In Joseph Shaheen v. Progressive Casualty Ins. Co., the 6th Circuit U.S. Court of Appeals determined that the insurer’s conduct did not satisfy the threshold standard for bad faith claims under Kentucky law.
In 2005, the insured, while intoxicated, struck and killed a pedestrian in a “hit and run.” After his arrest, the insured claimed he was not driving the vehicle on the night in question. Plaintiff pursued a civil action against the insured, the insured’s fraternity, the insured’s fraternity brothers and the bar where the insured had been drinking before the drunk-driving hit and run. After the insured was convicted in 2007 of driving under the influence and murder, the insurer offered its policy limit of $250,000 to the plaintiff in exchange for a full release of all claims against the insured. Plaintiff’s counsel rejected the insurer’s settlement offer and demanded an “unconditional” payment of the policy limit.
Ultimately, after the plaintiff’s claims against the other defendants were resolved, the plaintiff proposed a settlement package demanding the insurer’s payment of the $250,000 policy limit and a $100,000 payment from the insured in exchange for a covenant not to execute against the insured. The insurer and insured accepted the plaintiff’s settlement package. However, the plaintiff still pursued its third-party statutory bad faith claim against the insurer on the grounds that the insurer’s failure to timely settle plaintiff’s claims and refusal to unconditionally pay plaintiff the policy limit earlier, was a violation of the Kentucky Unfair Claims Settlement Practices Act (KUCSPA), Ky. Rev. Stat. §304.12-230.
The KUCSPA recognizes third-party statutory bad faith claims against insurers and imposes a duty of good faith and fair dealing, requires that a good faith attempt be made to effectuate a prompt, fair and equitable settlement, and specifically prohibits insurers from engaging in any one of the 14 identified unfair practices.
The insurer responded that it had a duty to protect its insured, not simply pay the policy limit, and that it had a duty to obtain a release of the claims against the insured and protect the insured against an excess judgment. Further, the insurer argued that the threshold standard for bad faith could not be met.
The 6th Circuit evaluated the insurer’s competing duties and found that unconditionally paying the full policy limit would have settled nothing since the insured would have remained a defendant in the pending civil action and vulnerable to an excess judgment. The court also determined that the insurer’s failure to unconditionally pay the policy limit (or, “propose alternative conditions of payment”) and “delay” was not “bad faith” because it was not outrageous, recklessly indifferent to plaintiff’s rights, or motivated by any malicious intent.
Absent evidence to support a reasonable inference that the insurer’s conduct was so egregious to entitle plaintiff to punitive damages, even if there was sufficient evidence to show violation of certain provisions of the KUCSPA, the court held that the insurer’s conduct did not satisfy the threshold standard for bad faith claims under Kentucky law.
This case highlights issues that can arise in dealing with policy limit demands, the insured’s potential excess exposure and complicating factors and demands by the claimant. While the court found there were justifiable reasons for the insurer’s refusal to tender the policy limit – namely the need to get a release of the insured – the intricacies in these situations require good claim handling practices and sometimes advice of counsel.