The U.S. Sixth Circuit Court of Appeals has held that, under Kentucky common law, an insurer may not maintain a reverse bad faith claim against an insured found to have submitted a fraudulent claim. State Auto Property and Cas. Ins. Co. v. Hargis, 2015 WL 2081922 (6th Cir. May 6, 2015).
An homeowner submitted a claim for fire damage to her home. The insurer paid a substantial portion of the claim before concluding that the fire had been intentionally set and filed suit to have the policy declared void. The insured counterclaimed for breach of contract and bad faith, but ultimately admitted that she intentionally set the fire. The insurer filed an amended complaint, asserting claims for insurance fraud and a common law tort claim for reverse bad faith. The trial court declared the policy void and awarded damages, but rejected the claim for reverse bad faith.
The insurer appealed the dismissal of its reverse bad faith claim, arguing that the inherent duty of good faith must flow to both parties to the contract. The appeals court acknowledged that the covenant of good faith is an obligation owed by both parties, but held that a tort claim for breach of that duty is only permitted where there is a special relationship between the parties. Surveying Kentucky law, it noted that the purpose of the Kentucky Unfair Claims Settlement Practices Act is to protect policyholders and indicates a willingness of courts to conclude that the public is in need of protection from insurers. It then considered decisions from courts in Ohio, Iowa and California which all declined to recognize the tort of reverse bad faith. The court concluded by stating that the penalties already imposed upon the policyholder (including full restitution as part of a sentence following a guilty plea in a separate criminal proceeding) were severe and that recognizing a new species of tort claim was unlikely to have additional deterrence. The district court’s judgment was affirmed.