The Court of Appeals of Kentucky affirmed an award of almost $3.5 million against an insurer for causing emotional distress to its policyholder in its handling of a liability claim. The Indiana Insurance Company v. Demetre, 2015 WL 393041 (Ky. App. Ct. Jan. 30, 2015).

An insured property owner received a demand from neighboring landowners who alleged injuries as a result of gasoline fumes emanating from the insured’s property. Suit was filed against the property owner and the insurer, and the insurer defended under a reservation of rights. The insurer also filed a cross-claim for declaratory judgment against its insured, asserting that there was no coverage for the claims and moved for summary judgment on coverage relying on a known loss argument. That motion was denied, and the insurer abandoned its coverage defenses and settled the plaintiffs’ claims. The insured then filed a cross-claim against the insurer, alleging that the insurer’s actions violated both the Consumer Protection Act and Kentucky Unfair Claims Settlement Practices Act and breached the insurer’s duties of good faith and fair dealing. The insured presented testimony of his emotional distress about the litigation and possible bankruptcy and that he was forced to hire his own defense attorney. The jury found that the insurer’s claim practices violated statutory law and breached its duties of good faith and fair dealing. It awarded $925,000 for emotional distress and $2.5 million in punitive damages. The insurer appealed.

The appellate court affirmed. It rejected the insurer’s argument that, by defending the insured under a reservation of rights and ultimately settling the claim, it could not have acted in bad faith. The court “decline[d] to adopt a blanket rule shielding an insurer from bad faith” in any case in which it defends its insured and ultimately pays the claim. The appellate court cited evidence that the insurer failed to investigate in order to assert coverage defenses, asserted control over the attorney appointed to defend the insured and refused to provide a competent defense to claims with little merit. This all supported the jury’s finding of liability. The court also affirmed the damages award, citing the insured’s evidence of stress and anxiety caused by the insurer’s conduct and noting that the ratio of compensatory damages to punitive damages was not unreasonably disproportionate.