The Sixth Circuit, applying Kentucky law, is the latest jurisdiction to reject an insurance company’s attempt to bring a lawsuit against a policyholder for “reverse” bad faith. Generally, the tort of bad faith arises from an insurer’s action or inaction with respect to servicing the policy of insurance it sold to the insured. Bad faith normally arises from the insurer’s claims handling or failure to pay for a covered claim. Recently, insurers have sought to bring a tort claim for bad faith against policyholders for various activities, including misrepresentation of the risk being insured and failure to cooperate in the investigation of a claim. Numerous courts have resoundingly rejected the insurers’ attempts and have refused to recognize a claim of “reverse” bad faith.
Recently, the Sixth Circuit joined these courts. In State Auto Property and Casualty Ins. Co. v. Hargis, the insured, Lori Hargis, purchased a homeowner's policy from State Auto. In mid-winter, the house burned to the ground, and Hargis filed a claim for approximately $866,000. The Kentucky State Police determined that the fire was intentionally set, and Hargis later admitted that the claim with State Auto was a fraudulent claim. Prior to Hargis's admission, State Auto paid off the mortgage on the home of $386,000. State Auto then filed suit to have the policy declared void, and to obtain damages for insurance fraud and reverse bad faith. The Western District of Kentucky granted summary judgment to State Auto on the policy being void and that State Auto was entitled to damages in the amount that it last loss. However, the court rejected State Auto's claim for reverse bad faith. State Auto appealed the decision and asked the Sixth Circuit to certify the question to Kentucky's Supreme Court.
In affirming the district court's ruling, the Sixth Circuit noted that no jurisdiction has recognized a common law claim for reverse bad faith. The court analyzed the relationship between an insurer and insured and determined that there was not unequal bargaining power or any distinct elements giving rise to an independent tort claim. The court denied the motion for certification and upheld the district court's rulings. Thus, if insureds are ever faced with defending a claim for reverse bad faith, it is highly recommended that policyholders seek advice from experienced coverage counsel who can guide them through such a situation.