Since the Kentucky Supreme Court issued its opinion in Associated Ins. Serv., Inc. v. Garcia, 1 it has been abundantly clear that an insured tortfeasor may assign a claim against its insurance carrier to an injured third-party by means of a consent judgment and agreement to forbear execution in order to protect itself from liability. In fact, the Court in Garcia specifically endorsed the use of such assignments as a means to “provide a remedy to the injured party as well as the tortfeasor who has been negligently denied adequate insurance coverage.”2 In the unavoidable subsequent action against the insurance carrier, the injured third-party would merely have the burden of offering prima facie evidence that the amount of the fixed judgment was reasonable before making its arguments with regard to coverage.3 Practically speaking, the insured tortfeasor could clearly meet its prima facie burden by notifying its insurance carrier of its intent to resolve the claim with the injured party and giving the insurance carrier one more chance to resolve the claim and eliminate risk.

More recently, in Indiana Ins. Co. v. Demetre, 4 the Kentucky Supreme Court provided putative insureds and thirdparty claimants with perhaps a greater remedy against insurance carriers which may have improperly denied coverage. In Demetre, Indiana Insurance Company’s insured, Mr. James Demetre, was sued by a tenant for physical injuries which were allegedly the result of environmental factors arising from the condition of a piece of real property. There was no dispute that Mr. Demetre had informed Indiana Insurance’s agent of the condition of the property, but there was a significant question as to whether the underwriters at Indiana Insurance were informed of the risk or intended to underwrite that risk. In response to the suit, Indiana Insurance provided Demetre with a defense in conjunction with a reservation of rights. Four months after the initial suit was filed, Indiana Insurance filed a declaratory judgment action seeking a determination as to coverage. In response, Demetre filed a first-party bad faith case against Indiana Insurance alleging breach of contract, violation of Kentucky’s Consumer Protection Act and violation of Kentucky’s Unfair Claims Settlement Practices Act. After more than two years of litigation, Indiana Insurance elected to settle the third-party claims for $165,000, and the declaratory judgment action was dismissed. Presumably, Indiana Insurance had eliminated all risk and foreclosed any possibility of liability against Demetre. Demetre, however, was not satisfied. After spending more than two years of his life in litigation and spending nearly $400,000.00 of in his own money in legal fees, Demetre continued to pursue his bad faith case against Indiana Insurance. Upon hearing the evidence at trial, the jurors awarded Mr. Demetre $3,425,000 in damages ($925,000 in emotional distress damages and $2,500,000 in punitive damages) as a result of Indiana Insurance’s lack of a reasonable basis to delay a coverage determination; misrepresentation of facts or policy provisions; failing to respond in a reasonably prompt manner to Demetre’s claim; failing to settle the third-party’s claim in good faith; failing to provide a prompt, fair and equitable settlement after liability had become clear; engaging in false and deceptive practices prohibited by the Kentucky Consumer Protection Act and for its violation of the covenant of good faith and fair dealing implied in the subject policy.5 In other words, Indiana Insurance got hit for $3.45 million dollars because it failed to deny or accept the claim at the outset of litigation.

Does an insurer open itself up to a bad faith claim like Mr. Demetre’s by resolving a claim upon which it had previously denied coverage once it receives notice of the potential entry of a consent judgment? Does a putative insured have an obligation to inform its carrier of the assignment of a bad faith claim? Could a jury have returned the same verdict to an injured third-party who had accepted assignment of Demetre’s bad faith claim? For now, those questions remain unanswered in Kentucky, but one thing is clear. It is critically important for carriers with coverage questions in Kentucky to engage counsel to provide definitive coverage opinions at the outset of a claim.

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1 307 S.W.3d 58, 64 (Ky. 2010), as modifi ed (Feb. 3, 2010), as modifi ed (Mar. 19, 2010).

2 527 S.W.3d 12.

3 Id. at 68.

4 27 S.W.3d 12 (Ky. 2017).

5 Id. at 33.