State Auto Prop. & Cas. Ins. Co. v. Hargis

• Decision Date: 06 May 2015
• Docket Number: No. 13–5020.,13–5020.
• Citation: 785 F.3d 189
• Parties: STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY, Plaintiff–Appellant, v. Lori HARGIS, Defendant–Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

785 F.3d 189

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY, Plaintiff–Appellant

v.Lori HARGIS, Defendant–Appellee.

No. 13–5020.

United States Court of Appeals, Sixth Circuit.

Argued: April 23, 2015.

Decided and Filed: May 6, 2015.

ARGUED:Tia J. Combs, Fowler Bell PLLC, Lexington, Kentucky, for Appellant. Michael Griffin, Vanderbilt Appellate Litigation Clinic, Nashville, Tennessee, for Appellee. ON BRIEF:

Tia J. Combs, Barry Miller, Fowler Bell PLLC, Lexington, Kentucky, for Appellant. Alistair E. Newbern, Vanderbilt Appellate Litigation Clinic, Nashville, Tennessee, Edmund Sauer, Bradley Arant Boult Cummings LLP, Nashville, Tennessee, for Appellee.

Before: GUY, MOORE, and McKEAGUE, Circuit Judges.

OPINION

RALPH B. GUY, JR., Circuit Judge.

This appeal presents two related issues: (1) whether it was error for the district court to dismiss the claim asserted by the insurance company against its insured for “reverse bad faith” because it has not been recognized in Kentucky (or any other jurisdiction); and (2) whether this court should certify the question of the viability of such a claim to the Kentucky Supreme Court. The insurance company in this case, State Auto Property and Casualty Insurance Company (“State Auto”), argues that the district court erred by summarily dismissing the claim without attempting to predict what the state court would do. Reviewing the legal issue de novo, however, State Auto has not offered a convincing basis to conclude that the Kentucky Supreme Court would adopt a common law cause of action in tort by an insurer against its insured for breach of the implied duty of good faith and fair dealing (or “reverse bad faith”). Although certification under the state court procedure is within this court's discretion, its use is disfavored when the party requesting certification does so only after an adverse judgment has been entered. For the reasons that follow, the motion for certification is denied and the district court's judgment is affirmed.

I.

Lori Hargis's home located in Henderson, Kentucky, was insured by State Auto under a standard homeowner's policy when it burned to the ground in the early morning hours of December 9, 2007. No one was home at the time of the fire, but investigations by the Kentucky State Police and State Auto determined that the fire was intentionally set. Hargis filed what she would only later admit was a fraudulent insurance claim for approximately $866,000. State Auto paid out in excess of $425,000—including a mortgage payoff of $386,720.34—before commencing this action in state court to declare the policy void. State Auto alleged that Hargis caused or conspired to cause the fire and falsely inflated the property loss resulting from the fire in breach of the “intentional loss” and “concealment or fraud” provisions of the policy.

Hargis removed the case to federal court in early 2009, and asserted counterclaims against State Auto for breach of contract and for bad faith under the common law of Kentucky, the Kentucky Consumer Protection Act (KCPA), and the Kentucky Unfair Claims Settlement Practices Act (KUCSPA). SeeKy. Stat. Ann. §§ 367.170, 304.12–230 and 446.070. Hargis moved for partial summary judgment in her favor with respect to the competing breach of contract claims, but State Auto defeated that motion by presenting circumstantial evidence sufficient to create a genuine issue of material fact for trial on its defenses of arson and misrepresentation. The evidence summarized in the district court's April 2010 Order included circumstantial evidence that Hargis had the opportunity and financial motive to commit the arson.

Trial would not be necessary in the end, however, because State Auto's investigation eventually led to Hargis's admission that she had solicited a friend to burn down her house to collect the insurance proceeds. Specifically, the investigation resulted in the return of a federal indictment in January 2011 that charged Hargis and Leslie Veshaun White with conspiracy to use fire to commit wire fraud in violation of 18 U.S.C. § 844(h) and (m). Hargis pleaded guilty in January 2012, and admitted during the change-of-plea hearing that she solicited White to burn down her house for $10,000 from the insurance proceeds; that she called White on the day of the fire to tell him that she and her children would be out of the house; and that she knowingly filed the fraudulent insurance claim to collect the proceeds of the homeowner's policy. Hargis was sentenced to a 60–month term of imprisonment and was ordered to pay restitution to State Auto totaling $672,497.80. The restitution ordered was the full amount sought by State Auto and consisted of: $386,720.34 for the mortgage payoff; $11,500 for debris removal; $27,994.43 for living expenses; and $195,116.70 for investigation costs and attorney fees incurred by State Auto (including $80,000 that was attributable to the defense of Hargis's bad faith claim).

As soon as the indictment was returned against Hargis, State Auto moved for partial summary judgment in its favor with respect to Hargis's bad faith claims. The district court granted that motion because “State Auto's refusal to pay Hargis's claim was at least reasonably debatable” and “[t]he indictment simply provides further support for the Court's belief.” State Auto also filed an amended complaint that added a statutory claim for damages for insurance fraud under Ky. Stat. Ann. § 304–47.020(3), and a common law tort claim for reverse bad faith under Kentucky law. A stay was entered pending resolution of the criminal case, after which State Auto moved for summary judgment in its favor on all of the remaining claims. Hargis only opposed summary judgment with respect to State Auto's claim for reverse bad faith.

In a one-page order entered December 12, 2012, the district court granted in part and denied in part State Auto's motion for summary judgment. Specifically, the district court: (1) declared that State Auto had no further obligations under the policy and that the policy was void ab initio; (2) awarded damages for Hargis's fraudulent insurance acts to the extent State Auto is not fully compensated by the order of restitution; and (3) rejected the claim for reverse bad faith for the reasons stated in Houchin v. Allstate Indemnity Ins. Co., No. 07–cv–0071, 2012 WL 2430474 (W.D.Ky. June 26, 2012). The district court's reasoning on the last claim, as incorporated by reference, was as follows:

Defendant argues that the Court should recognize a cause of action of reverse bad faith in the insurance context and award Defendant damages associated with Plaintiff's fraudulent claim. Defendants maintain that there is a strong public policy against allowing insureds to profit from their own wrongdoing while simultaneously subjecting insurers to inordinate increased costs for investigation, defense, and litigation. (Defendant's Motion for Summary Judgment at 15 (citing Cathryn M. Little, Fighting Fire with Fire: “Reverse Bad Faith” In First–Party Litigation Involving Arson and Insurance Fraud 19 Campbell L.Rev. 43, 44 (1996) ).

[Defendant cites] no Kentucky case that has adopted the claim by an insurer for reverse bad faith against an insured. In fact, the Court is not aware of any jurisdiction that has recognized a cause of action for reverse bad faith. See In re Tutu Water Wells Contamination Litig., 78 F.Supp.2d 436, 453 (D.Vi.1999) ; see also Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St.3d 621, 605 N.E.2d 936 (1992) ; First Bank of Turley v. Fidelity and Deposit[] Insurance Company of Maryland, 928 P.2d 298 (Okla.1996) ; Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995). This Court likewise declines to do so.

2012 WL 2430474, at *4. Finally, after filing this appeal, State Auto asked the district court to certify to the Kentucky Supreme Court the question of “[w]hether Kentucky courts permit an insurer to make a [tort] claim against its insured based on a breach of the duty of good faith inherent in every insurance contract.” The district court denied the request because there was no longer a pending claim that could be certified. State Auto has made the same motion to this court, which is opposed by Hargis.

II.

Kentucky's procedure for certification of a question of state law may be invoked by an order of this court when the question “may be determinative of the cause then pending before the originating court and as to which it appears to the party or the originating court that there is no controlling precedent in the decisions of the Supreme Court and the Court of Appeals of [Kentucky].” KY. R. CIV. P. 76.37. Whether to utilize a state court's certification procedure is a matter within the discretion of the court and is “most appropriate when the question is new and state law is unsettled.” Transamerica Ins. Co. v. Duro Bag Mfg. Co., 50 F.3d 370, 372 (6th Cir.1995) (citing Lehman Bros. v. Schein, 416 U.S. 386, 390–91, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974) ).

However, such certification is disfavored when it is sought only after the district court has entered an adverse judgment. This court has explained that the appropriate time for a party to seek certification of a state-law issue is before, not after, the district court has resolved the issue. See City of Columbus, Ohio v. Hotels.com, L.P., 693 F.3d 642, 654 (6th Cir.2012) (citing Thompson v. Paul, 547 F.3d 1055, 1065 (9th Cir.2008) ( “There is a presumption against certifying a question to a state supreme court after the federal district court has issued a decision.”); Enfield v. A.B. Chance Co., 228 F.3d 1245, 1255 (10th Cir.2000) (denying certification where party did not seek certification until adverse decision and stating “[t]hat fact alone persuades us that certification is inappropriate”); Perkins v. Clark Equip. Co., Melrose Div., 823 F.2d 207, 209–210 (8th Cir.1987) (discouraging requests for certification made by a party after summary judgment has been decided against that par...