LLOYD KNOTTS AND JACKIE KNOTTS V. ZURICH INSURANCE COMPANY, ET AL
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RENDERED : MAY 18, 2006
BLLSH
'SuprMt (90urf of'
2004-SC-0400-DG
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LLOYD KNOTTS; AND
JACKIE KNOTTS
V.
APPELLANTS
ON APPEAL FROM THE COURT OF APPEALS
2002-CA-1846-MR
JEFFERSON CIRCUIT COURT NO. 97-CI-4443
ZURICH INSURANCE COMPANY ;
ZURICH AMERICAN COMPANIES ; AND
ZURICH AMERICAN INSURANCE
COMPANY OF ILLINOIS
APPELANTS
OPINION OF THE COURT BY JUSTICE ROACH
REVERSING
I . Introduction
Appellant, Lloyd Knotts, was seriously injured in a construction accident while
performing construction work under a contract for a company. He initiated a claim with
the company's insurer and later filed a personal injury action against the company. He
subsequently filed a bad-faith suit against the company's insurer for violations of
Kentucky's Unfair Claims Settlement Practices Act (UCSPA) . The suit included
allegations of violations that occurred after the filing of his personal injury action. The
lower courts rejected Knotts's bad faith claim on grounds that the UCSPA is inapplicable
to an insurance company's conduct that occurs after the commencement of an
underlying tort action . Because we hold that the UCSPA continues to apply during
litigation, we reverse .
111 . Background
In November 1992, Lloyd Knotts, a self-employed construction contractor,
contracted with Lawson Mardon Flexible, Inc.' to build an "aging room" at the
company's warehouse in Shelby County . On November 12, 1992, Knotts was working
with an electric drill atop a thirty-foot high platform . The drill drew power through an
extension cord that was tethered to the platform and ran across the warehouse floor to
an electrical outlet. At the same time, Brian Lovings,
a temporary employee of Lawson
Mardon, was operating a forklift in the vicinity of the platform. As Lovings drove past the
platform, the extension cord caught on the fork of the forklift, causing the platform to
topple and Knotts to fall . Knotts suffered serious, permanent injuries and incurred
significant medical expenses as a result . At the time of the accident, Lawson Mardon
had a policy of general liability insurance with Zurich American Insurance Group.2
Knotts employed an attorney, Larry Franklin, who advised Lawson Mardon that
he would be representing Lloyd Knotts and his wife. In his initial letter, dated November
30, 1992, Franklin asked Lawson Mardon to cover Knotts's medical expenses, future
therapy, and full payment for the job he was performing when injured . The letter also
stated : "After Mr. Knotts reaches maximum medical improvement, we will negotiate
conclusion of this matter. If this proposal is not satisfactory to you, please let us know
so we can proceed with litigation ."
At the time of the accident, the company was called Alusuisse Flexible
Packaging, Inc . Because the name has since changed, we will employ the company's
current name, Lawson Mardon Flexible, Inc .
2 This moniker appears to be an umbrella name used by the Appellees-Zurich
Insurance Company, Zurich American Companies, and Zurich American Insurance
Company of Illinois-to whom we refer collectively hereinafter as "Zurich ."
Lawson Mardon referred the matter to its insurer, Zurich, which began the claims
adjustment process . On December 10, 1992, Zurich wrote Franklin a letter
acknowledging his representation of Knotts . The letter also stated, in pertinent part:
We are in the initial stage of our investigation of this accident .
Therefore, . . . we are not in a position to discuss liability . However, we
must advise you we do not find this to be a workers compensation
exposure, as outlined by the Kentucky Workers Compensation Act . Thus,
as we are not Mr. Knott's [sic] workers compensation carriers, we cannot
make payment of his medical expenses as you requested in youro [letter]
of November 30.
Naturally, once we have completed our investigations, we will be in
further contact with you .
On December 18, 1992, Franklin wrote a letter to Knotts that read simply : "I
recommend beginning suit right away. It looks like they are going to stall us." On
January 14; 1993, Knotts filed suit in Shelby Circuit Court. At trial, the jury rendered a
verdict in favor of Knotts and awarded him damages of $1,202,104 .29, reduced by 20%
after apportionment of fault for Knotts's own negligence . The Court of Appeals affirmed .
Knotts subsequently pursued a bad faith claim against Zurich . Specifically,
Knotts claimed that Zurich had violated Kentucky's UCSPA, KRS 304.12-230, in the
course of litigating the underlying tort case and the resulting appeal. The trial court
granted a summary judgment in favor of Zurich, holding that KRS 304.12-230 applied
only to an insurer's conduct before the commencement of litigation . The Court of
Appeals affirmed, and we granted discretionary review.
111 . Analysis
Zurich urges us to affirm the trial court and the Court of Appeals, both of which
held that the duty of good faith and fair dealing imposed on an insurer by KRS 304.12230 ends at the commencement of a tort action for which a claim under the insurance
policy has been made . While such an approach has some instinctive appeal, especially
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given that the adversarial nature of litigation undoubtedly makes it difficult for an insurer
to fulfill such a demanding duty to what amounts to an opposing party, we ultimately find
that the statute simply cannot be read in such a limited manner.
KRS 304.12-230 imposes what is generally known as the duty of good faith and
fair dealing owed by an insurer to an insured or to another person bringing a claim
under an insurance policy. However, the statute does not lay out an amorphous, nonspecific duty . Instead, it proscribes a list of particular acts and practices . The statute
specifically provides the following:
It is an unfair claims settlement practice for any person to commit or
perform any of the following acts or omissions:
(1) Misrepresenting pertinent facts or insurance policy provisions relating
to coverages at issue;
(2) Failing to acknowledge and act reasonably promptly upon
communications with respect to claims arising under insurance policies;
(3) Failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under insurance policies;
(4) Refusing to pay claims without conducting a reasonable investigation
based upon all available information ;
(5) Failing to affirm or deny coverage of claims within a reasonable time
after proof of loss statements have been completed;
(6) Not attempting in good faith to effectuate prompt, fair and equitable
settlements of claims in which liability has become reasonably clear;
(7) Compelling insureds to institute litigation to recover amounts due under
an insurance policy by offering substantially less than the amounts
ultimately recovered in actions brought by such insureds ;
(8) Attempting to settle a claim for less than the amount to which a
reasonable man would have believed he was entitled by reference to
written or printed advertising material accompanying or made part of an
application ;
(9) Attempting to settle claims on the basis of an application which was
altered without notice to, or knowledge or consent of the insured ;
(10) Making claims payments to insureds or beneficiaries not
accompanied by statement setting forth the coverage under which the
payments are being made ;
(11) Making known to insureds or claimants a policy of appealing from
arbitration awards in favor of insureds or claimants for the purpose of
compelling them to accept settlements or compromises less than the
amount awarded in arbitration ;
(12) Delaying the investigation or payment of claims by requiring an
insured, claimant, or the physician of either to submit a preliminary claim
report and then requiring the subsequent submission of formal proof of
loss forms, both of which submissions contain substantially the same
information ;
(13) Failing to promptly settle claims, where liability has become
reasonably clear, under one (1) portion of the insurance policy coverage in
order to influence settlements under other portions of the insurance policy
coverage;
(14) Failing to promptly provide a reasonable explanation of the basis in
the insurance policy in relation to the facts or applicable law for denial of a
claim or for the offer of a compromise settlement; or
(15) Failing to comply with the decision of an independent review entity to
provide coverage for a covered person as a result of an external review in
accordance with KRS 304.17A-621, 304.17A-623, and 304.17A-625 .
KRS 304.12-230.
Zurich argues that the use of the word "claim" in the statute means a prelitigation, adjustable claim' made against the insurance policy, thus the statute does not
apply to any acts or omissions by the insurer after litigation commences . However,
Zurich's argument fails from too narrow a reading of the word "claim." Like many words,
"claim" is subject to multiple, subtly different definitions . See, e.q., Black's Law
Dictionary 264 (8th ed . 2004) (defining "claim" as: "1 . The aggregate of operative facts
giving rise to a right enforceable by a court <the plaintiffs short, plain statement about
the crash established the claim>. - Also termed claim for relief. 2. The assertion of an
existing right ; any right to payment or to an equitable remedy, even if contingent or
provisional <the spouse's claim to half the lottery winnings>. 3. A demand for money,
property, or a legal remedy to which one asserts a right; esp., the part of a complaint in
a civil action specifying what relief the plaintiff asks for. . . . 4. An interest or remedy
recognized at law; the means by which a person can obtain a privilege, possession, or
enjoyment of a right or thing ; CAUSE OF ACTION (1) <claim against the employer for
wrongful termination> ."). But at its most basic, the word means an assertion of a right,
with the contours and specific nature of the right depending on context .
This general use is applicable to KRS 304.12-230 . The "right" being asserted
arises under the insurance policy and is the right to compensation for injuries for which
liability has been established . Thus, "claim," as used in the statute, means an assertion
of a right to remuneration under an insurance policy once liability has reasonably been
established . This is usually done by making the claim directly to the insurance
company, which then engages in the claim adjustment process . But it may also be
accomplished by instituting litigation, which is simply another means of asserting the
right under the insurance policy. Though litigation is distinct from the claims adjustment
process in that it specifically invokes the courts' power to decide the issue of liability,
both procedures are simply methods of pursuing claims under an insurance policy. It is
often the case that both methods are employed, with litigation following (or preempting)
the claim adjustment process .
The commencement of litigation by the filing of a complaint, even when the claim
adjustment process is underway, however, does not change the fundamental nature of
what the claimant seeks. The "claim"-for compensatory payment under the insurance
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policy-is the same as before the litigation began. The claimant has simply opted to
seek satisfaction of the claim through a different procedure. Nothing in KRS 304.12-230
limits its applicability to pre-litigation conduct, and since the statute applies to "claims," it
continues to apply to an insurer so long as a claim is in play. As such, we hold that
KRS 304 .12-230 applies both before and during litigation .
Though the statute's language is clear, we also note that this reading is
consistent with the public policy underlying the statute. See State Farm Mut. Auto. Ins .
Co . v. Reeder, 763 S .W .2d 116, 118 (Ky. 1988) ("The Kentucky law is similar to those
adopted by thirty-eight other states and is based on the 1971 amendment that the
National Association of Insurance Commissioners made to its model `act relating to
unfair methods of competition and unfair and deceptive acts and practices in the
business of insurance .' This statute is intended to protect the public from unfair trade
practices and fraud . It should be liberally construed so as to effectuate its purpose."). If
KRS 304 .12-230 were not applicable once litigation commenced, insurance companies
would have the perverse incentive to spur injured parties toward litigation, whereupon
the insurance company would be shielded from any claim of bad faith. Such a reading
would undermine the statute's fundamental purpose by allowing insurance companies
to engage in whatever sort of practicefair or unfair-they see fit to employ. The
remedial nature of the statute requires that we attempt to effectuate its purpose, which,
in a situation like this one, requires applying the statute to conduct occurring after the
commencement of litigation of a tort action.
We also note that this approach is consistent with that of almost every other
jurisdiction to have addressed the issue . Those courts have consistently held that the
duty of good faith, whether an inherent aspect of the insurance contract or a statutory
construct, continues during any litigation that is brought to determine liability for the
underlying tort . See, e.g . , White v. Western Title Ins . Co. , 710 P.2d 309, 316-17 (Cal.
1985) (holding that the duty of good faith continues during litigation because the
contractual relationship continues); Haddick v. Valor Ins. , 735 N .E.2d 132, 133 (III . Ct.
App. 2000) ("We reverse and hold that an insurance company has a duty to act in good
faith in settling a claim against its policyholder in a timely manner both before and after
suit is filed."); Harris v. Fontenot , 606 So .2d 72, 74 (La. Ct. App. 1992) ("We first note
that nowhere in either statute is there an express distinction limiting the application to
the pre-litigation conduct of the insurer . . . . [W]e believe that it is clear that the statute
was enacted to impose a requirement of good faith and fair dealing on the insurer,
requirements that are no less important after litigation has begun as before ."); Palmer v.
Farmers Ins. Exchange, 861 P.2d 895, 913 (Mont. 1993) ("[A]n insurer's duty to deal
fairly and not to withhold payment of valid claims does not end when an insured files a
complaint against the insurer.") ; O'Donnell ex rel. Mitro v. Allstate Ins. Co., 734 A.2d
901, 906 (Pa . Super. Ct . 1999) ("[W]e refuse to hold that an insurer's duty to act in good
faith ends upon the initiation of suit by the insured .") ; Barefield v. DPIC Companies, Inc. ,
600 S .E .2d 256, 267 (W.Va. 2004) ("We therefore must conclude that the language of
the UTPA does not restrict the scope of the conduct that is proscribed by the Act to that
which occurred prior to the filing of a lawsuit.").
Other jurisdictions, while not expressly addressing the issue of the viability of the
duty of good faith after litigation, have implicitly approved the concept by allowing
admission of evidence of the insurance company's conduct that occurred after the
commencement of litigation . See, e.g., T.D.S. Inc. v. Shelby Mut. Ins. Co. , 760 F.2d
1520, 1527 (11th Cir. 1985) (applying Florida law: "Certainly the litigation conduct of [the
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insurer] was relevant to the claim that [the insurer] or those acting on its behalf dealt
dishonestly with [insured] ."); Southerland v. Argonaut Ins. Co. , 794 P .2d 1102, 1106
(Colo. Ct. App. 1989) (holding that admission of evidence of post-filing conduct was not
an abuse of discretion because the evidence helped establish a habitual pattern of
dealing with the plaintiff); Home Ins. Co. v. Owens , 573 So.2d 343, 344 (Fla. Dist. Ct.
App . 1990) ("[W]e concur with the Eleventh Circuit Court of Appeals . In T.D.S . Inc. v.
Shelby Mutual Insurance Co., 760 F.2d 1520 (11th Cir.1985), . . . a bad faith case, the
court held that the insurance company's litigation conduct was admissible, relevant
evidence."); Spadafore v. Blue Shield , 486 N .E.2d 1201, 1204 (Ohio Ct. App. 1985)
("[E]vidence of the breach of the insurer's duty to exercise good faith occurring after the
time of filing suit is relevant so long as the evidence related to the bad faith or handling
or refusal to pay the claim."). But see Parker v. Southern Farm Bureau Cas. Ins. , 935
S .W.2d 556, 562 (Ark . 1996) (stating that "none of the conduct by Farm Bureau after the
filing of the complaint, including legal positions asserted, can provide a basis for
Parker's bad-faith claim"); Roussalis v. Wyoming Medical Center, Inc. , 4 P .3d 209,
257 (Wyo. 2000) (holding that post-filing conduct is controlled by the Rules of Civil
Procedure and disallowing the bad faith claim based on such conduct) .
Recognizing the existence of a continuing duty of good faith, however, is not the
end of our inquiry. We must also address the further question of what sorts of post-filing
conduct by an insurer will be admissible in a bad faith action. This is truly an issue of
first impression in this state, so we turn to other jurisdictions for guidance. Treatment of
this issue can be divided broadly into two camps : (1) allowing only evidence of the
insurance company's settlement behavior and (2) allowing that evidence plus evidence
of the litigation tactics, strategies, and techniques employed on behalf of the insurance
company .3
The first approach appears to have developed initially in California, beginning
with White v. Western Title Insurance Co., 710 P.2d 309 (Cal. 1985), which is
considered the seminal case in this area of the law. In White, the California Supreme
Court held that the admission of low "settlement offers and other matters occurring after
commencement of litigation" could be used to prove bad faith. Id. at 316. The court
declined a blanket exclusion of all litigation strategy, noting that while it was cognizant of
the insurance company's fear that jurors would not be able to distinguish between
legitimate, though aggressive, litigation techniques and actual bad faith, it nonetheless
"trust[ed] that the jurors will be aware that parties to a lawsuit are adversaries, and will
evaluate the insurer's conduct in relation to that setting ." Id. at 317 . The court also
noted that "[t]he trial court . . . would retain the authority to exclude evidence of
settlement offers or other conduct of the insurer if it concluded that in the case before it
the prejudicial effect of such evidence would outweigh its probative value." Id. at 31
n .9 .
Since White, however, California's courts have not accepted the invitation to
allow broader evidence of post-filing conduct . In fact, California courts have sharply
3 There actually is a third approach, namely a blanket prohibition of the
admission of post-filing conduct . Arkansas and Wyoming are representative of this rule .
Parker v. Southern Farm Bureau Cas. Ins., 935 S .W.2d 556, 562 (Ark. 1996) ; Roussalis
v. Wyoming Medical Center, Inc., 4 P.3d 209, 257 (Wyo. 2000). This approach,
however, amounts to the denial of the continuing existence of a duty of good faith once
litigation begins. Because our statute applies both before and during litigation, we need
not address this approach any further.
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limited the application of White so as to prohibit admission of evidence of the vast
majority of post-filing conduct, namely, litigation techniques and strategies . As one
California appellate court has noted, "White stands for the proposition that ridiculously
low statutory offers of settlement may be introduced . . . .as bearing on the issue of bad
faith of the insurance company." California Physicians' Service v. Superior Court , 12
Cal .Rpt.4th 1321, 1330 (Cal. Ct. App. 1992) . That same court further held:
Defensive pleading, including the assertion of affirmative defenses, is
communication protected by the absolute litigation privilege . Such
pleading, even though allegedly false, interposed in bad faith, or even
asserted for inappropriate purposes, cannot be used as the basis for
allegations of ongoing bad faith . No complaint can be grounded upon such
pleading .
Id . ; see also Nies v. National Auto . & Casualty Ins. Co., 199 Cal.App.3d 1192 (Cal. Ct.
App . 1988) (holding that insurers will be disabled from conducting a vigorous defense in
a bad faith insurance action if their pleadings may be used to prove pre-existing bad
faith); Tomaselli v. Transamerica Ins. Co. 31 Cal .Rptr.2d 224, 228 (Cal. Ct. App. 1994)
(claim for bad faith cannot be based on an insurer's appeal from an adverse judgment) .
In essence, California's approach has evolved to allow the introduction of unreasonable
settlement behavior (specifically, low settlement offers) that occurs after suit has been
filed while prohibiting the admission of litigation conduct, techniques, and strategies .
The other approach, though it pays lip-service to limiting the evidence of postfiling conduct, allows the introduction of litigation strategies and techniques as evidence
of bad faith on the part of an insurance company. See Barefield v. DPIC Companies,
Inc. , 600 S .E .2d 256, 271 (W.Va . 2004) (allowing the introduction of evidence of alleged
misconduct by defense counsel during litigation, so long as the insurer knowingly
encourages, directs, participates in, relies upon or ratifies such alleged wrongful
conduct) ; Home Ins. Co . v. Owens, 573 So .2d 343, 344 (Fla . Dist . Ct. App. 1990)
(upholding admission of evidence of an insurer's pleadings as well as the insurer's
failure to answer a request for admissions) .
This permissive approach is unappealing for a variety of reasons, the most
compelling of which have been addressed extensively by the Montana Supreme Court .
Palmer v. Farmers Ins. Exchange , 861 P .2d 895 (Mont. 1993) . Specifically, the court
explained the overriding policy rationale for excluding evidence of litigation strategies
and techniques and generally limiting evidence of an insurance company's post-filing
behavior:
Courts have held, and we agree, that an insurer's duty to deal fairly
and not to withhold payment of valid claims does not end when an insured
files a complaint against the insurer . See, e.g . , White v. Western Title Ins.
Co. (1985), 40 Cal.3d 870, 221 Cal .Rptr. 509, 710 P.2d 309, 317. Several
courts have considered whether evidence of an insurer's conduct during
litigation of the underlying suit is admissible in a subsequent bad faith
action . After examining the reasoning of courts that have considered the
issue, we conclude that the continuing duty of good faith does not
necessarily render evidence of an insurer's post-filing conduct admissible .
See Palmer v. Ted Stevens Honda, Inc. (1987), 193 Cal.App .3d 530, 238
Cal .Rptr. 363, 366-69 ; White, 221 Cal.Rptr. at 517, 710 P.2d at 317 (as
interpreted by both Nies v. National Auto. & Casualty Ins. Co. (1988), 199
Cal .App.3d 1192, 245 Cal. Rptr. 518, 523-25, and California Physicians' v.
Superior Ct. (1992), 9 Cal .AppAth 1321, 12 Cal . Rptr.2d, 95, 99-100) .
Indeed, courts rarely should allow such evidence and we have adopted a
balancing test for those rare circumstances.
Public policy favors the exclusion of evidence of an insurer's postfiling litigation conduct in at least two respects . First, permitting such
evidence is unnecessary because during the initial action, trial courts can
assure that defendants do not act improperly. Next, and more importantly,
the introduction of such evidence hinders the right to defend and impairs
access to the courts .
The Rules of Civil Procedure control the litigation process and, in
most instances, provide adequate remedies for improper conduct during
the litigation process . Once the parties have assumed adversarial roles, it
is generally for the judge in the underlying case and not a jury to
determine whether a party should be penalized for bad faith tactics . Ted
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Stevens Honda, 238 Cal .Rptr. 363, 369, (citing White, 221 Cal .Rptr. at
525, 710 P.2d at 325 (Lucas, J ., concurring and dissenting)).
An attorney in litigation is ethically bound to represent the client
zealously within the framework provided by statutes and the Rules of Civil
Procedure . These procedural rules define clear boundaries of litigation
conduct . If a defense attorney exceeds the boundaries, the judge can
strike the answer and enter judgment for the plaintiff, enter summary
judgment for the plaintiff, or impose sanctions on the attorney . See White,
221 Cal.Rptr . at 525, 710 P.2d at 325, (Lucas, J., concurring and
dissenting) . There is no need to penalize insurers when their attorneys
represent them zealously within the bounds of litigation conduct. To allow
a jury to find that an insurer acted in bad faith by zealously defending itself
is to impose such a penalty.
The most serious policy consideration in allowing evidence of the
insurer's post-filing conduct is that it punishes insurers for pursuing
legitimate lines of defense and obstructs their right to contest coverage of
dubious claims . As discussed below, if defending a questionable claim
were actionable as bad faith, it would impair the insurer's right to a zealous
defense and even its right of access to the courts;
Allowing evidence of litigation strategies and tactics would expose
the insurer's entire defense in a coverage action to scrutiny by the jury,
unless the insurer won the underlying suit. The jury then, with the
assistance of hindsight, and without the assistance of insight into litigation
techniques, could "second guess the defendant's rationales for taking a
particular course." White, 221 Cal.Rptr. at 524, 710 P.2d at 324 (Lucas, J.,
concurring and dissenting) . In addition, the jury could consider evidence of
the defendant's litigation strategy and tactics without any showing that the
insurer's conduct was technically improper. Thus, insurers would be
reluctant to contest coverage of questionable claims .
The case at hand exemplifies the warning given by Justice Lucas in
his dissent to White. Justice Lucas warned that permitting evidence of the
post-filing conduct of the insurer's attorneys would allow juries to impose
liability for litigation tactics which are in and of themselves proper, merely
because a jury may conclude that the strategy and tactics in and of
themselves amounted to bad faith . See White, 221 Cal .Rptr. at 523-24,
710 P .2d at 323-24 n . 4 (Lucas, J., concurring and dissenting) .
In this case, as in White, the plaintiff did not contend that insurer's
tactics in and of themselves were improper, rather the implicit claim was
that the litigation strategy and tactics amounted to bad faith. The jury was
allowed to consider Farmers' legitimate defense strategy and proper
litigation tactics as evidence of bad faith, when the relevant inquiry should
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have been whether Farmers' had a reasonable basis for denying the
claim.
To permit evidence of insurers' litigation strategies and tactics is to
impede insurers' access to the courts and right to defend, because it
makes them reluctant to contest coverage of questionable claims . "Free
access to the courts is an important and valuable aspect of an effective
system of jurisprudence, and a party possessing a colorable claim must
be allowed to assert it without fear of suffering a penalty more severe than
typically imposed on defeated parties." White, 221 Cal .Rptr. at 524, 710
P .2d at 324 (Lucas, J., concurring and dissenting) (quoting Young v.
Redman (Cal .App .1976), 55 Cal.App .3d 827, 128 Cal.Rptr. 86, 93). Public
policy dictates, therefore, that courts must use extreme caution in deciding
to admit such evidence even if it is relevant to the insurer's initial decision
to deny the underlying claim.
This brings us to another crucial point, the relevance of the insurer's
post-filing conduct. In general, an insurer's litigation tactics and strategy in
defending a claim are not relevant to the insurer's decision to deny
coverage. Indeed, if the insured must rely on evidence of the insurer's
post-filing conduct to prove bad faith in denial of coverage, questions arise
as to the validity of the insured's initial claim of bad faith. One court has
gone so far as to hold that "once litigation has commenced, the actions
taken in its defense are not, in our view, probative of whether defendant in
bad faith denied the contractual lawsuit." Ted Stevens Honda, 238
Cal .Rptr. at 368.
After the onset of litigation, an insurer begins to concentrate on
supporting the decisions that led it to deny the claim . The insurer relies
heavily on its attorneys using common litigation strategies and tactics to
defend against a debatable claim . Consequently, actions taken after an
insured files suit are at best marginally probative of the insurer's decision
to deny coverage. See Randy Papetti, Note, Insurer's Duty of Good Faith
in the Context of Litigation, 60 Geo.Wash .L.Rev.1931, 1972 (1992) .
In some instances, however, evidence of the insurer's post-filing
conduct may bear on the reasonableness of the insurer's decision and its
state of mind when it evaluated and denied the underlying claim.
Therefore, we do not impose a blanket prohibition on such evidence .
Id . 913-15 . Similar policy concerns have driven the decisions in a number of other
jurisdictions to prohibit the introduction of litigation strategy and techniques. See, e .g. ,
Timberlake Const. Co . v. U.S. Fidelity and Guar. Co. , 71 F.3d 335, 340-41 (10th Cir.
1995) ("Allowing litigation conduct to serve as evidence of bad faith would undermine an
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insurer's right to contest questionable claims and to defend itself against such claims
. . . [P]ermitting allegations of litigation misconduct would have a chilling effect on
insurers, which could unfairly penalize them by inhibiting their attorneys from zealously
and effectively representing their clients within the bounds permitted by law. Insurers'
counsel would be placed in an untenable position if legitimate litigation conduct could be
used as evidence of bad faith . Where improper litigation conduct is at issue, generally
the Federal Rules of Civil Procedure provide adequate means of redress, such as
motions to strike, compel discovery, secure protective orders, or impose sanctions .");
Sims v. Travelers Insurance Co . , 16 P.3d 468 (Ok. Civ. App. 2000) (specifically
adopting Timberlake 's rule disallowing use of litigation conduct and strategy); O'Donnell
ex rel. Mitro v. Allstate Ins. Co. , 734 A.2d 901, 908-09 (Pa . Super. Ct. 1999) (prohibiting
the introduction of evidence of improper discovery techniques) . Those policy concerns
are equally at play under Kentucky law.
We recognize that Montana's Supreme Court has since retreated from what had
appeared to be a strict rule against allowing the introduction of litigation conduct by an
insurer. See Federated Mut. Ins. Co. v. Anderson, 991 P.2d 915, 922-23 (Mont. 1999)
(allowing some litigation conduct, specifically meritless appeals, to be introduced as
evidence of bad faith). This is, no doubt, because Palmer expressly left the door open
for the admission of evidence of extraordinary post-filing conduct to support a bad faith
claim, with the restriction that it should "rarely be admitted ." However, given the chilling
effect that allowing introduction of evidence of litigation conduct would have on the
exercise of an insurance company's legitimate litigation rights, any exception threatens
to turn our adversarial system on its head . We are confident that the remedies provided
by the Rules of Civil Procedure for any wrongdoing that may occur within the context of
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the litigation itself render unnecessary the introduction of evidence of litigation conduct.
This is particularly true given that the attorneys, who in fact control and perpetuate the
litigation conduct on behalf of an insurance company, are subject to direct sanction
under the Civil Rules for any improper conduct. Though it goes without saying, we also
note that those attorneys have significant duties under the Rules of Professional
Responsibility, which allow for further sanctions for unethical behavior . Thus, we think
the better approach is an absolute prohibition on the introduction of such evidence in
actions brought under KRS 304.12-230 .4
Our preferred rule as to what evidence of post-filing conduct may be admissible
in a bad faith action is best summed up as follows :
One should note a distinguishing factor between the insurer's
settlement behavior during litigation and its other litigation conduct. The
Rules of Civil Procedure provide remedies for the latter. To permit the jury
to pass judgment on the defense counsel's trial tactics and to premise a
finding of bad faith on counsel's conduct places an unfair burden on the
insurer's counsel, potentially inhibiting the defense of the insurer . An
insurer's settlement offers, on the other hand, are not a separate abuse of
the litigation process itself. If a litigant refuses to settle or makes low
offers, his adversary cannot avail himself of motions to compel, argument,
or cross-examination to correct his failure.
In principle, an insurer's duty to settle should continue after the
commencement of litigation . If the insurer were immunized for objectional
settlement conduct occurring after litigation begins, the insured would be
left without a remedy. It makes sense, therefore, to hold the insurer
responsible for such conduct . The rules, however, provide litigants with
protection against other forms of litigation [conduct], and for that reason a
4 We also note application of this approach means we need not address Zurich's
claims under the Kentucky Constitution, specifically that allowing introduction of such
litigation conduct evidence would violate Section 116, which grants to the Court of
Justice the sole power to regulate the practice of law, and would mean that UCSPA
applies to attorneys (in addition to insurance companies), thus violating Section 51,
which prohibits the General Assembly from enacting laws that relate to more than one
subject .
- 1 6-
court could rationally exclude evidence of the insurer's other misdeeds
committed during the litigation process .
Stephen S . Ashley, Bad Faith Actions Liability and Damages § 5A:6 (2005). 5
We must add, however, that such evidence is not automatically admissible .
Evidence of post-filing conduct may often be of limited relevance to a claim of bad faith
and raises distinct concerns about prejudice to the insurance company. While
resolution of the tension between the competing considerations of probativeness and
prejudice is an unquestioned requirement of the law of evidence, see KRE 403, we note
that there has been heightened concern about this issue, as it applies to post-filing
conduct, since courts began considering such evidence of bad faith . See White , 710
P .2d at 317 n.9. Thus, while it will no doubt further limit the admissibility of post-filing
behavior, we want to emphasize that before admitting evidence of post-filing behavior,
courts must be careful to weigh the probativeness of the proposed evidence against its
potential for prejudice, as required by KRE 403 . See Timberlake Const. Co. v. U .S.
Fidelity and Guar. Co . , 71 F .3d 335, 341 (10th Cir. 1995) ("In light of existing case law
and the public policy concerns . . . . . . . while evidence of an insurer's litigation conduct
may, in some rare instances, be admissible on the issue of bad faith, such evidence will
generally be inadmissible, as it lacks probative value and carries a high risk of
prejudice. See Fed .R.Evid. 401, 403.").
For the foregoing reasons, the Court of Appeals is reversed .
5 We also note, since Knotts alludes in his brief to the possibility of introducing
such evidence, that evidence of improper or abusive tactics by an insurance company
during litigation of the bad faith action itself are truly irrelevant to proof of bad faith in
handling the underlying claim . Such evidence simply is inadmissible in the bad faith
suit.
- 1 7-
Lambert, C .J . ; Graves and Johnstone, JJ ., concur. Cooper, J ., dissents by
separate opinion . Wintersheimer, J., dissents by separate opinion in which Scott, J.,
joins.
COUNSEL FOR APPELLANTS :
Larry B . Franklin
Franklin & Hance
505 West Ormsby Avenue
Louisville, Kentucky 40203
Lee E . Sitlinger
Sitlinger, McGlincy, Steiner, Theiler & Karem
370 Starks Building
455 South Fourth Avenue
Louisville, Kentucky 40202
COUNSEL FOR APPELLEES :
James Douglas Harris, Jr.
Wyatt, Tarrant & Combs
918 State Street
PO Box 1220
Bowling Green, Kentucky 42102-1220
Robert E. Stopher
Boehl, Stopher & Graves
Aegon Center
Suite 2300
400 West Market Street
Louisville, Kentucky 40202-3354
COUNSEL FOR AMICUS CURIAE, THE INSURANCE INSTITUTE OF KENTUCKY:
Douglas Hoots
Landrum & Shouse
106 West Vine Street
Suite 800
Lexington, Kentucky 40507
Tyler Griffin Smith
Landrum & Shouse
PO Box 951
Lexington, Kentucky 40599-0951
COUNSEL FOR AMICUS CURIAE, STATE AUTO INSURANCE COMPANIES:
Douglas Hoots
Landrum & Shouse
106 West Vine Street
Suite 800
Lexington, Kentucky 40507
Tyler Griffin Smith
Landrum & Shouse
PO Box 951
Lexington, Kentucky 40599-0951
COUNSEL FOR AMICUS CURIAE, STATE FARM INSURANCE COMPANIES:
Douglas Hoots
Landrum & Shouse
106 West Vine Street
Suite 800
Lexington, Kentucky 40507
Tyler Griffin Smith
Landrum & Shouse
PO Box 951
Lexington, Kentucky 40599-0951
COUNSEL FOR AMICUS CURIAE, THE KENTUCKY ACADEMY OF TRIAL
ATTORNEYS :
Carl D . Frederick
Seiller & Handmaker
2200 Medinger Tower
462 S . Fourth Street
Louisville, Kentucky 40202-3485
Paul Joseph Hershberg
Seiller & Handmaker
2200 Medinger Tower
462 S . Fourth Street
Louisville, Kentucky 40202-3485
COUNSEL FOR AMICUS CURIAE, UNITED POLICYHOLDERS :
Eugene R. Anderson
Anderson, Kill & Olick
1251 Avenue of the Americas
New York, New York 10020
Amy Bach
42 Miller Avenue
Mill Valley, California 94941
M. Austin Mehr
Austin Mehr Law Offices
145 West Main Street
Suite 300
Lexington, Kentucky 40507
Timothy E. Geertz
Austin Mehr Law Offices
145 West Main Street
Suite 300
Lexington, Kentucky 40507
RENDERED : MAY 18, 2006
TO BE PUBLISHED
SupuntP Courf of ~6ufurhv
'
2004-SC-0400-DG
LLOYD KNOTTS; AND
JACKIE KNOTTS
V
APPELLANTS
ON REVIEW FROM COURT OF APPEALS
2002-CA-1846-M R
JEFFERSON CIRCUIT COURT NO . 97-CI-4443
ZURICH INSURANCE COMPANY ;
ZURICH AMERICAN COMPANIES ; AND
ZURICH AMERICAN INSURANCE
COMPANY OF ILLINOIS
APPELANTS
DISSENTING OPINION BY JUSTICE COOPER
I would concur in the majority opinion if this were a first-party bad faith action in
-which Mr. and Mrs . Knotts were Zurich's insureds . In that event, Zurich would owe a
continuing fiduciary duty of good faith and fair dealing implicit in the insurance contract
purchased by the insureds that would not conflict with any superior duty that it might
owe to someone else . See Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368, 380
(Ky. 2000) ("[A] bad faith action is based upon the fiduciary duty owed by an insurance
company to its insured based upon the insurance contract ."). A first-party bad faith
action is one brought by the insured against the insurance company seeking to enforce
coverage claimed to be provided by the insured's own policy, e.g_, homeowner's claims,
uninsured (UM) and underinsured (UIM) motorist claims, claims for collision coverage
payments, basic reparation benefit (BRB) claims, enforcement of duty to defend,
enforcement of denied coverage, etc . This case, however, is
a third-party
bad faith
action by tort plaintiffs, strangers to the insurance contract who claim that the
tortfeasor's liability insurance carrier owed them a fiduciary duty of good faith and fair
dealing in defending the tort action they brought against its insured .
In Kentucky, both first-party and third-party claims can be premised upon a
violation of KRS 304.12-230, the Unfair Claims Settlement Practices Act ("UCSPA") .
State Farm Mut. Auto . Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky. 1988) ; FB Ins . Co.
v. Jones , 864 S.W.2d 926, 929 (Ky. App. 1993) . I agree that the insurer's duty to
negotiate in good faith with its own insured continues even after the commencement by
the insured of a first-party action against the insurer See White v. W. Title Ins. Co. , 710
P.2d 309, 317 (Cal . 1985)) ("[T]he contractual relationship between insurer and the
insured does not terminate with commencement of litigation."). However, I do not agree
that the insurer owes any duty to a third party after that party commences a tort action
against the insured . Cf . Palmer v. Ted Stevens Honda, Inc. , 238 Cal. Rptr. 363, 368
(Cal . Ct. App. 1987) ("[U]nlike White , there was no continuing contractual relationship
between plaintiff and defendant in the instant case and therefore no implied covenant to
treat plaintiff fairly . . . ... ) .
When the tort plaintiff commences the tort action against the insured tortfeasor,
the insurer's primary obligation is the defense of its insured . J. Graham Brown Found. .
Inc. v. St. Paul Fire & Marine Ins. Co., 814 S .W.2d 273, 279-80 (Ky. 1991) ; Wolford v.
Wolford , 662 S .W.2d 835, 838 (Ky. 1984) . If the insurer violates that duty, e .-Q ., by
failing to pay a reasonable settlement demand, Harvin v. U.S . Fid . & Guar. Co. , 428
S.W.2d 213, 214-15 (Ky. 1968), and such results in an excess judgment against the
insured, the insurer can be liable to the insured for the excess, and the insured can
make an assignment of the chose in action to the injured plaintiff . Manchester Ins. &
Indem . Co. v. Grundy , 531 S.W.2d 493, 498 (Ky. 1975) . However, it makes no sense to
say that the insurer is answerable to the tort plaintiff for the manner in which it performs
its contractual duty to defend its insured against the tort action . The potential for a
conflict of interest in that scenario is self-evident . Once suit is filed, the Rules of Civil
Procedure control the conduct of the parties and provide remedies for any alleged
abuses . Palmer , 238 Cal. Rptr. at 369 ("Litigation is governed by a different set of rules.
It is for the law-and-motion judge and not the jury to assess whether a party should be
penalized for bad faith discovery positions ."); Roussalis v. Wyo. Med. Ctr., Inc . , 4 P.3d
209, 257 (Wyo. 2000) ("The Rules of Civil Procedure control the litigation process and,
in most instances, provide adequate remedies for improper conduct during the litigation
process. Once the parties have assumed adversarial roles, it is generally for the judge
in the underlying case and not a jury to determine whether a party should be penalized
for bad faith tactics .") .
Thus, while Reeder permits a plaintiff to sue the tortfeasor's insurer premised
upon a violation of the UCSPA, a violation of the UCSPA cannot be premised upon
actions occurring after the plaintiff sues the insured in tort . Thereafter, the insurer's duty
is to its insured, and the insurer can determine for itself how settlement negotiations
enter into the defense strategy . (In Reeder , the insurer's CR 12.02 motion to dismiss
was granted, so the case did not address whether a UCSPA violation could be
premised upon conduct occurring after suit was filed. 763 S.W.2d at 117. In Motorists
Mutual Insurance Co . v. Glass, 996 S.W .2d 437 (Ky. 1997), the actions giving rise to the
bad faith claims all occurred prior to the commencement of the lawsuit except failure to
pay a settlement demand in excess of policy limits, which, of course, could not
constitute bad faith. Id. at 442-46 .)
Each foreign case, save one, that has been cited in this action for the proposition
that suit can be brought against an insurer for a violation of the UCSPA was a first-party
claim . See Timberlake Const. Co. v. U . S. Fid. & Guar. Co . , 71 F.3d 335, 338 (10th Cir.
1995) (denial of coverage to insured under builder's risk policy) ; Graham v. Gallant Ins.
Group , 60 F. Supp. 2d 632, 633 (W.D. Ky. 1999) (UM and collision coverage claims);
Parker v. S. Farm Bureau Cas. Ins. Co., 935 S.W.2d 556, 557 (Ark. 1996) (action to
enforce denied automobile liability and collision coverage) ; White v. W. Title Ins. Co. ,
710 P.2d 309, 311 (Cal . 1985) (action to enforce denied title insurance coverage) ;
Tomaselli v. Transamerica Ins. Co. , 31 Cal. Rptr. 2d 224, 225 (Cal . Ct. App. 1994)
(homeowner's claim) ; Cal . Physicians' Serv . v. Superior Court , 12 Cal. Rptr. 2d 95, 9596 (Cal . Ct. App. 1992) (claim under health insurance policy) ; Nies v. Nat'l-Auto. & Cas.
Ins . Co., 245 Cal . Rptr. 518, 519 (Cal . Ct. App. 1988) (UM claim); Palmer ex rel . Diacon
v. Farmers Ins . Exch., 861 P .2d 895, 899 (Mont . 1993) (UM claim); O'Donnell ex rel .
Mitro v. Allstate Ins. Co. , 734 A.2d 901, 902-03 (Pa . Super. Ct. 1999) (homeowner's
claim) . The only exception is Barefield v. DPIC Cos., Inc., 600 S.E.2d 256 (W. Va.
2004) . However, all of the cases cited by Barefield in support of its holding were also
first-party actions . See Tucson Airport Auth . v. Certain Underwriters , 918 P .2d 1063,
1064 (Ariz. Ct. App . 1996) (failure to defend) ; Gooch v. State Farm Mut. Auto. Ins. Co.,
712 N .E.2d 38, 39 (Ind . Ct. App. 1999) (UM claim) ; Federated Mut. Ins. Co. v.
Anderson , 991 P .2d 915, 919 (Mont. 1999) (denial of coverage); Palmer , 861 P.2d at
899 (UM claim) ; O'Donnell , 734 A.2d at 902-03 (homeowners' claim) . To date, no other
jurisdiction has cited Barefield for the proposition that a third party tort claimant can
bring a bad faith action against the tortfeasor's insurer .
An overwhelming majority of jurisdictions that have addressed the issue do not
allow any third-party bad faith actions whatsoever against insurers . E.g_, O .K. Lumber
Co., Inc ., v. Providence Washington Ins. Co., 759 P.2d 523, 525-26 (Alaska 1988) ("The
relationship between the claimant and an insurance carrier for a third party alleged to be
liable is an adversary relationship giving rise to no fiduciary obligation on the part of
such insurance carrier to the claimant . Any obligation to deal with settlement offers in
good faith runs only to the insured ."); Page v. Allstate Ins . Co. , 614 P.2d 339, 340 (Ariz.
Ct. App. 1980) ("The duty to settle is intended to benefit the insured, not the injured
claimant .") ; Murphy v. Allstate Ins . Co. , 553 P .2d 584, 586-87 (Cal. 1976) (insured's
duty to settle runs to the insured, not to the injured claimant) ;' Scroggins v. Allstate Ins.
Co. , 393 N.E .2d 718, 721-22 (III . App. Ct. 1979) (insurer's duty of good faith and fair
dealing is owed to insured, not to third parties) ; Menefee v. Schurr, 751 N .E.2d 757, 761
(Ind . Ct. App. 2001) ("The excess liability of [a liability insurance] company arises out of
the relationship between insured and company. Claimant is a stranger to that
relationship .") .
See also Bates v. Allied Mut. Ins . Co. , 467 N .W.2d 255, 258 (Iowa 1991)
("[W]hile an insurer has a fiduciary relationship with its insured, it has an adversarial
relationship with a third-party claimant . Therefore, a tort victim, as a third-party
claimant, cannot compel a tortfeasor's insurer to negotiate and settle a claim in good
' The California Supreme Court subsequently held in Royal Globe Insurance Co. v.
Superior Court , 592 P.2d 329, 334 (Cal. 1979), that both first-party and third-party bad
faith actions against insurers were authorized . Royal Globe was overruled on both
points by Moradi-Shalal v. Fireman's Fund Insurance Cos., 758 P.2d 58, 63, 66 (Cal.
1988) .
faith anymore than he could compel the tortfeasor to do so himself." (Citation omitted .));
Linscott v. State Farm Mut. Auto. Ins. Co., 368 A.2d 1161, 1163 (Me. 1977) ("The pretrial negotiations which may be conducted between a tort claimant and a defending
insurance company are adversary in nature and, hence, will not give rise to a duty to
bargain in good faith, as claimed by plaintiff . A 'duty of good faith and fair dealing' i.n the
handling of claims runs only to an insurance company's insured . . . ."); Chavez v.
Chenoweth , 553 P .2d 703, 709 (N.M. Ct. App. 1976) ("The 'bad faith dealing' rule
applies between an insurer and insured . Plaintiff's dealings with State Farm in
connection with damages based on [tortfeasor]'s alleged fault were not dealings
between insurer and insured, but arm's length dealings on the basis of plaintiff's claim
against State Farm as the insurer of [tortfeasor] ." (Citation omitted .)) .
See also Niemeyer v. U .S . Fid. & Guar: Co. , 789 P.2d 1318, 1322 (Okla. 1990)
("Because Niemeyer is a third party claimant, she could not bring a bad faith action
against USF & G.") ; Auclair v. Nationwide Mut. Ins . Co. , 505 A.2d 431, 431 (R.I. 1986)
("The relationship between the claimant and the insurance carrier for a third party
alleged to be liable is an adversary relationship giving rise to no fiduciary obligation on
the part of such insurance carrier to the claimant . Any obligation to deal with settlement
offers in good faith runs only to the insured . . . .") ; Caserotti v. State Farm Ins . Co., 791
S.W.2d 561, 566 (Tex. App. 1990) ("The present cause is distinguishable from those
cases where courts have imposed a duty of good faith and fair dealing upon insurance
companies . The cases imposing such a duty all involve first-party claims, i .e. , suits by
insureds pursuant to their own insurance policies after their insurer wrongly denied or
delayed recovery of the insureds' claims .") ; Pixton v . State Farm Mut. Auto. Ins . Co .,
809 P .2d 746, 749 (Utah Ct. App. 1991) ("[T]here is no duty of good faith and fair
dealing imposed upon an insurer running to a third-party claimant, such as Pixton,
seeking to recover against the company's insured ."); Kranzush v. Badger State Mut.
Cas. Co. , 307 N .W.2d 256, 265 (Wis . 1991) ("The insurer's duty of good faith and fair
dealing arises from the insurance contract and runs to the insured . No such duty can
be implied in favor of the claimant from the contract since the claimant is a stranger to
the contract and to the fiduciary relationship it signifies .") ; Herrig v. Herrig, 844 P.2d
487, 491 (Wyo. 1992) ("[C]ourts simply refuse to place an insurer in the untenable
position of owing a duty of good faith and fair dealing to both the insured and the
adversary of the insured, whether in the double-insured context or not.") .
In Menefee v. Schurr, the Indiana Court of Appeals noted that "[o]nly four states,
Kentucky see Reeder , Louisiana, Massachusetts, and West Virginia [see Barefield . . .
permit third-party direct action bad faith claims . . . against insurers ." Menefee , 751
N.E .2d at 761 n.2 . Massachusetts created its right of direct action by a 1979
amendment of its Uniform Trade Protection Acts, Mass. Gen . Laws ch. 93A, § 9(1),
under which UCSPA-type claims are litigated, to provide that "[a]ny person, other than a
person entitled to bring action under section eleven of this chapter, who has been
injured by another person's use or employment of any method, act or practice declared
to be unlawful by section two . . . or any person whose rights are affected by another
person violating the provisions of [G .L. c. 176D, § 3(9)] may bring an action . . . ." 1979
Mass. Acts ch . 406, § 1 . Although Louisiana does permit a third-party direct action
against an insurer for a violation of its Uniform Trade Practices Act, La. Rev. Stat. Ann.
§ 22:1220(A), which specifically contains language requiring a "reasonable effort to
settle claims with insured or the claimant ," (emphasis added), it does not permit a thirdparty direct action against an insurer for a violation of the UCSPA, La. Rev. Stat. Ann .
§ 22:1214, which contains no such language. Theriot v. Midland Risk Ins . Co. , 694 So.
2d 184,190-91 (La. 1997) .
Thus, Kentucky, Massachusetts, and West Virginia stand alone in permitting a
third-party tort plaintiff to sue the tortfeasor's insurer for a UCSPA violation that occurs
even prior to commencement of the tort action . Absent legislative authorization, I am
unwilling to conclude that liability insurers owe a fiduciary responsibility both to its
insured and to the tort plaintiff who sued its insured, thus triggering the insurer's
contractual duty to defend.
Accordingly, I dissent.
RENDERED : MAY 18, 2006
TO BE PUBLISHED
,Supxeccr d1ourf of ~rttfurkg
2004-SC-0400-DG
LLOYD KNOTTS AND
JACKIE KNOTTS
APPELLANTS
ON APPEAL FROM THE COURT OF APPEALS
2002-CA-1846-MR
JEFFERSON CIRCUIT COURT NO. 97-CI-4443
V.
ZURICH INSURANCE COMPANY,
ZURICH AMERICAN COMPANIES AND
ZURICH AMERICAN INSURANCE
COMPANY OF ILLINOIS
APPELLEES
DISSENTING OPINION BY JUSTICE WINTERSHEIMER
I must respectfully dissent from the majority opinion because an insurance
company must continue to abide by the Unfair Claims Settlement Practices Act, KRS
304.12-230 even after a lawsuit has been filed against its insured .
We recognize that the majority opinion does reverse the Court of Appeals.
However, the majority does not go far enough in reversing and as such the result is of
very limited value, if any, to these appellants or any others who may share the same
general problem . Any conduct engaged in by the insurer may form the basis of a bad
faith claim.
This is a case of first impression in Kentucky. The major issue is whether the Act
regulates only the pre-litigation claims adjusting process . Stated differently, whether an
insurance company can be guilty of bad faith conduct after a lawsuit has been filed
against its insured . Other related questions are whether Kentucky or federal case law
supports a continuing duty of good faith after the filing of a lawsuit ; whether other
jurisdictions recognize such a duty; whether the construction by the Court of Appeals of
the word "claim" is contrary to its common usage; and, whether a rule relating to postlitigation conduct violates the separation of powers.
Lloyd Knotts, a self-employed construction contractor, suffered serious and
permanent injuries as a result of a fall from a 30-foot high platform while working on the
premises of Lawson-Mardon, Inc. At the time of the accident, Lawson-Mardon was
insured under a policy of general liability insurance issued by the Zurich Insurance
Company. Knotts incurred significant medical and hospital expenses because of his
severe injuries for which he did not have available health insurance. Zurich refused to
assist Knotts with payment of any of his medical expenses and thereby prevented him
from obtaining necessary medical care . As a result of the denial of assistance, Knotts
proceeded with the filing of a lawsuit against the insured, Lawson-Mardon, Inc .,
approximately two months after the accident . The jury awarded damages totaling
$1,202,104 .29, which was reduced by 20% for comparative fault, resulting in a
judgment of $961,683 .44 for Lloyd Knotts and $20,000.00 for his wife, Jackie Knotts,
for her loss of consortium . The judgment was appealed to the Court of Appeals which
affirmed the jury verdict .
The Knottses then began the present litigation, alleging continued bad faith
conduct by Zurich after the filing of the lawsuit. The circuit judge granted summary
judgment in favor of Zurich, holding that the statute upon which the claim was based did
not apply to behavior that occurred after litigation commenced . The Court of Appeals
affirmed and this Court accepted discretionary review.
I . UCSPA
The Kentucky Unfair Claims Settlement Practices Act, KRS 304.12-230, is
almost a verbatim adoption of the 1971 version of the model act formulated by the
National Association of Insurance Commissioners entitled "An Act Relating to Unfair
Methods of Competition and Unfair and Deceptive Acts and Practices in the Business
of Insurance ." Davidson v. American Freightwa s~ , Inc . , 25 S .W.3d 94, 96 (Ky. 2000).
This model act has been adopted in one form or another in all 50 states and all
territories . Id . at 96-97 . The UCSPA is intended to protect the public from unfair trade
practices and fraud, and it should be liberally construed so as to effectuate its purpose.
State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S .W .2d 116, 118 (Ky. 1988).
The statute is remedial legislation and should be broadly interpreted so as to
accomplish its intended purpose, that is, to make certain that insurance companies deal
fairly with their insureds and third party claimants throughout the claim handling
process . There is nothing that is contained in the statute which terminates the
responsibility of an insurance company to act in good faith, even though a lawsuit has
been filed against its insured. The company still has an obligation to exercise good
faith in an attempt to complete a prompt, fair and equitable settlement of the claim in
which liability against its insured has become reasonably clear. KRS 304.12-230(6) .
It should be abundantly clear that this continuing responsibility of good faith
throughout the pendency of the claim is separate and distinct from the obligations
imposed on the insured and their counsel under the civil rules of procedure once
litigation begins. It should also be observed that the UCSPA is not intended to interfere
with the exercise of an attorney's zealous, independent, professional judgment in the
defense of a client . An attorney retained by an insurance company to defend an
insured is ethically required to independently and vigorously defend the interest of the
insured .
Counsel employed by the insurance company to defend its insureds cannot
compel the company to act in good faith once a lawsuit has been filed against the
insured. They are paid for their services by the insurance company, and their
involvement in the litigation is dependent on the selection process of the insurance
company. Counsel for the insurance company has no authority to control the conduct
of the company, which is not a party to the litigation . In this case, Zurich had distributed
a litigation manual outlining how counsel had to defend its insureds .
There has long been a policy in Kentucky that insurance companies should work
diligently to fairly settle claims so as to avoid filing of a lawsuit . However, if the
company is not subject to the Unfair Claims Settlement Practices Act, a company could
have an incentive to make litigation, rather than settlement, realizing that nothing they
did after the date of filing could constitute bad faith. This would violate the fiduciary
relationship that exists between an insurer and its insured . Cf. Curry v. Fireman's Fund
Ins. Co . , 784 S.W .2d 176 (Ky. 1989).
The alleged bad faith by Zurich in violation of the Act does not involve litigation
conduct of the parties or their counsel . The Knottses are not basing their bad faith
claims against Zurich on the litigation tactics or strategies used by the insured, Lawson
Mardon, or its attorneys in the matter in which they defended that company. Instead, it
is based solely on the manner in which Zurich failed to process, evaluate and extend a
fair and reasonable settlement offer based on information available to it regarding both
liability and damage issues throughout the entire course of its handling of the claim
against its insured .
An insurance company can be guilty of bad faith conduct in the manner in which
it continues to handle a claim against its insured even after a lawsuit has been filed
against the insured . The rules of civil procedure do not have any applicability to the
conduct of an insurance company in its handling of the claim and the insurance
company is not a party to the litigation . The Act and industry standards govern the
manner in which insurance companies handle claims against its insured, both prior to
and subsequent to the litigation . The practical effect of this decision would be to allow
an insurance company to insulate itself from any bad faith conduct merely because a
lawsuit has been filed.
II . Kentucky Case Law
Although this is an issue of first impression in Kentucky, decisions rendered by
federal courts in both the Eastern and Western Districts applying Kentucky law support
the contention that the insurance company has a duty of good faith which continues
past the filing of a bad faith complaint against the insurer. Cf. Graham v. Gallant Ins.
Group, 60 F .Supp.2d 632 (W .D .Ky. 1999) and Cobb King v. Liberty Mut. Ins . Co ., 54
Fed .Appx. 833 (6 th Cir. 2003). It should also be noted that Motorist Mutual Insurance
Co. v. Glass, 996 S .W .2d 437 (Ky. 1997), held that the same principles apply to thirdparty claims as to first party claims . Kentucky has refused to make any type of
distinction regarding the nature of proof that must be presented to establish a thirdparty bad faith claim as opposed to a first party claim. Any reliance on the case of
Torres v. American Employers Ins. Co . , 151 Fed .Appx. 402 (6th Cir. 2005), is
unpersuasive . A reading of the Torres opinion indicates that the court was relying on
the Court of Appeals in this case, even though that opinion was not a final decision .
III. Other Jurisdictions
There is general acceptance by many other jurisdictions that the duty of an
insurer to use good faith is
a continuing responsibility that does not end simply because
litigation has begun . White v. Western Tile Ins . Co., 710 P.2d 309 (Cal . 1985), is
considered
as the seminal
case establishing that insurance companies have a
continuing duty to a policyholder throughout litigation . In White, supra , the California
Supreme Court authorized the admission of evidence of unreasonably low settlement
offers made during trial to establish that the insurance company had acted in bad faith .
The Supreme Court of West Virginia has considered the question in Barefield v.
DPIC Companies, Inc. , 600 S.E .2d 256 (W.Va. 2004) and held that "the conduct of an
insurance company or other person in the business of insurance during the pendency of
a lawsuit may support a cause of action under West Virginia Trade Practices Act." Both
the West Virginia Act and the Kentucky Act are based on model legislation promulgated
by the National Association of Insurance Commissioners .
IV. "Claim"
The word "claim" is not specifically defined anywhere within the Act.
Consequently, the word must be construed according to its common usage. KRS
446 .080(4); Alliant Health System v. Ky. Unemployment Ins . Comm'n , 912 S .W.2d 452
(Ky.App. 1995). The word "claim" has many meanings, including "a demand for
something as due; an assertion of a right to something ." II Oxford English Dictionary 451
(1970) ; "a demand for something due or believed to be due." Merriam-Webster's
Collegiate Dictionary 210 (10th Ed., 2001); and, "a demand for compensation, benefits,
or payment (as . . . one made under an insurance policy upon the happening of the
contingency against which it is issued)." Webster's Third New International Dictionary
414 (1970). The common usage of "claim" also includes "cause of action ." Kyriss v.
Aetna Life & Casualty, 624 F.Supp . 1130 (D .Mont . 1986) .
The legislature's repeated use of the word "claim" in the Act indicates an intent to
impose duties upon those in the business of insurance to deal fairly with persons
asserting a right or demanding something that is believed to be rightfully due under an
insurance policy. Barefield , supra . A lawsuit or litigation is simply a means of asserting
a right or demanding something by using the judicial process. Barefield.
"Settlement" is commonly understood to mean the ending of a dispute by a final
decision or agreement . See Webster's II New Riverside University Dictionary 1068
(1988). The plain literal meaning of settlement in no way inhibits the Act from extending
the duty of an insurer to act in good faith and with fair dealing beyond the
commencement of litigation . It is obvious that a settlement can occur at any time before
or after litigation which would include the finality on appeal.
There is no language in the Act that limits the applicability to pre-complaint
behavior. If the legislature had intended that the statute should not apply to the conduct .
of an insurance company after suit had been filed, it could have easily provided definite
language to that effect. It did not. The courts are not entitled to add language to
existing statutes . The statute clearly does not apply just to claims adjusting. After all,
the statute prohibits "unfair claims settlement practices" not "unfair claims adjustment
practices ."
VI . Constitutional Concerns
The Court of Appeals concluded that the Separation of Powers Doctrine
announced in Sections 27 and 28 of the Kentucky Constitution would prohibit legislation
from regulating post-litigation conduct because Section 116 of the Constitution grants
this Court sole authority to regulate the conduct of attorneys . This holding demonstrates
a fundamental misconception of the majority rule, as well as the statute involved . The
majority of courts that have examined this issue have unanimously recognized that juries
cannot pass judgment on the conduct of attorneys and thus cannot be permitted to
censure an insurer for engaging in zealous advocacy. The allegations in this matter do
not focus on the conduct undertaken by the defendant insurer on the advice of counsel ;
rather they indicate that claims handlers disregarded the advice of counsel to the benefit
of the insurer and in contravention of the Act. It is the behavior of the agents and
employees of the insurance company that is the subject of the Act, not the conduct of
attorneys who are engaged in the litigation . The adoption of a rule relating to the postlitigation behavior of an insurance company does not violate the provisions on
separation of powers in the Kentucky Constitution .
The clear and unambiguous language of KRS 304.12-230, its remedial nature
and the legislative intent underlying the statute, all indicate that it is the duty of an
insurer to exercise good faith and fair dealing and that the duty continues and does not
end simply because litigation has begun. The Act was intended to protect the public
from unfair trade practices and fraud and because of the nature of settlement
negotiations the duty of good faith exists pre-litigation, during trial and post-litigation until
the matter is finally resolved .
The decision of the Court of Appeals should be reversed and this case remanded
to the circuit court with directions to vacate the summary judgment .
Scott, J . joins .
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