On May 6, 2015, the Sixth Circuit Court of Appeals predicted in State Auto Property & Casualty Ins. Co. v. Hargis (applying Kentucky law) that the Supreme Court of Kentucky would not recognize a common law tort claim for reverse bad faith.

The underlying case stemmed from a 2007 house fire, in which an insured made an $866,000 claim under a standard homeowner’s policy.  State Auto initially paid in excess of $425,000, but later brought suit against the insured to declare the policy void due to suspicion that the fire was intentional.  The insured counterclaimed, alleging common law and statutory bad faith.  Subsequent investigation resulted in the insured’s admission that she had committed arson.  The insured was indicted, sentenced to prison, and ordered to pay restitution, including amounts for investigatory costs and attorney fees.  State Auto was granted summary judgment on the insured’s bad faith claim.  State Auto filed an amended complaint, seeking relief for statutory insurance fraud and common law reverse bad faith.  The insured only contested the claim for reverse bad faith.

The Sixth Circuit acknowledged that this was an issue of first impression in Kentucky, but reasoned that certification to the Supreme Court of Kentucky was not necessary because “it was clear” that the Kentucky courts would not recognize a claim for reverse bad faith.  The Court based its rejection on four (4) grounds.  

1. The Court recognized that the covenant of good faith is “an obligation owed by both parties.” However, a special relationship between the parties is required to support an independent tort claim.  When an insurer brings a bad faith claim against its insured,  the insurer is not in a position of unequal bargaining power or vulnerability.  Thus, the  special relationship necessary to maintain an independent tort does not exist.  “[I]nsureds are in need of protection that insurers are not.”

2. The specific elements of proof in a standard bad faith claim can’t be met because the insured is under no obligation to pay.

3. The Court looked to other jurisdictions and noted that no other states have recognized a claim for reverse bad faith.

4. In examining public policy, State Auto argued that it was “unjust” for insurers to have no reciprocal cause of action for willful and malicious claims made by insureds. The Court explained that the insured was federally indicted and ordered to pay restitution of the claim proceeds and all associated costs.

In sum, the Court held, “we predict that the Kentucky Supreme Court would reject State Auto’s invitation to adopt a common law tort claim for reverse bad faith by an insured.”