The Supreme Court of Kentucky held that an insurer’s defense and settlement of a claim against its insured does not preclude the insured’s bad faith claim and affirmed an award against an insurer for causing emotional distress to its policyholder, finding as a matter of first impression that the insured was not required to present expert medical proof to support the emotional distress claim. Indiana Ins. Co. v. Demetre, 2017 WL 3635500 (Ky. Aug. 24, 2017).

A policyholder sued its insurer for breach of contract, violation of the Kentucky Unfair Claims Settlement Practices Act and violation of the Kentucky Consumer Protection Act in connection with the insurer’s handling of a claim related to property damage allegedly caused by pollution from the insured’s property. The insurer defended and ultimately settled the claim, but a jury found that the insurer’s handling of the claim over a three-year period was in bad faith, and awarded emotional distress and punitive damages. 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. No medical testimony was offered to support the emotional distress claim. The jury found that the insurer’s claim practices violated statutory law and breached its duties of good faith and fair dealing and awarded damages for emotional distress and punitive damages. The Court of Appeals affirmed, and the insurer appealed.

The Kentucky Supreme Court affirmed, finding that the insurer’s decision to defend the insured under a reservation of rights and ultimately to settle on his behalf did not preclude the insured’s bad faith claim where there was evidence of a prolonged continuation of a meritless coverage dispute and the insurer pursued a declaratory judgment action for a full year after learning that the claims against the insured were likely not legitimate. Further, as a matter of first impression, the Supreme Court ruled the insured was not required to present expert medical or scientific proof to support the claim for emotional distress where it found the insured’s testimony that he suffered from daily stress wondering what would happen to his family due to a potentially uninsured exposure was clear and satisfactory proof to support the jury award.