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Lack Of Adjudication Of Coverage Claim Does Not Render Third-Party Bad Faith Claim Against Insurer Premature, Says Kentucky Supreme Court (Insurance Law Alert)

08.21.23

(Article from Insurance Law Alert, July/August 2023)

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Holding

The Kentucky Supreme Court ruled that an intermediate appellate court erred in holding that the lack of final adjudication as to policy coverage rendered a third-party bad faith claim premature. Estate of Lahoma Salyer Bramble v. Greenwich Ins. Co., 2023 Ky. LEXIS 159 (Ky. June 15, 2023).

Background

Claimants sued Carty, a drilling company, alleging trespass, conversion of natural gas and property damage caused by drilling activities. Greenwich Insurance defended Carty under a reservation of rights and ultimately offered to contribute $20,000 to an agreed judgment of $628,000, which Carty was to pay in monthly installments. In negotiating this payment, Carty’s appointed counsel advised the claimants that Carty would be released in favor of Greenwich Insurance. When Carty defaulted on payment, the claimants sought payment from Greenwich Insurance, and brought suit alleging common law bad faith and statutory violations. In that matter, the parties cross-moved for summary judgment to whether the policy covered the underlying claims. A trial court ruled in the claimants’ favor on the coverage issue. Greenwich Insurance appealed, but the intermediate appellate court dismissed the appeal as interlocutory. As such, no final determination was made as to coverage under Greenwich Insurance’s policies.

On remand, litigation as to the bad faith claims continued. A jury found in favor of the claimants, awarding both compensatory and punitive damages. Greenwich Insurance appealed, and the intermediate appellate court ruled that the trial court improperly permitted the claimants to pursue bad faith claims because coverage under the policies had not yet been conclusively established. The Kentucky Supreme Court reversed.

Decision

Addressing this matter of first impression under Kentucky law, the Kentucky Supreme Court ruled that a third party may pursue a bad faith claim against an insurer even if a final coverage determination is not yet made. The court emphasized that a finding of bad faith is dependent upon a preliminary finding of coverage under the policy, but clarified that coverage need not “be finally and conclusively determined prior to a third party bringing its bad faith claim.”

Comments

Kentucky, unlike many other jurisdictions, allows a third party to assert a bad faith claim against a tortfeasor’s insurer. However, the decision leaves intact two well-established rules of law: (1) in order to ultimately prevail on a third-party bad faith claim, the claimant bears the burden of establishing that the policy covers the underlying liability; and (2) a tort victim does not have a direct contractual cause of action against a tortfeasor’s insurance company without first obtaining judgment against the insured.