Knotts v. Zurich Ins. Co., No. 2004-SC-0400-DG.

• Decision Date: 18 May 2006
• Docket Number: No. 2004-SC-0400-DG.
• Citation: 197 S.W.3d 512
• Parties: Lloyd KNOTTS; and Jackie Knotts, Appellants, v. ZURICH INSURANCE COMPANY; Zurich American Companies; and Zurich American Insurance Company of Illinois, Appellees.
• Court: United States State Supreme Court — District of Kentucky

197 S.W.3d 512

Lloyd KNOTTS; and Jackie Knotts, Appellants, v. ZURICH INSURANCE COMPANY; Zurich American Companies; and Zurich American Insurance Company of Illinois, Appellees.

No. 2004-SC-0400-DG.

Supreme Court of Kentucky.

May 18, 2006.

Rehearing Denied August 24, 2006.

Larry B. Franklin, Franklin & Hance, Lee E. Sitlinger, Sitlinger, McGlincy, Steiner, Theiler & Karem, Louisville, Counsel for Appellants.

James Douglas Harris, Jr., Wyatt, Tarrant & Combs, Bowling Green, Robert E. Stopher, Boehl, Stopher & Graves, Louisville, Counsel for Appellees.

Douglas Hoots, Tyler Griffin Smith, Landrum & Shouse, Lexington, Counsel for Amicus Curiae, the Insurance Institute of Kentucky, State Auto Insurance Companies, State Farm Insurance Companies.

Carl D. Frederick, Paul Joseph Hershberg, Seiller & Handmaker, Louisville, Counsel for Amicus Curiae, the Kentucky Academy of Trial Attorneys.

Eugene R. Anderson, Anderson, Kill & Olick, New York, NY, Amy Bach, Mill Valley, CA, M. Austin Mehr, Timothy E. Geertz, Austin Mehr Law Offices, Lexington, Counsel for Amicus Curiae, United Policyholders.

ROACH, Justice.

I. Introduction

Appellant, Lloyd Knotts, was seriously injured in a construction accident while performing construction work under a contract for a company. He initiated a claim with the company's insurer and later filed a personal injury action against the company. He subsequently filed a bad-faith suit against the company's insurer for violations of Kentucky's Unfair Claims Settlement Practices Act (UCSPA). The suit included allegations of violations that occurred after the filing of his personal injury action. The lower courts rejected Knotts's bad faith claim on grounds that the UCSPA is inapplicable to an insurance company's conduct that occurs after the commencement of an underlying tort action. Because we hold that the UCSPA continues to apply during litigation, we reverse.

II. Background

In November 1992, Lloyd Knotts, a self-employed construction contractor, contracted with Lawson Mardon Flexible, Inc.¹ to build an "aging room" at the company's warehouse in Shelby County. On November 12, 1992, Knotts was working with an electric drill atop a thirty-foot high platform. The drill drew power through an extension cord that was tethered to the platform and ran across the warehouse floor to an electrical outlet. At the same time, Brian Lovings, a temporary employee of Lawson Mardon, was operating a forklift in the vicinity of the platform. As Lovings drove past the platform, the extension cord caught on the fork of the forklift, causing the platform to topple and Knotts to fall. Knotts suffered serious, permanent injuries and incurred significant medical expenses as a result. At the time of the accident, Lawson Mardon had a policy of general liability insurance with Zurich American Insurance Group.²

Knotts employed an attorney, Larry Franklin, who advised Lawson Mardon that he would be representing Lloyd Knotts and his wife. In his initial letter, dated November 30, 1992, Franklin asked Lawson Mardon to cover Knotts's medical expenses, future therapy, and full payment for the job he was performing when injured. The letter also stated: "After Mr. Knotts reaches maximum medical improvement, we will negotiate conclusion of this matter. If this proposal is not satisfactory to you, please let us know so we can proceed with litigation."

Lawson Mardon referred the matter to its insurer, Zurich, which began the claims adjustment process. On December 10, 1992, Zurich wrote Franklin a letter acknowledging his representation of Knotts. The letter also stated, in pertinent part:

We are in the initial stage of our investigation of this accident. Therefore, . . . we are not in a position to discuss liability. However, we must advise you we do not find this to be a workers compensation exposure, as outlined by the Kentucky Workers Compensation Act. Thus, as we are not Mr. Knott's [sic] workers compensation carriers, we cannot make payment of his medical expenses as you requested in your[ ] [letter] of November 30.

Naturally, once we have completed our investigations, we will be in further contact with you.

On December 18, 1992, Franklin wrote a letter to Knotts that read simply: "I recommend beginning suit right away. It looks like they are going to stall us." On January 14, 1993, Knotts filed suit in Shelby Circuit Court. At trial, the jury rendered a verdict in favor of Knotts and awarded him damages of $1,202,104.29, reduced by 20% after apportionment of fault for Knotts's own negligence. The Court of Appeals affirmed.

Knotts subsequently pursued a bad faith claim against Zurich. Specifically, Knotts claimed that Zurich had violated Kentucky's UCSPA, KRS 304.12-230, in the course of litigating the underlying tort case and the resulting appeal. The trial court granted a summary judgment in favor of Zurich, holding that KRS 304.12-230 applied only to an insurer's conduct before the commencement of litigation. The Court of Appeals affirmed, and we granted discretionary review.

III. Analysis

Zurich urges us to affirm the trial court and the Court of Appeals, both of which held that the duty of good faith and fair dealing imposed on an insurer by KRS 304.12-230 ends at the commencement of a tort action for which a claim under the insurance policy has been made. While such an approach has some instinctive appeal, especially given that the adversarial nature of litigation undoubtedly makes it difficult for an insurer to fulfill such a demanding duty to what amounts to an opposing party, we ultimately find that the statute simply cannot be read in such a limited manner.

KRS 304.12-230 imposes what is generally known as the duty of good faith and fair dealing owed by an insurer to an insured or to another person bringing a claim under an insurance policy. However, the statute does not lay out an amorphous, non-specific duty. Instead, it proscribes a list of particular acts and practices. The statute specifically provides the following:

It is an unfair claims settlement practice for any person to commit or perform any of the following acts or omissions:

(1) Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

(4) Refusing to pay claims without conducting a reasonable investigation based upon all available information;

(5) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

(6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;

(7) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;

(8) Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;

(9) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of the insured;

(10) Making claims payments to insureds or beneficiaries not accompanied by statement setting forth the coverage under which the payments are being made;

(11) Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;

(12) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;

(13) Failing to promptly settle claims, where liability has become reasonably clear, under one (1) portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;

(14) Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement; or

(15) Failing to comply with the decision of an independent review entity to provide coverage for a covered person as a result of an external review in accordance with KRS 304.17A-621, 304.17A-623, and 304.17A-625.

KRS 304.12-230.

Zurich argues that the use of the word "claim" in the statute means a pre-litigation, adjustable claim made against the insurance policy, thus the statute does not apply to any acts or omissions by the insurer after litigation commences. However, Zurich's argument fails from too narrow a reading of the word "claim." Like many words, "claim" is subject to multiple, subtly different definitions. See, e.g., Black's Law Dictionary 264 (8th ed.2004) (defining "claim" as: "1. The aggregate of operative facts giving rise to a right enforceable by a court plaintiff's short, plain statement about the crash established the claim>.—Also termed claim for relief. 2. The assertion of an existing right; any right to payment or to an equitable remedy, even if contingent or provisional . 3. A demand for money, property, or a legal remedy to which one asserts a right; esp., the part of a complaint in a civil action specifying what relief the plaintiff asks for .... 4. An interest or remedy recognized at law; the means by which a person can obtain a privilege, possession, or enjoyment of a right or thing; CAUSE OF ACTION (1) ."). But at its most basic,...