In
the second trial, a bad faith action, the jury returned a verdict of $71 ,013.47 in attorneys
fees and $3.1 million in punitive damages: $2 million against Appellant, $1 million
against Crawford, and $100,000 against Shields. While Crawford and Shields have
settled, Appellant has appealed. among other things, what it sees as an excessive
verdict.
While Appellant is entitled to a new trial on other grounds, the error with this
proceeding which most desperately needs to be addressed is the availability of punitive
damages in Kentucky’s civil suits.
I. PUNITIVE DAMAGES ARE QUASI-CRIMINAL
PENALTIES WITHOUT SAFEGUARDS OF CRIMINAL TRIALS
In 1988. the Kentucky General Assembly indicated its misgivings about punitive
damage awards and attempted tort reform by enacting KRS 411.184. The statute
redefined circumstances, and increased the burden of proof necessary to recover
punitive damages. We ultimately held some of this legislation unconstitutional, which
will be discussed in more detail below. However. under KRS 411.184(f), a section
unaffected by our ruling on the statute’s constitutionality, punitive damages rnclude
“exemplary damages and means damages, other than compensatory and nominal
damages. awarded against a person to punish and to discourage him and others from
similar conduct in the future.” This focus on punishment and deterrence is
inappropriate in the civil law context.
Proponents of punitive damages point to the long history of such awards, which
stems back to ancient civilizations, including Babylon, Egypt Greece, and Rome. Even
the Bible suggests the use of punitive damages in some instances, as in this passage
from Exodus: “[l]f a man shall steal an ox or a sheep, and kill it or sell it, he shall restore
five oxen for an ox, four sheep for a sheep.” The problem with relying on this ancient
basis to reaffirm the inherent correctness of punitive damages is that these civilizations
3
---
made no attempt to distinguish civil from criminal law. Alan Calnan, Endino the Punitive
Damages Debate, 45 DePaul L. Rev. 101, 105 (1995). Because common law
developed into two branches civil. which focuses on compensation. and criminal, which
focuses on punishment, it no longer needs punitive damages, a hybrid category which
imposes penalties in excess of compensation on civil defendants.
While the concept is accepted in most jurisdictions, including ours since the
decision in Chile v. Drake, 59 Ky. 146 (1859), some state courts realized well before the
20th century that something was wrcng with the rmposition of a penalty without the
protections of a criminal trial. The Supreme Court of New Hampshire, one of the
earliest American courts to hold so, stated. “The idea is wrong. It is a monstrous
heresy. It is an unsightly and unhealthy excrescence, deforming the symmetry of the
body of law.” Fay v. Par&L. 53 N.H. 342. 382 (1872).
While the United States Supreme Court regularly upholds such awards, see
BMW of North America v --Gore. 517 U.S. 559. 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996)
(guidelines given for determrnrng an appropriate award), various members of that Court
have voiced concerns about the appropriateness of punitive damages.
Justices
O’Connor and Scalra espo:ir+d some of these concerns in their dissent in Bankers Life
and Cas. Co. v. Crensh:tv.
~--
d:Si- U S 71, 108 S.Ct. 1645, 100 L.Ed.2d 62 (1988), and
added that the imposrtlon o’ standardless discretion to determine the severity of
punishment could be rncorlslr~tent
with due process. Id. at 87; 108 S.Ct. at 1656.
In his dissent In Srn~i!:-~~ Wade, 461 U.S. 30, 103 S.Ct. 1625, 75 L.Ed.2d 632
(1983). Justice Rehnqurst gave three rationales for the awarding of punitive damages:
punishing the defendant. deterring the defendant from similar conduct in the future, and
acting as a bounty to encourage private lawsuits seeking to assert legal rights. Punitive
damages are also thought to have arisen as an additional means of compensation, for
such costs as attorneys fees and damages from emotional injuries, which historically
were not recoverable in tort. 22 Am.Jur.2d, Damaqes 5732 (1988). No matter which
rationaie is given for punitive damages, the argument fails
The compensation rationale is the most quick!y dismissed. Emotional harm.
attorneys fees, and pain and suffering are regularly recoverable under current tort law.
As noted in James B. Sales and Kenneth B. Cole, Punitive Damaqes: A Relic That Has
Outlived Its Oriqins, 37 Vand. L. Rev. 1117 (1984) at 1161, high compensatory
damages cften have a sufficient deterrent effect and should they not, the plaintiff can
seek an injunction, which, if violated, would subject the defendant to criminal sanctions.
Thus the plaintiff, being fully compensated, has no interest in punishing the defendant.
As the Washington Supreme Court noted in an early case, “Surely the public can have
no interest in exacting a pound of flesh.” Spokane Truck & Drav Co. v. Hoefer, 25 P
1072, 1074 (Wash. 1891). But even if the public had such an interest. punitive
damages should go to the state on behalf of the public and not to the plaintiff
The most egregious problem with punitive damages is that they attempt to
punish and deter conduct without providing the safeguards of a criminal trial. such as
the requirement of proof beyond a reasonable doubt, the prohibition against selfincrimination, and the security of the codification of law. In his Wade, suora, dissent,
Rehnquist stated:
[Plunitive damages are frequently based upon the caprice and prejudice
of jurors. We observed in Electrical Workers v. Foust, [442 U.S. 42, 50-51
n. 14. 99 SCt. 2121, 2126-2127 n. 14, 60 L.Ed.2d 698 (1979)J that
“punitive damages may be employed to punish unpopular defendants,”
and noted elsewhere that “juries assess punitive damages in wholly
unpredictable amounts bearing no necessary relation to the harm
caused.” Finally, the alleged deterrence achieved by punitive damages
--I-
awards is likely outweighed by the costs -- such as the encouragement of
unnecessary litigation and the chilling of desirable conduct.
461 !J.S. at 40-41; 103 S.Ct. at 59.
Furthermore, if the conduct is both tortious and criminal, a defendant could be
forced to face a kind of double jeopardy: a civil trial resulting in the imposition of
punitive damages and a criminal trial resulting in fines or imprisonment. Finally,
particularly in the business context. punitive damages have a tendency to punish not
those who acted tortiously, but innocents: shareholders, through lower profits, or
consumers, through higher prices. The blending of civil and criminal penalties defies
reason and should be abolished.
Awards of punitive damages are an anomaly of our legal system. Although they
are assessed in connection with the common-law tort system--which has as its
overriding goal the compensation of private parties for actual injuries --punrtive
damages are imposed to serve the identical purposes of the criminal law: retribution
and deterrence. But the punitive damage system lacks every protection of the criminal
justice system. Criminal punishments can be imposed only in prosecutions by
disinterested public officials who serve the public interest. They may be imposed only
pursuant to clear legislative standards and punishment levels. And criminal
prosecutions are subject to a panoply of explicit constitutional procedural safeguards.
Punitive damages, on the other hand, are pursued by self-interested private
bounty hunters who are motivated to impose the largest possible punishment in every
case. They are assessed in unlimited amounts for violation of vague, elastic,
retroactive, and highly subjective standards of conduct. And, while punitive damage
defendants are not afforded the numerous procedural rights of the criminal system,
punitive damage awards often vastly exceed criminal punishments for comparable
conduct.
The purpose of punitive damages is to punish an offender rather than to
compensate a victim. The goals of punishment include: retribution, which here means
to give a wrongdoer his “just dessert:” and deterrence, in creating an economic
disincentive to engage in prohibited activity. In this regard. punitive damages more
closely resemble a criminal, rather than civil, sanction.
Under the criminal law. of course, any fines levied as punishment are paid to the
state and not the victim. This conforms with the notion that it is society as a whole
which has an interest in maintaining order and public safety. In light of this generally
accepted premise, the award of punitive damages to the victim represents an anomaly.
As the Wisconsin Supreme Court noted over a century ago: “It is difficult on principle to
understand why, when the sufferer by a tort has been fully compensated for his
sufferrng.
he should recover anything more. And it is equally difficult to understand
why, if the tortfeasor is to be punished by exemplary damages, they should go to the
compensated sufferer, and not the public in whose behalf he is punished.” Bass v.
Chicaqo & Northwestern Railway Co.,42 Wis. 654, 672 (1877) (cont. opinion, Ryan.
C.J.).
Punitive damages invite jurors to rely on private beliefs and personal
predilections. Juries are permitted to target unpopular defendants penalize unorthodox
or controversial views, and redistribute wealth.
The arguments for and against punitive damages that have developed over time
are well-defined. Some lawyers argue that punitive damages: (1) serve a wholly
distinct function from compensatory awards in that they deter and punish wrongful
conduct; (2) encourage the continued development of safer work practices and
-o-
products; and (3) are subject to review by trial and appellate courts, with new trials as a
viable check on a jury’s abuse of discretion or unreasonable awards bearing little
relationship to the facts of the case or the award of compensatory damages. Other
lawyers argue that punitive damages: (1) are a mere surrogate for compensatory
damages; (2) are often awarded by juries given unfettered discretion based on illdefined jury instructions to award as much as they feel is necessary to punish; and (3)
are violative of constitutionally-protected procedural and substantive rights. In
particular, the constitutional challenges raised most frequently in recent years are
violatrons of the Due Process Clause of the Fourteenth Amendment
Punitive damages present a persistent problem of lack of uniformity and
vagueness of standards. Of greater concern is the chilling effect the unfettered
discretion given jurors in considering punitive awards will have upon defendants in
attempting to adequately assess the risks associated with litigating claims
In Bankers Life & Casualtv Co. v. Crenshaw. supra, the Court declined to
discuss the constitutional issues of punitive damages. However, Justice O’Conner,
joined by Justice Scalia, stated in her concurrence:
Appellant has touched on a due process issue that I think is worthy
of the Court’s attention in an appropriate case. Mississippi law gives
juries discretion to award any amount of punitive damages in any tort case
in which a defendant acts with a certain mental state. In my view,
because of the punitive character of such awards, there is reason to think
that this may violate the Due Process Clause.
Punitive damages are not measured against actual injury, so there is no
objective standard that limits their amount. Hence, “the impact of these
windfall recoveries is unpredictable and potentially substantial.” (citation
omitted). For these reasons, the Court has forbidden the award of
punitive damages in defamation suits brought by private plaintiffs and in
unfair representation suits brought against unions under the Railway
Labor Act. (citations omitted). For similar reasons, the Court should
scrutinize carefully the procedures under which punitive damages are
-7-
awarded in civil lawsuits.
486 U.S. at 87-88; 108 S.Ct. at 165556.
In Browninq-Ferris Indus. v. Kelco Disposal, 492 U.S. 257. 109 S.Ct. 2909, 106
L.Ed.2d 219 (1989), Justice Brennan, in his concurrence, expressed concern about
punitive damages procedures and stated:
Without statutory (or at least common-law) standards for the
determination of how large an award of punitive damages is appropriate in
a given case, juries are left largely to themselves in making this important,
and potentially devastating, decision. Indeed, the jury in this case was
sent to the jury room with nothing more than the following terse
instruction: “In determining the amount of punitive damages, you may
take into account the character of the defendants, their financial standing,
and the nature of their acts.” App. 81. Guidance like this is scarcely better
than no guidance at all. I do not suggest that the instruction itself was in
error; indeed, it appears to have been a correct statement of Vermont law.
The point is, rather, that the instruction reveals a deeper flaw: the fact
that punitive damages are imposed by juries guided by little more than an
admonition to do what they think is best.
@. at 280; 109 S.Ct. 2923
Punitive damages may be excessive and akin to a criminal punishment,
especially when compared with criminal fines. If a civil defendant is to be exposed to
such “criminal liability,” the defendant should be entitled to criminal procedural
protections: (1) a “beyond a reasonable doubt” burden of proof; (2) a unanimous jury,
(3) an upper limit on the punishment; and (4) bifurcation of the liability and punitive
damages portions of the trial.
Aside from my belief that punitive damages have no place in modern tort law,
two other issues at trial require a reversal in this case: the trial court’s refusal to allow
the testimony of proposed expert witness Mike Breen, and the failure of the jury
instructions to mirror the relevant punitive damages statute.
-8-
II.
TRIAL COURT ERRED IN EXCLUDING APPELLANT’S EXPERT WITNESS.
Breen is a Bowling Green attorney whom Appellants offered at trial as an expert
witness on various bad faith issues. The trial court ruled that Breen was not competent
to testify because he did not have sufficient experience in fire litigation. By avowal, it
was shown that Breen has been licensed to practice law in Kentucky since 1983, and
that his practice consists primarily of plaintiff litigation, concentrating on personal injury
and insurance litigation, particularly bad faith issues. At the time of trial, this witness had
lectured on six occasions on this topic, practiced several bad faith cases, reviewed
numerous bad faith claims, and written a leading treatise on Kentucky bad faith law,
Bad Faith in Kentuckv: A Primer.
-.
By avowal, Breen testified that Appellant’s
interpretation of the policy, its settlement offer, and the basis of that offer were
reasonable, and thai its response had been timely
Appellants rightfully argue that Breen need not be an expert in fire litigation to be
qualified as a bad faith expert, which encompasses a range of litigation topics. KRE
702, which governs the admissibility of testimony by experts, reads:
If scientific, technical, or other specialized knowledge will assist the trier of
fact to understand the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience, training, or
education, may testify thereto in the form of an opinion or otherwise.
Thus, the test for allowing an expert witness is whether his testimony would assist the
trier of fact. This Court held in Kentuckv Power Co. v. Kilbourn, Ky., 307 S.W.2d 9, 12
(1957), that no precise method of obtaining expertise exists. “A witness may become
qualified by practice or an acquaintance with the subject. lie may possess the requisite
skill by reason of actual experience or long observation.”
Jurors would have little reason to know what is evidence of bad faith in the
adjustment of insurance claims, and Breen himself in his treatise calls bad faith a
general “substantive abstraction at its greatest.” Breen at 1. Examples of what would
constitute bad faith in various insurance adjusting practices cannot differ so greatly that
Breen’s testimony would not have at least made the amorphous concept more
concrete. His testimony could have aided the trier of fact in putting Appellant’s actions
in the context of the industry, of which he has studied hundreds of claims. That alone
would qualify him as one who obtained his expertise by “long observation.”
Breen
IS
not out of line with other expert witnesses this court has upheld. In
Manchester insurance &Indemnity Co. v. Grundy, Ky., 531 S.W.2d 493, 501 (1975),
although we held that the two attorneys who acted as expert witnesses in a bad faith
claim gave irrelevant testimony, we did not say they were unqualified to testify. In
Washinqton v. Goodman, Ky.App., 830 S.W.2d 398 (1992), an internist was deemed
qualified to testify about the probability and nature of infectious diseases. In Ford,
supra, a serotologist who identified biological material for size, quantity and quality was
allowed to testify to the likelihood that pieces of skin had come from the holes in a
particular hand. In that case, the appellant admitted that he knew of no one who was a
direct expert in matching skin to holes, while the opposition’s physician testified that
such matching would be impossible because the skin flecks would shrink, while the
holes would enlarge. 665 S.W. 2d at 309-10. This Court in Arndell v. Peay, Ky., 411
S.W.2d 473 (1967), held that a general practitioner could give expert testimony about
whether a party had senile dementia based on his observations. We stated, “[IIt has
been held that the lack of specialized training by a doctor goes only to weight and not to
competency.” Id. at 475. This rule was expanded beyond doctors to all expert
witnesses in Washinaton, supra, at 400.
It is settled in Kentucky that the decision to allow an expert witness is within the
discretion of the trial judge. See Ford v. Commonwealth, KY., 665 S.W.Zd 304 (1983);
Gentry v. General Motors Corp., Ky. App., 839 S.W.2d 576 (1992); Washington,
supra.
Considering past rulings on expert witnesses, the ruling in this case was clearly
erroneous and should be reversed.
In this case, the trial court abused its discretion by not allowing Breen’s
testimony. Although he had little expertise on fire litigation, he had a well-grounded
knowledge of bad-faith claims against insurance companies. His lack of fire experience
should go only to weight and he should have been allowed to testify.
III.
JURY INSTRUCTIONS SHOULD HAVE MIRRORED APPLICABLE STATUTE.
Appellant argues that the trial court erroneously failed to give an instruction on
punitive damages which mirrored KRS 411.184, the punitive damages statute. Our
opinion in Williams v. Wilson, Ky., 972 S.W.2d 260 (1998), declared KRS
411_184( l)(c)’ unconstitutional, but stated that the constitutionality of KRS 411.184(2)
was not properly before this Court on appeal. Appellant’s objection to the instruction
related to KRS 411 .I84 (2)‘. In its instructions the trial court used a three-part test
enumerated in Justice Leibson’s dissent in Federal Kemper Insurance Co. v.
Hornback, Ky., 711 S.W.2d 844, 846 (1986) which was accepted as the state of the
law in Curry v. Fireman’s Fund insurance Co., Ky., 784 S.W.2d 176 (1989).”
court also instructed the jury using KRS 411.184(f),
and KRS 411.186(2).
The trial
which defines punitive damages,
which lists the appropriate factors to consider in determining the
amount of punitive damages.
The trial courts error lies in the belief that it can choose which portions of the
statute to use in jury instructions. The trial court and Court of Appeals rely on Justice
Leibson’s statement in Federal Kemper, supra, where he noted that this test was the
equivalent of that for punitive damages that was described in Feathers v. State Farm
Fire and Casualtv Co., Ky. App., 667 S.W.2d 693 (1983), overruled by Federal Kemper,
supra. Appellees also claim that the scienter requirement described by KRS 411.184(2)
is incorporated into parts two and three of the three-part test. Both of these arguments
fail for two reasons
First, this Court in Williams supra, stated, “[where
statutes are applicable, trial
courts must instruct in statutory language.” Id. at 264. See also Sora v. Purvis, Ky.,
487 S.W.2d 943 (1972), and McCulloh’s Adm’r v. Abell’s Adm’r, 272 Ky. 756, 115
S.W.2d 386, 390 (1938)(“Where
the statute speaks in no uncertain terms, it hardly can
be said that the use in an instruction of other terms not meaning substantially the same
thing is not prejudicial error.“) Because it is imperative to instruct the jury in the exact
language of applicable statutes, this Court found KRS 411 .I 84(l)(c) unconstitutional
We stated, “We are unimpressed by the argument that the statute could be ‘loosely
interpreted’. It would be the height of duplicity to at once uphold the constitutionality
of a statute and declare that it not be literally observed.” Williams, supra at 264.
Second, in considering the timing of the cited cases and the statute’s enactment.
the statute controls. KRS 411.184 was enacted after Feathers, suora, between Federal
Kemoer, suora, and Curry, supra, and before Williams,supra.
The statute provides in
KRS 411.184(5), “This statute is applicable to all cases in which punitive damages are
sought and supersedes any and all existing statutory or judicial law insofar as such law
is inconsistent with the provisions of this statute.”
Because of its timing, this statute
would supersede Feathers, supra, and Federal Kemoer, supra, in as much as Federal
Kemper, supra, noted that the enumerated three-part test for bad faith is the equivalent
of the test for punitive damages in Feathers, supra.
Appellees argue that if the Court had meant for the statute to control jury
instructions, it would have said so in Curry, supra, or Wittmer, supra, both of which were
decided after the statute’s enactment. However, nothing in Currv, supra, which simply
incorporated the dissent in Federal Kemper, supra, is inconsistent with the statute.
Furthermore, in considering Justice Leibson’s statement in Federal Kemoer about the
similarity to the three-prong test of bad faith and the punitive damages considerations in
Feathers, suora, thet lower courts’ holdings u e persuasive.
O n
h e
i s s are not o f
p
u
n
i
t
i
v
e
damages, the Court of Appeals in Feathers, supra, only stated, “if State Farm was not
justified in its actions, then its conduct was tortious against the policyholder for which
consequential and punitive damages may be presented to the factfinder.” Id. at 697.
(emphasis added). This statement suggests not that the finding of bad faith is the
direct equivalent of finding of the appropriateness of punitive damages, but that the
finding of bad faith opens the door for consideration of punitive damages. None of that
trumps a statute which this court has not found to be unconstitutional. In Wittmer,
-l3-
supra, this Court only addressed its fear that the statute would infringe upon jural rights
We acted on that fear five years later, by holding the statute partially unconstitutional,
but at no time did that affect the consideration to be given to KRS 411.184(Z) in
formulating jury instructions.
For the above reasons, I would reverse.
Cooper. J., joins this dissent only as to Part II and Part III.
-14
1998-SC-0938-DG
FARMLAND MUTUAL
INSURANCE COMPANY
v.
APPELLANT
ON APPEAL FROM THE COURT OF APPEALS
NO. 97-CA-1212
SIMPSON CIRCUIT COURT NO. 93-Cl-0136
HONORABLE WILLIAM R. HARRIS
LEMUEL JOHNSON, VIRGINIA
JOHNSON; and A.L. JOHNSON
: DISTRIBUTION, INC.
APPELLEES
** ** ** ** ** ** **
ORDER DENYING PETITION FOR REHEARING
AND MODIFYING OPINION
The petition for rehearing is denied.
The Court, on its own motion, to correct a typographical error appearing on page
2 of Justice Cooper’s dissenting opinion, hereby modifies its opinion rendered herein on
October 26, 2000, by substituting page 1 of the original opinion, and pages 1 and 2 of
Justice Cooper’s dissenting opinion, hereto attached, in lieu of page 1 of the original
opinion, and pages 1 and 2 of Justice Cooper’s dissenting opinion. Said modification
does not affect the holding of the opinion as originally rendered.
Lambert, C.J.; Graves, Johnstone, Keller, Stumbo, and Wintersheimer, JJ.,
concur. Cooper, J., would grant.
ENTERED: February 22,200l
1998-SC-0938-DG
APPELLANT
FARMLAND MUTUAL
INSURANCE COMPANY
V.
ON APPEAL FROM THE COURT OF APPEALS
NO. 97-CA-1212
SIMPSON CIRCUIT COURT NO. 93-Cl-0136
HONORABLE WILLIAM R. HARRIS
LEMUEL JOHNSON, VIRGINIA
JOHNSON; and A.L. JOHNSON
DISTRIBUTION, INC.
APPELLEES
** ** ** ** ** ** **
ORDER OF CORRECTION
The Order of this Court in the above styled action Denying Petition for
Rehearing and Modifying Opinion entered on February 22, 2001, is corrected on its
face by correction of the vote of the members of the Court as follows:
“Lambert, C.J., Johnstone, Keller, Stumbo, and Wintersheimer, JJ.,
concur. Cooper and Graves, JJ., would grant.”
ENTERED: February 23,200l.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.