Farmland Mut. Ins. Co. v. Johnson
| Decision Date | 26 October 2000 |
| Docket Number | No. 1998-SC-0938-DG.,1998-SC-0938-DG. |
| Citation | 36 S.W.3d 368 |
| Parties | FARMLAND MUTUAL INSURANCE COMPANY, Appellant, v. Lemuel JOHNSON, Virginia Johnson; and A.L. Johnson Distribution, Inc., Appellees. |
| Court | United States State Supreme Court — District of Kentucky |
Matthew J. Baker, Matthew P. Cook, Cole, Moore & Baker, Bowling Green, KY, for appellant.
Roy Lee Steers, Jr., Steers & Steers, Franklin, KY, for appellees.
This litigation arises out of a disputed fire insurance claim. The insured stipulated that the amount of the loss was fairly debatable, and the insurer contends that a claim against it for bad faith under the Kentucky Unfair Claims Settlement Practices Act ("KUCSPA") is thereby foreclosed. This and a multiplicity of other issues are raised in this appeal from a judgment upon a jury verdict awarding the plaintiffs punitive damages of $2 million for bad faith and violations and violations of the KUCSPA.
On April 22, 1992, a commercial building owned by Lemuel and Virginia Johnson, doing business as A.L. Johnson Distribution, was destroyed by fire. The building was insured by Farmland Mutual Insurance Company. The pertinent policy provisions of the insurance contract were:
I. PROPERTY INSURANCE
. . . .
C. LOSS SETTLEMENT CLAUSE
We will determine the value of covered property in the event of loss or damage at the actual cash value as of the time of the loss or damage. We will not pay more for loss or damage than the least of:
. . .
(b) The cost to repair or replace the lost or damaged property with similar property intended to perform the same function when replacement with identical property is impossible or unnecessary;
. . .
(d) The value of the damaged property.
VI. POLICY DEFINITIONS THE FOLLOWING DEFINITIONS ARE MADE A PART OF THIS POLICY
. . .
(emphasis added).
After the fire, Farmland retained Crawford and Company to adjust the claim. Crawford and Company assigned the case to its adjuster, Richard Shields. A dispute soon arose between the parties as to whether the premises should be repaired or completely re-built, and there was also a disagreement regarding the value of the loss. On behalf of Farmland, Shields took the position that the structure could be repaired and that the actual cash value of the property was the cost of repair less depreciation. He made only one offer, $168,993.18, to settle the claim. The Johnsons insisted that repairing the building with reasonable assurance of structural integrity would cost more than to rebuild it, and they also maintained that Shields' offer was too low.
After failing to reach an agreement with Farmland on the value of the property, the Johnsons filed a complaint in Simpson Circuit Court against Farmland, Crawford and Company, and Shields, alleging breach of the insurance contract and violations of the Kentucky Unfair Claims Settlement Practices Act. The Johnsons' basic theory of the case was that Shields had misrepresented a pertinent contract provision, resulting in a significantly decreased amount of recovery under the insurance contract, and that he had also conspired with Paul Davis Systems ("PDS"), a fire restoration contracting service, to create a repair estimate that Shields knew was too low.
The trial court ordered severance that the breach of contract and bad faith claims. In the breach of contract trial, which is not at issue here, the jury found that the cost of repairing the building exceeded the replacement cost and awarded the Johnsons $213,810 as the "actual cash value" of the premises. This amount represented what the jury believed to be the replacement cost, $251,541, minus depreciation. Thus, the "actual cash value" awarded was approximately $45,000 more than the only offer Shields had made to the Johnsons. Farmland appealed from that judgment, and the Johnsons took a cross-appeal. The Court of Appeals affirmed the judgment of the Simpson Circuit Court.
Thereafter, the bad faith claim was tried. The Johnsons alleged that Farmland committed four violations of the KUCSPA: (1) misrepresentation of pertinent policy provisions,1 (2) failure to conduct a reasonable investigation,2 (3) failure to attempt to bring about a fair and equitable settlement of the claim,3 and (4) compelling the insureds to initiate litigation by offering an amount substantially less than the amount ultimately recovered.4
The Johnsons moved for summary judgment on the first issue, i.e., whether Shields misrepresented the policy provisions. From the record it was undisputed that Shields claimed that "actual cash value" meant the cost of repair less depreciation. Yet in fact the contract expressly stated that "actual cash value" was the cost of replacement less depreciation. The trial court thus granted the Johnsons' motion for partial summary judgment.
At trial on the remaining issues, the following evidence was presented. Two days after the fire, Shields met Johnson at the fire site. Shortly after Shields arrival, an employee of PDS also arrived. Johnson told Shields that he did not intend to rebuild the building as it had been. Thus Shields knew that it would be a cash adjustment, and that the value of the claim would never be tested in the marketplace. A few days later, Larry Smith, a local building contractor, went to the fire site to prepare an estimate for Johnson. When Smith arrived at the fire site, a PDS employee arrived and said to Smith, Smith immediately went to Johnson to ask if the PDS employee's statement was true. At this time, Johnson began to suspect collusion between Shields and PDS.
About one month after the fire, Shields left a phone message for Johnson offering to settle the claim for $168,993.18. It was later learned that this offer was based on the cost to repair the damaged property, less a deduction for depreciation. Shields first testified that he had based this one and only offer on his own repair estimate, but on cross examination he admitted that he had based the offer on the PDS repair estimate even though he knew it was too low. Shields' repair estimate was $220,000, and the PDS repair estimate was $203,000. Moreover, Shields testified that he was familiar with a prototype of the Johnsons' policy, but that he had never obtained a copy of the policy at issue from Farmland.
Farmland had made its own internal appraisal of the building two months before the fire. Yet Shields never asked Farmland about the appraisal, and Linda Dombkowski, who managed the claim for Farmland, never told Shields that she had it. Johnson thought that the appraisal represented the fair value of the claim. Farmland objected to the introduction of the appraisal, and the amount of the appraisal was excluded from evidence. However, the fact that the appraisal existed, the fact that Shields never asked about any appraisal by Farmland, and the fact that Dombkowski never pointed out the company's own appraisal to Shields were put before the jury.
On June 3, 1992, the Johnsons met with Shields in Louisville. Mr. Johnson told Shields that he thought the cost of adequate repairs would exceed the cost to demolish and replace the building. Johnson insisted that the claim should be adjusted based on the replacement cost of the building less depreciation, under subparagraph (C)(1)(d), rather than repair cost, under subparagraph (C)(1)(b). Nevertheless, at the Louisville meeting Shields reiterated Farmland's first and only offer of $168,993.18. Mr. Johnson insisted that a structural engineer be retained.
Shields retained Bill Mitchell, a structural engineer. Johnson hired his own structural engineer. Shields never asked Mitchell or PDS to determine whether the cost to repair would exceed the cost to replace, less depreciation, nor did he attempt to do so himself. Mitchell rendered his report in July 1992. After Shields received Mitchell's report, he refused to provide a copy to Johnson unless and until Johnson was in a position to exchange engineering reports. After receiving a letter from the Johnsons' attorney, Shield's agreed to send a copy of Mitchell's report to Johnson. The opening paragraph of the report stated,
To limit cost, compensation to Structural Integrity, Inc. (SII) does not provide for removal of floor, ceiling, or wall coverings. The detailed examination of every structural member, even where visible, is also beyond the scope of SII's authorized work.... [T]he purpose of this inspection is to provide SH's opinion concerning the conditions observed based on a limited visual examination.
On the basis of Mitchell's inspection, Shields advised Johnson that the "previous offer ... still stands."
On August 3, 1992, Shields wrote Johnson as follows:
We would like to have a reply from you within a week so that we can bring the claim to a conclusion and repairs can begin. Additional damages that occur as a result of delay in beginning repairs or additional loss of income as a result are not covered under the policy.
Upon receipt of this letter, Johnson began demolishing the building in order to resume business, which occurred on September 18, 1992. On September 28, 1992, Shields restated Farmland's offer and requested a response from Johnson. On September 30, 1992, Shields was told that Johnson had not completed his own investigation and could neither accept nor reject Farmland's offer at that time.
On October 28, 1992, Johnson informed Shields in a letter that his consultants, a structural engineer and a building contractor, had confirmed his opinion that repair cost would exceed replacement cost, which the building contractor had estimated would be $304,444.5 Johnson also informed Shields that he was willing to compromise...
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