Kentucky recognizes both a common law and a statutory claim for bad faith, even on a third-party basis. KRS 304.12-230 is titled “Unfair Claims Settlement Practices Act,” and is geared toward both first-party and third-party claims. The statute however must be read in conjunction with 802 KAR 12:095. Under that regulation much of the UCSPA is limited to first-party claims only. In State Farm v. Reeder, 763 S.W. 2d. 116 (1988), and in Simpson v. Travelers Ins. Co., 812 S.W. 2d. 510 (1991), the Kentucky courts held a single incident of an unfair claim practice is enough to trigger a violation of the statute and a series of violations need not be proven by the plaintiff.

In Wittmer v. Jones, 864 S.W. 2d. 885 (1993), the Kentucky Supreme Court discussed the elements of a bad faith claim and the court concluded they were substantially the same for both first-party and third-party bad faith claims. The following three elements were identified:

1. An obligation on the part of the insurer to pay the claim under the policy.

2. The insurer lacks a reasonable basis for denying the claim.

3. The insurer either knew there was no reasonable basis to deny the claim or acted with a reckless disregard as to whether such a basis existed.

Mere negligence is not enough to support a claim for bad faith. Bad faith requires a higher showing and is more than poor judgment. Instead it must include such items asa dishonest purpose, conscious wrongdoing, a breach of a known duty, ill will, or some element of fraud. Harrod v. Meridian Mut. Ins. Co., 389 S.W. 2d. 74 (1964). This over the years has been interpreted to require a finding of intentional wrongful conduct. Blue Cross and Blue Shield v. Whitaker, 687 S.W. 2d. 557 (1985).

Where a claim is “fairly debatable” the insurer is entitled to contest that aspect of the claim and, even if found to be incorrect, they are not found to have acted in bad faith so long as there was a genuine dispute as to the issue in question. Empire Fire and Marine Ins. Co. v. Simpsonville Wrecker Service, 880 S.W. 2d. 886 (1994). Sculimbrene v. Paul Revere Ins. Co., 925 F. Supp. 505 (Eastern Dist. of Kentucky 1996).

In Motorists Mut. Ins. Co. v. Glass, 996 S.W. 2d 437 (1999), the Supreme Court held:

The UCSPA does not require that a claim be evaluated, or that it be evaluated correctly . . . [i]t only requires that payment of a claim not be refused without conducting a reasonable investigation based on all available information , and that a good faith attempt be made to effectuate a prompt, fair and equitable settlement.

An insurer did not act in bad faith when it provided a defense for its insureds under a reservation of rights and simultaneously brought a declaratory judgment action to determine coverage. Guaranty Nat. Ins. Co. v. George, 953 S.W. 2d 946 (1997). The Court cautioned it did not hold an insurer is automatically absolved of bad faith liability by defending under a reservation of rights and filing a declaratory action, noting, “one can envision factual situations where an insurer could abuse its legal prerogative in requesting a court to determine coverage issues.”

In Davidson v. American Freightways, 25 S.W. 3d 94 (2000), the plaintiffs sued a self-insured trucking company following an accident. After prevailing at trial, plaintiffs filed a second suit against the trucking company, alleging it acted in bad faith and violated the UCSPA in not settling before trial. The Supreme Court ruled such claims cannot be brought against self-insured or uninsured entities; they can only be brought against insurers.

In Matt v. Liberty Mut. Ins. Co., 798 F. Supp. 429 (Western Dist. of Kentucky 1991), the wrongdoer’s insurer settled with the plaintiff for the policy limits. The insurer also named the no-fault insurer on the settlement check even though under Kentucky law the no-fault insurer had no legal basis to assert a subrogation claim. Within 24 hours a correct check was issued and the court ruled this error did not rise to the level of being bad faith. Specifically, the court found errors in judgment by themselves are not acts of bad faith. Instead they indicated some finding of conscious wrongdoing or recklessness must exist.

This approach was echoed in Winburn v. Liberty Mut. Ins. Co., 8 F. Supp. 2d. 644 (Eastern Dist. of Kentucky 1998). A claims representative tried to settle a claim with the parents of a minor child who was killed in an automobile accident. The parents’ attorney claimed the claims representative tried to discourage them from retaining an attorney and misrepresented the amount of coverage available. Utilizing the holding in Matt, the court declined to find bad faith.

Evidence of prior claims of a particular adjuster was admissible in bad faith litigation to show a pattern of misconduct. Kentucky Farm Bureau v. Troxell, 959 S.W. 2d. 82 (1997). In General Accident Ins. Co. v. Blank, 873 S.W. 2d 580 (1993), the court held the UCSPA did not provide a cause of action against a workers’ compensation carrier. In Curry v. Cincinnati Equitable Ins. Co., 834 S.W. 2d 701 (1992), the court held a bad faith claim under the UCSPA can be pre-empted by ERISA due to the clear congressional intent. ERISA’s civil enforcement scheme is an exclusive remedy.

The Kentucky courts have discussed at great length what constitutes a reckless disregard. Surprisingly there has been little discussion as to what constitutes damages on a bad faith claim. In F.B. Insurance Company v. Jones, 864 S.W. 2d. 926 (1993), the court listed as damages—anxiety, mental anguish, and loss of consortium.