In North American Specialty Insurance Co. v. John Paul Pucek, et al., Docket No. 5:09-CV-49 (JMH) (E.D.KY Nov. 4, 2009), the owners of a thoroughbred horse purchased an equine mortality insurance policy. During the policy period, the horse sustained an injury that ultimately resulted in the horse being euthanized. The Owners submitted a claim for benefits under the policy, which was denied by the Insurer. As a result, the Owners commenced a lawsuit in the state court against the Insurer and its Agent (who also served as the managing underwriter of the policy), alleging breach of contract and bad faith, among other claims. The Insurer removed the action to federal court on the basis of diversity jurisdiction. Although the Agent was non-diverse from the Owners, the Insurer asserted that the Owners fraudulently joined the Agent solely to destroy diversity. Owners moved to remand.
Analyzing whether a non-diverse party is fraudulently joined requires an examination of whether the non-moving party has a colorable basis for the claims against the non-diverse party. Thus, the court examined whether the Owners asserted a viable claim against the Agent. Owners asserted common law and statutory bad faith claims against the Agent for unfair claims settlement practices. However, Kentucky law is unclear as to whether bad faith claims can be asserted against agents. The Kentucky Supreme Court previously held that “self-insured or uninsured persons and entities are not subject to the Unfair Claims Settlement Practices Act and the common law tort of bad faith, because both apply only to persons or entities engaged in the business of insurance.” Davidson v. Am. Freightways, Inc., 25 S.W.3d 94 (Ky. 2000) (emphasis added).
Davidson contained a discussion of Kentucky insurance regulations, noting their application to insurance companies and their agents. Dicta within the opinion suggested that bad faith claims could lie against agents of insurers. The District Court observed that since Davidson, no appellate court had decided the issue of whether claims of bad faith can lie against insurance agents, and trial courts come down on both sides of the debate. Concluding that Kentucky’s bad faith law was ambiguous, the District Court resolved that ambiguity in favor of the Owners, as the non-removing party, holding that they plead at least a plausible claim for bad faith against the Agent and, therefore, joinder was not fraudulent. The District Court granted the Owners’ motion to remand.