Federal Kemper Ins. Co. v. Hornback, 85-SC-581-DG
| Decision Date | 12 June 1986 |
| Docket Number | No. 85-SC-581-DG,85-SC-581-DG |
| Citation | 711 S.W.2d 844 |
| Court | United States State Supreme Court — District of Kentucky |
| Parties | FEDERAL KEMPER INSURANCE COMPANY, Movant, v. James HORNBACK and Mabel Hornback, Respondents. |
Armer H. Mahan, Jr., Louisville, for movant.
David L. Van Zant, Huddleston & Van Zant, Elizabethtown, for respondents.
The trial court entered judgment against Federal Kemper Insurance Company, imposing punitive damages for bad faith refusal to settle a fire loss with its policyholder. The Court of Appeals affirmed. We granted discretionary review and reverse.
The Hornbacks' fire insurance policy with Federal Kemper was raised from $6,000 to $30,000. Thirty-five days later, the house burned. The evidence clearly showed that the fire was set. As stated by the Court of Appeals, there was little evidence that the Hornbacks set the fire. However, there was clearly a jury issue presented which was resolved by the jury in favor of the Hornbacks. There was a verdict on the terms of the policy and a verdict for punitive damages.
Federal Kemper appealed only the judgment for punitive damages.
We reverse the decision of the Court of Appeals but, in so doing, do not fault either the trial court or the Court of Appeals panel.
The case was tried and affirmed on appeal according to Feathers v. State Farm Fire & Casualty Company, Ky.App., 667 S.W.2d 693 (1983).
Feathers involved the fire loss of a house and contents. The insurance company refused to pay on the proof of loss on the ground that it contained misrepresentations. The court opined that the homeowner's fire policy is unique and that if the allegations of the complaint are true, the breach of contract is so great as to constitute tortious conduct. Feathers then held:
... Nevertheless, once the policyholder has substantially complied with the terms and conditions required by the policy, and there is no substantial or credible evidence that the policyholder directly or indirectly set fire to his property for personal gain, then at that point, the insurance company becomes akin to a fiduciary as to the sums that may be owed under the policy. So the proceeds of the policy may not be withheld unless there is a substantial breach of the contract by the policyholder. Whether or not State Farm was justified in withholding and denying the payment of the losses will be resolved by trial. We simply say that if State Farm was not justified in its actions, then its conduct was tortious against the policyholder for which consequential and punitive damages may be presented to the fact finder.
Feathers arrived at this conclusion by recognizing the traditional principle of law in this Commonwealth that one may not recover consequential or punitive damages for breach of contract, citing a line of cases beginning with Cumberland Telephone and Telegraph Co. v. Cartwright Creek Telephone Company, 108 S.W. 875 (1908), and ending with General Accident Fire & Life Assurance Corp. v. Judd, Ky., 400 S.W.2d 685 (1966).
Feathers then went on to state that for the purpose of establishing a definite principle of law, these and similar authorities are flawed for the reason that they contain such modifiers as ordinarily. Cumberland stated unequivocally that punitive damages are not recoverable for a mere breach of contract. Judd gratuitously added ordinarily when it relied upon and cited Cumberland. We do not regard Judd as in any way diminishing the rule denying punitive damages in contract cases.
Feathers established a new tort action in this Commonwealth by reasoning that the insurance company became a fiduciary by breach of a covenant to act in good faith.
This new tort is apparently based on Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973).
In that opinion, it is stated that California recognizes a cause of action in tort against the insurance company for breach of an implied covenant of good faith and fair dealing. This case drew an analogy of the fiduciary relationship created in third-party cases involving automobile accidents, whether there was good faith on the part of the insurer to settle within policy limits so as to protect the insured against a judgment in excess of the policy limits. The opinion allows recovery for mental distress, not punitive damages. We do not draw such an analogy in this Commonwealth so as to convert an action for breach of contract into a tort action.
The only fiduciary relationship we recognize attaching to insurance policies is the excess-of-the-policy-limits cases where good faith is required on the part of the insurance company. Manchester Ins. & Indem. Co. v. Grundy, Ky., 531 S.W.2d 493 (1975), and similar cases cited therein, recognize these principles. This principle of law is contract and not tort and has no application to insurance contracts generally. Above all, there is no suggestion that punitive damages would follow breach.
The theory expressed in Grundy is that of protection of the policyholder against a larger judgment than the policy limits. There is no protection of the policyholder involved in Feathers. The insurance company has an obligation to pay money according to the terms of the contract. Failure or refusal to pay will give rise to a suit for breach of contract.
We are of the opinion that Feathers is not, and should not be, the rule in this Commonwealth and, to the extent that we are able, overrule it. Sanctions for a frivolous defense, as provided for by our rules, are deemed sufficient to deter insurance companies from refusing to pay according to the terms of the contract without cause.
The decision of the Court of Appeals is reversed with directions that the claim for punitive damages be dismissed.
LEIBSON, J., dissents and files a separate dissenting opinion in which STEPHENS, C.J., and WINTERSHEIMER, J., join.
I concur with the majority opinion. We should not extend the scope of punitive damages to allow their recovery for breach of contract.
The purpose of compensatory damages is to make the claimant whole and to allow him to recover all of the actual damage he has sustained. In cases where punitive damages are allowed, they constitute a windfall to an already fully compensated claimant.
Punitive damages represent a sum over and above the amount a claimant is entitled to receive as compensation for a loss suffered by him. In theory, they are allowed as a punishment of a defendant for outrageous conduct or to deter such conduct in the future.
While the theory of punishing the grossest and most outrageous conduct so as to deter such conduct in the future has some intrinsic merit, the allowance of punitive damages has at least three severe faults. First, there is no adequate standard for the assessment of such damages; secondly, since punitive damages are allowed as a punishment to deter future conduct, they are in the nature of a fine and should redound to the benefit of the state treasury rather than constitute a windfall recovery to a claimant who has already recovered all of his actual loss by means of compensatory damages; and thirdly, and perhaps most important of all, punitive damages in most cases have little deterrent effect because Kentucky law allows insurance coverage to protect against punitive damages. Continental Insurance Companies v. Hancock, Ky., 507 S.W.2d 146 (1974). Thus, most often, it is not the wrongdoer who is punished; instead, the punishment is spread among a myriad of policyholders who must, in the long run, bear the cost.
In the past, Kentucky has allowed the recovery of punitive damages for tortious conduct, but not for breach of contract. If any change is called for in the law related to punitive damages, it should reflect some limitation rather than an enlargement of the scope of recovery.
Respectfully, I dissent.
With admirable candor, able counsel for the movant/insurer admitted at oral argument that in cases of recent vintage "without exception" every jurisdiction called upon to decide this question has recognized the principle that, given proper circumstances, an insured may pursue a tort claim against his own insurer for bad faith failure to pay first party benefits due and owing under the policy. The question before the court is not whether such a tort claim exists, but rather when will the facts justify an award of punitive damages and, more particularly, does the evidence in the present case justify such an award? The Majority Opinion goes beyond the questions presented.
Movant's brief cites us to several cases bearing upon the resolution of an appropriate legal standard for deciding when punitive damages may be recovered in cases such as the present one. In McLaughlin v. Alabama Farm Bureau Mut. Cas., 437 So.2d 86, 90 (Ala.1983), the court stated: "In short, plaintiff must go beyond a mere showing of nonpayment and prove a bad faith nonpayment, a nonpayment without any reasonable ground for dispute."
Movant cites Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978), in which the Wisconsin court stated that an insured must prove three elements in order to prevail against an insurance company for alleged refusal in bad faith to pay the insured's claim: (1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Subsequently, in Davis v. Allstate Ins. Co., 101 Wis.2d 1, 303 N.W.2d 596 (1981), the Wisconsin court...
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