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(Article from Insurance Law Alert, May 2015)

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The Sixth Circuit rejected a reverse bad faith claim asserted by an insurer against its policyholder and refused to certify the question of the claim’s viability to the Kentucky Supreme Court. State Auto Prop. & Cas. Ins. Co. v. Hargis, 2015 WL 2081922 (6th Cir. May 6, 2015).

After a fire destroyed Hargis’s home, State Auto reimbursed her approximately $425,000 under a homeowner’s policy. Thereafter, Hargis admitted that she had conspired to intentionally destroy her home in order to collect insurance proceeds. The trial court declared the policy void, awarded damages to State Auto, and dismissed Hargis’s bad faith claim. The court also dismissed State Auto’s reverse bad faith claim on the basis that Kentucky law does not recognize such a cause of action. The Sixth Circuit affirmed. Although Kentucky law permits first party bad faith claims by a policyholder against an insurer, the Sixth Circuit reasoned that "insureds are in need of protection that insurers are not," and that the Kentucky Supreme Court has previously rejected an insurer’s challenge to a Kentucky statute that affords certain rights and remedies to insureds but provides no reciprocal rights or remedies to insurers.

Notably, a New York district court recently allowed a reverse bad faith claim to proceed in reinsurance litigation. In Utica Mutual Ins. Co. v. Century Indem. Co., No. 6:13-cv- 995 (N.D.N.Y. May 11, 2015), a magistrate judge granted a reinsurer’s motion to amend its answer to add a counterclaim against the ceding insurer for reverse bad faith. The district court held that this ruling was not clearly erroneous, notwithstanding the absence of New York precedent recognizing such claims. Acknowledging the plausibility of a reverse bad faith claim in this context, the court emphasized the duty of "utmost good faith" owed by a cedent to its reinsurer.