When you think of insurance bad faith you generally think of an insurance company being sued by their insured. Recently, reverse bad faith cases have emerged, where instead of the insurance company having acted in “bad faith” it is in the insurer who has acted in “bad faith.” Insurers are now bringing lawsuits against their insureds for such actions. In these suits, insurers would potentially be permitted to collect compensatory and evenpunitive damages for the claimants bad faith conduct.
Kentucky courts have not determined whether or not they would recognize a cause of action for reverse bad faith however, the Sixth Circuit Court of Appeals, in their May 6, 2015 decision in State Auto Property & Casualty Ins. Co. v. Hargis predicted that the Supreme Court of Kentucky would not recognize a common law tort claim for reverse bad faith. This prediction was drawn from a case in 2007 in which a claimant falsified an insurance claim resulting in the insurer paying an excess of $425,000 for damages to an intentionally set house fire. The insured was indicted, sentenced to prison, and ordered to pay restitution as well as investigatory costs and attorney fees, as the insurer prevailed in court.
The Sixth Circuit presents four (4) grounds for why it predicts the Kentucky Supreme Court will reject the reverse bad faith claim:
1) Insureds are in need of protection that insurers are not. A tort claim of bad faith is supported by a covenant of good faith shared between the parties. When an insurer brings a bad faith claim against its insured, the insurer is not in a position of unequal bargaining power or vulnerability. This does not allow for the relationship necessary for an independent tort claim to prevail.
2) The specific elements of proof in a standard bad faith claim can’t be met because the insured is under no obligation to pay.
3) The Court looked to other jurisdictions and noted that no other states have recognized a claim for reverse bad faith.
4) In examining public policy, the insurer argued that it was “unjust” for insurers to have no reciprocal cause of action for willful and malicious claims made by insureds. The Court explained that the insured was criminally charged and ordered to pay restitution of the claim proceeds and all associated costs therefore, there were consequences to the insureds actions.
The concept of reverse bad faith is one that is still being figured out by legislatures. It will be interesting to see if courts decide to permit insurance companies to file claims of bad faith against their insureds. The Poppe Law Firm has been successful in handling bad faith cases brought by insureds against insurance companies. If you have been affected by any of these issues please contact The Poppe Law Firm at 502-895-3400.