Until last week, Indiana courts were strict in their treatment of an insurance bad-faith lawsuit. Not only must the plaintiff show ill will by the insurer, he must show that the insurer denied coverage wrongfully. E.g., Foster v. State Farm Fire & Cas. Co., no. 1:10-cv-20 (N.D. Ind. Aug. 17, 2011). But in a puzzling decision recently handed down in Klepper v. ACE American Ins. Co., the Indiana Court of Appeals permitted a bad-faith claim to proceed despite having found that the policy did not indemnify the insured’s loss, despite the insurer having funded the insured’s defense, and despite a lack of any prior Indiana decision suggesting that a bad-faith claim could succeed when the insurer’s denial of coverage was correct.
Pernod Ricard USA, LLC’s distillery produced gin and emitted ethanol. The ethanol made mold grow on buildings neighboring the distillery. In 2005, Klepper, one of those moldy buildings’ owners, sued Pernod Ricard, which tendered the lawsuit to XL and ACE, its commercial general liability carriers. XL agreed to defend Pernod Ricard, while ACE refused, at least at first. Ultimately, ACE acceded to the request for a defense and, under a full reservation of rights, paid $167,000 towards it – 49% of Pernod Ricard’s defense expenses. But ACE was loathe to contribute all the money Pernod Ricard wanted to settle the lawsuit, so in 2009 Pernod Ricard and XL settled without ACE. They agreed to settle with Klepper for $5.2 million, for Pernod Ricard to pay $1.2 million and XL $1 million, and for Pernod Ricard to assign its rights so that Klepper could chase ACE for $3 million and bad faith. So far, that chase has proved fruitless for Klepper, as the trial court awarded judgment in ACE’s favor on Klepper’s claim for $3 million. But the trial court did not dispose of the bad-faith claim. Klepper and ACE appealed, and the Court of Appeals affirmed.
The Court of Appeals affirmed that Klepper could not collect the $3 million from ACE. ACE refused to contribute more than $250,000 to any settlement because, as the Court of Appeals acknowledged, ACE had valid reasons to doubt that it had significant exposure under its policy. These reasons showed ACE’s good faith in refusing to pitch in more money. Further, ACE defended Pernod Ricard. Thus ACE never breached the policy and was entitled to hold Pernod Ricard to the policy’s terms and conditions. They required ACE’s consent to Pernod Ricard’s settlement before ACE would indemnify it. Pernod Ricard breached the policy by settling without ACE’s consent, and therefore the settlement fell outside the terms and conditions of ACE’s policy.
The Court of Appeals rightly rejected the dissenting judge’s contention that Pernod Ricard should not have needed ACE’s consent because an insurer’s reservation of its rights put an insured in the “perilous position” of facing “the very real possibility of economic ruin.” Both ACE and Pernod Ricard proceeded with uncertainty as to whether and to what extent Klepper’s lawsuit was covered. Pernod Ricard had the options of either paying Klepper an acceptable price to eliminate Pernod Ricard’s risk of a ruinous loss; or letting Klepper’s lawsuit run its course and then finding out from a court whether ACE’s policy covered any judgment Klepper might win. ACE could not force Pernod Ricard’s choice, and there is no sound reason why ACE should agree to indemnify any judgment in Klepper’s favor without first knowing the facts behind Pernod Ricard’s liability. If anyone knew those facts, it was Pernod Ricard and Klepper. All we know is that Pernod Ricard could have fought Klepper on ACE’s dime to the bitter end, but it did not. Pernod Ricard’s willingness to settle without ACE’s consent – and Klepper’s willingness to take its chances against ACE instead of win a judgment that detailed Pernod Ricard’s liability – we suspect are clues about the nature of Pernod Ricard’s liability and whether ACE’s policy would cover it. Pernod Ricard faced “economic ruin” only if it failed to buy insurance for the risk advanced by Klepper’s lawsuit.
Yet the Court of Appeals let Klepper carry on with his bad-faith lawsuit, which challenges how ACE handled Pernod Ricard’s claim. Citing caselaw that ruled that the manner an insurer handled a claim could justify a bad-faith lawsuit even though the insurer denied that claim in good faith, albeit incorrectly, the court deemed it premature to get rid of Klepper’s lawsuit at that stage. Without explaining how Klepper could state a bad-faith claim when ACE rejected Pernod Ricard’s settlement correctly, the court let the claim proceed in tort.
No tort claim can survive summary disposition if the plaintiff cannot show damages, and because the court does not specify Klepper’s allegations, we are left guessing as to exactly what damages Pernod Ricard, who assigned the bad-faith claim to Klepper, could possibly have. At all times, Pernod Ricard was defended by XL, so it did not incur any defense costs ACE should have paid. The settlement agreement was not covered under ACE’s policy, so ACE is not at fault for the $1.2 million Pernod Ricard paid Klepper. A claim for emotional distress would be far-fetched, as Pernod Ricard is a company. And, of course, “[w]ithout compensatory damages, there can be no punitive damages.” Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993).
The mere existence of Klepper’s bad-faith claim is a departure from prior Indiana law, and there seems to be little point in innovating a new claim for Klepper’s sake if it is doomed. The opinion of the Court of Appeals in Klepper v. ACE American Ins. Co., no. 15A05-1212-CC-645 (Ind. Ct. App. Dec. 5, 2013) is here.