Kentucky Farm Bureau Mutual Insurance Co. v. Rodgers , 2005 Ky. LEXIS 294 ( 2005 )

OPINION OF THE COURT

Tina Rodgers (now Johnson) brought this action in the Lincoln Circuit Court against Kentucky Farm Bureau Mutual Insurance Company (“Farm Bureau”) alleging that Farm Bureau acted in “bad faith” in negotiating her claim under the underinsured motorists (UIM) coverage of her policy in violation of KRS 304.12-230, the Unfair Claims Settlement Practices Act (UCSPA). See State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116 (Ky.1988) (KRS 446.070 authorizes a cause of action for damages arising from a violation of the UCSPA). A jury awarded Rodgers $30,000.00 in compensatory damages and $1,000,000.00 in punitive damages. The trial court entered judgment accordingly and also awarded Rodgers attorney fees of $16,666.00 and costs of $2,704.00. The Court of Appeals affirmed. We granted discretionary review and now reverse and remand for a new trial because of the admission of improper “bad acts” evidence in violation of KRE 404(b) and State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003). This obviates the need to address whether the punitive damages award violates the Due Process Clauses of the Fifth and Fourteenth Amendments of the United States Constitution as analyzed in Campbell.

Rodgers suffered injuries to her neck, left shoulder, and left thumb when a vehicle operated by Pearly Webb struck her vehicle. Webb had an automobile insurance policy with Omni Insurance Company that provided liability coverage with limits of $25,000.00 per person. Rodgers’s automobile policy with Farm Bureau provided basic reparations benefits (BRB) coverage with limits of $10,000.00, medical payments coverage with limits of $500.00, and UIM coverage with limits of $50,000.00. Rodgers’s injuries required excision of a small sesamoid bone from her left thumb and arthroscopic surgery to remove scar tissue around a tendon in her left shoulder. She also incurred substantial expenses for chiropractic treatment. Farm Bureau voluntarily made BRB payments directly to Rodgers’s medical providers, finally exhausting the combined $10,500.00 limits of its BRB and medical payments coverages on March 31,1998.

On June 19,1998, Omni offered its liability policy limits of $25,000.00 to settle Rodgers’s tort claim against Webb. On June 22, 1998, pursuant to KRS 304.39-320(3) and Coots v. Allstate Insurance Co., 853 S.W.2d 895, 902 (Ky.1993), Rodgers’s attorney, Robert McClelland, notified Farm Bureau in -writing of the proposed settlement and demanded payment of Farm Bureau’s UIM policy limits. Farm Bureau did an “assets check” on Webb to determine whether it should make a “Coots substitution” to protect its subrogation right. KRS 304.39-320(4); Coots, 853 S.W.2d at 902. Ultimately, Farm Bureau adjuster Gary Montgomery notified McClelland that Farm Bureau would not make the substitution and that Rodgers could accept Omni’s $25,000.00 offer.

During a subsequent telephone conversation between McClelland and Farm Bureau adjuster Terry Lester, McClelland demanded payment of Farm Bureau’s $50,000.00 UIM coverage limits. Lester offered $10,000.00, representing a total claim evaluation of $45,000.00, i.e., $10,000.00 in BRB already paid that would be deducted from any tort judgment per Beckner v. Palmore, 719 S.W.2d 288, 289 (Ky.App.1986); $25,000.00, representing Omni’s liability limits already paid and which would also be deducted from any tort judgment per KRS 304.39-320(2) (UIM coverage payable only to the extent judgment exceeds tortfeasor’s liability coverage); and the $10,000.00 UIM settlement offer. McClelland refused the counteroffer, and no further negotiations ensued. In the subsequent UIM action, a jury awarded Rodgers damages totaling $98,618.00, being $53,618.00 more than Lester’s evaluation. Rodgers then filed this action claiming that Farm Bureau acted in bad faith in offering only $10,000.00 of its UIM coverage to settle her claim.

Farm Bureau filed a motion in limine to suppress evidence about “the Mabel Raines case.” Raines proposed to testify that she had been involved in a separate automobile accident and that Farm Bureau had also acted in bad faith in negotiating her claim. The motion was overruled on the record. That sufficed to preserve the issue for review, and Farm Bureau was not required to further object at trial. KRE 103(d); Davis v. Commonwealth, 147 S.W.3d 709, 722-23 (Ky.2004). Rodgers’s assertion that Raines’s testimony was rendered harmless when essentially the same information was elicited during the testimony of Raines’s attorney, Paul Hibberd, is erroneous. Farm Bureau’s motion in limine was not addressed to suppression of testimony “by Mabel Raines ”, but to suppression of testimony “about the Mabel Raines case ”. However, as will be discussed, infra, some of Hibberd’s testimony on cross-examination was admissible for the purpose of impeachment.

At trial, Raines testified that she was injured in an automobile accident on January 20, 1996, twenty-one months prior to Rodgers’s accident; and that the operator of the other vehicle, Lecia True, had a policy of liability insurance with Farm Bureau with limits of $100,000.00 per person. Raines complained that Farm Bureau initially offered her only $14,000.00, then increased the offer to $31,000.00 prior to trial, and finally paid its policy limits of $100,000.00 only after her testimony at trial on February 25, 1998. However, Raines also sued her own UIM carrier and the UIM carrier of her domestic companion. Thus, despite her 'settlement with Farm Bureau, her case proceeded to a verdict awarding her a total of $219,071.00. The case was ultimately appealed to this Court on issues of whether Raines' could recover under the UIM coverage of her domestic companion’s insurance policy, and whether she could recover the excess verdict against True, despite,her acceptance of a Coots settlement from True’s insurer, Farm Bureau. She eventually lost on both issues. See generally True v. Raines, 99 S.W.3d 439 (Ky.2003).

Raines testified in the case sub judice that the Farm Bureau adjuster who handled her claim was Richard Smith, that she believed he worked out of Danville, but that she had never met him. Raines’s attorney, Hibberd, also testified in the case sub judice, but was never asked to identify the Farm Bureau adjuster who negotiated Raines’s claim. Attorney Robert Baker, ■ who represented True on behalf of Farm Bureau, testified that an adjuster out of Lexington handled Raines’s claim.' Terry Lester, the Farm Bureau adjuster who handled this case, is the office manager of Farm Bureau’s Somerset office, and there is no evidence that he was involved in any aspect of Raines’s case.

Richard Smith’s only involvement in this case was to write letters to Webb’s insurer, Omni, demanding payment to Farm Bureau of BRB payments that Farm Bureau made on behalf of Rodgers. See KRS 304.39-070(3) (reparation obligor having paid BRB to injured insured is entitled to reimbursement directly from reparation obligor of person at fault). Neither Farm Bureau’s claims file nor any other evidence offered at trial indicates that Smith was involved in the handling of Rodgers’s UIM claim. Rodgers, herself, did not testify that she had any personal communication with Farm Bureau about her UIM claim and did not identify the-person who handled her BRB claim (concerning which she does not assert any “bad faith”). Farm Bureau’s claims file indicates that Tammie Bullock ■ handled Rodgers’s BRB claim. Rodgers’s attorney, McClelland, testified that he initially corresponded with Gary Montgomery about the UIM claim but that his subsequent negotiations were with Lester. He did not testify to any communications with Richard Smith.

In summary, Farm Bureau was the liability insurer of the tort defendant in the Raines case, thus providing primary coverage, but was only the UIM insurer in Rodgers’s case,’ thus providing only secondary or excess coverage. Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 453 (Ky.1997) (citing Ohio Cas. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 511 S.W.2d 671, 674 (Ky.1974)); State ex rel. State Farm Mut. Auto. Ins. Co. v. Canady, 197 W.Va. 107, 475 S.E.2d 107, 111 n. 4 (1996) (UIM coverage is only secondary coverage, analogous to excess liability insurance), In the Raines case, Farm Bureau paid its policy limits before the verdict, but the litigation continued because of Raines’s claims against two other insurers. Thus, Raines, unlike Rodgers, did not incur additional damages in the form of litigation costs, expenses, and anxiety because of any perceived dilatoriness on the part of Farm Bureau in settling her liabili-" ty claim. In fact, Raines never filed a bad faith claim against Farm Bureau. Although the same attorney represented Farm' Bureau in both cases, the claims were negotiated by different adjusters working out of different claims offices. Attorney Baker testified that he needed authorization from Farm Bureau’s Lexington adjuster before making his policy lim-. its offer to Raines. No one testified to the nature of Raines's injuries or whether they-were similar to those sustained by Rodgers.

In State Farm Mutual Automobile Insurance Co. v. Campbell, which was also an appeal of a “bad faith” judgment against an insurance company, the United States Supreme Court sharply limited the use of evidence of other transgressions to prove entitlement to punitive damages.

A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis ....

... Although our holdings that a recidivist may be punished more severely than a first offender recognize that repeated misconduct is more reprehensible than an individual instance of malfeasance ..., in the context of civil actions courts must ensure the conduct in question replicates the prior transgressions

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... Although evidence of other acts need not be identical to have relevance in the calculation of punitive damages, the Utah court erred here because evidence pertaining to claims that had nothing to do with a third-party lawsuit was introduced at length.... The reprehensibility guidepost does not permit courts to expand the scope of the case so that a defendant may be punished for any malfeasance, which in this case extended for a 20-year period. In this case, because the Campbells have shown no conduct by State Farm similar to that which harmed them, the conduct that harmed them is the only conduct relevant to the reprehensibility analysis.

538 U.S. at 422-24, 123 S.Ct. at 1523-24 (internal citations and quotations omitted) (emphasis added).

Although KRE 404(b) usually is cited in the context of a criminal case, it applies to civil cases as well. Robert G. Lawson, The Kentucky Evidence Law Handbook § 2.25[2], at 125-26 (4th ed. LexisNexis 2003). E.g., Ansell v. Green Acres Contracting Co., Inc., 347 F.3d 515, 521 (3d Cir.2003) (evidence of employer’s conduct towards other employees admissible for purpose of establishing or negating discriminatory intent in age discrimination claim); Hitt v. Connell, 301 F.3d 240, 249-50 (5th Cir.2002) (evidence that employer had fired other employees for union activities admissible to prove motive to fire this employee for same reason). The rule precludes evidence of other acts of misconduct for the purpose of showing mere propensity or bad character but permits such evidence if relevant for another purpose, e.g., proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident. The requirement in Campbell that the present conduct “replicates” the prior transgressions, 538 U.S. at 423, 123 S.Ct. at 1523, mirrors our requirement that to be admissible under KRE 404(b) to prove, e.g., motive, intent, plan or identity, by modus operandi, the prior bad act must have been so strikingly similar to the present act as to constitute a “signature crime.” Rearick v. Commonwealth, 858 S.W.2d 185, 187 (Ky.1993). Of course, as noted in Campbell, “strikingly similar” does not necessarily mean “identical.” Campbell, 538 U.S. at 423-24, 123 S.Ct. at 1523-24.

We admit evidence of a prior bad act under KRE 404(b) only if the evidence satisfies the three-part test of Bell v. Commonwealth, 875 S.W.2d 882 (Ky.1994), viz: (1) Is it relevant? (2) Does it have probative value? (3) Is its probative value substantially outweighed by its prejudicial effect? Id. at 889-91. The probativeness prong of this test relates to whether there is sufficient evidence that the other crime, wrong, or act actually occurred. Id. at 890; Lawson, supra, § 2.25[3][c], at ISO-31. Since Raines did not file a “bad faith” action against Farm Bureau, and there was no evidence of the nature and extent of her injuries, her evidence was not probative that Farm Bureau acted in bad faith with respect to her claim.

In Kentucky Farm Bureau Mutual Insurance Co. v. Troxell, 959 S.W.2d 82 (Ky.1997), we approved evidence of the mishandling of a prior claim in a bad faith action because it arose out of conduct by the same claims adjuster involved in the claim at issue; thus the insurer/employer was on notice of “a pattern of conduct practiced by its agent.” Id. at 85-86. We also held that “any monetary amounts involved in the prior litigation are not relevant and should not be introduced .... ” Id. at 86. Here, the Raines case did not involve the same adjuster and did not result in a bad faith claim that might have put Farm Bureau on notice of a pattern of conduct practiced by one of its agents. Further, Rodgers was permitted to introduce evidence of the judgment Raines recovered in her case in direct contravention of the holding in Troxell. (Troxell became final on February 19, 1998. The case sub judice was tried in October and November 2000.)

The evidence does not show that Farm Bureau’s handling of Raines’s case “replicates” its handling of Rodgers’s case. Farm Bureau was the primary insurer in Raines’s case and only the secondary insurer in Rodgers’s case. It is impossible to compare claims evaluations made in those respective cases because there was no evidence of the nature of Raines’s injuries. Moreover, the mere comparison of settlement offers to ultimate verdicts falsely assumes that all juries treat similar cases the same.

However, Paul Hibberd’s testimony about the Raines case was elicited on cross-examination, and some of that testimony was admissible for the purpose of impeaching his direct testimony. As noted supra, Rodgers’s attorney, McClelland, sent Farm Bureau a letter on June 22, 1998, demanding that it pay the policy limits of its UIM coverage. The demand letter did not set forth the basis for this evaluation, and Hibberd testified on direct examination that a proper demand letter should set forth the nature and extent of the client’s injuries and contain supporting documentation such as copies of medical bills and medical reports.

Hibberd testified:

A demand letter is a- communication ■ from the attorney for the injured person ... setting out the reasons that the plaintiff is entitled to compensation for their [sic] injury. It includes a wide variety of things, depending upon the type of ... incident that' caused the injury and the'type of injury. But it is a communication to familiarize the insurance company with all the different aspects of the incident and the injury and then- to tie it all together to say, on behalf of the plaintiff, we demand the sum of X number of dollars as compensation for this injury.

Thus, the crux of Hibberd’s direct testimony was his expert opinion that McClelland had deviated from standard practice by making a demand that was unsupported by sufficient documentation to permit Farm Bureau to properly evaluate the claim. The purpose of this evidence was to attribute any appearance of bad faith in the form of delay and a low settlement offer to McClelland’s failure to follow what Hib-berd opined was “standard practice.” (Of course, since Farm Bureau was also Rodgers’s BRB insurer, it already had most of the information Hibberd claimed it needed and, in fact, had furnished it to McClelland for use in support of Rodgers’s liability claim against Omni.)

On cross-examination, Rodgers elicited from Hibberd that he had represented Raines in her liability claim against Farm Bureau, that he had furnished Farm Bureau with a properly documented letter demanding payment of its policy limits, and that Farm Bureau did not offer its policy limits until the second day of Raines’s trial. This testimony was admissible to impeach the implication arising from Hibberd’s direct examination that a properly documented demand letter would have resulted in a more prompt and favorable settlement offer. The evidence was relevant as “facts tending to disprove a defense,” Tuttle v. Perry, 82 S.W.3d 920, 922 (Ky.2002), and “[a]ll relevant evidence is admissible, except as otherwise provided ....” KRE 402.

Nevertheless, the mere fact that this testimony was relevant for another purpose does not remove it from the purview of Campbell or KRE 404(b). The Raines evidence that tended to show the ineffectiveness of Hibberd’s “proper demand letter” was not admissible for the purpose of proving Farm Bureau’s bad faith in this case by showing that it had acted in bad faith in another case. Rather, the evidence was admissible only to impeach the credibility of Hibberd’s expert opinion about the efficacy of detailed demand letters in aiding insurance companies to process claims in a more timely and fair manner. Such impeachment testimony is not proscribed by Campbell or KRE 404(b). “The credibility of a witness’ relevant testimony is always at issue, and the trial court may not exclude evidence that impeaches credibility even though such testimony would be inadmissible to prove a substantive issue in the case.” Sanborn v. Commonwealth, 754 S.W.2d 534, 545 (Ky.1988). Professor Lawson echoed this sentiment when he noted that “[a] wide array of evidence is admissible only because it renders testimonial credibility more probable or less probable than it would without the evidence.” Lawson, supra, § 5.05[3], at 82. However, since the Raines evidence was admissible only for this limited purpose and was inadmissible for the purpose of obtaining punitive damages or proving action by Farm Bureau in conformity with other wrongful acts, an admonition, if requested, should be given if the same evidence is offered for impeachment purposes upon retrial.

Accordingly, we reverse the Court of Appeals and remand this case to the Lincoln Circuit Court for a new trial in conformance with the content of this opinion.

■ COOPER, GRAVES, JOHNSTONE, and ROACH, JJ., concur. LAMBERT, C.J., dissents by separate opinion, with SCOTT, and WINTERSHEIMER, JJ., joining that dissenting opinion.

WINTERSHEIMER, J., dissents by separate opinion, with LAMBERT, C.J., and SCOTT, J., joining that dissenting opinion.