Knotts v. Zurich Insurance Co.

COOPER, Justice,

dissenting.

I would concur in the majority opinion if this were a first-party bad faith action in which Mr. and Mrs. Knotts were Zurich’s insureds. In that event, Zurich would owe a continuing fiduciary duty of good faith and fair dealing implicit in the insurance contract purchased by the insureds that would not conflict with any superior duty that it might owe to someone else. See Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368, 380 (Ky.2000) (“[A] bad faith action is based upon the fiduciary duty owed by an insurance company to its insured based upon the insurance contract.”). A first-party bad faith action is one brought by the insured against the insurance company seeking to enforce coverage claimed to be provided by the insured’s own policy, e.g., homeowner’s claims, uninsured (UM) and underinsured (UIM) motorist claims, claims for collision coverage payments, basic reparation benefit (BRB) claims, enforcement of duty to defend, enforcement of denied coverage, etc. This case, however, is a third-party bad faith action by tort plaintiffs, strangers to the insurance contract who claim that the tortfeasor’s liability insurance carrier owed them a fiduciary duty of good faith and fair dealing in defending the tort action they brought against its insured.

In Kentucky, both first-party and third-party claims can be premised upon a violation of KRS 304.12-230, the Unfair Claims Settlement Practices Act (“UCSPA”). State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky.1988); FB Ins. Co. v. Jones, 864 S.W.2d 926, 929 (Ky.App.1993). I agree that the insurer’s duty to negotiate in good faith with its own insured continues even after the commencement by the insured of a first-party action against the insurer (See White v. W. Title Ins. Co., 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309, 317 (1985)) (“[T]he contractual relationship between insurer and the insured does not terminate with commencement of litigation.”). However, I do not agree that the insurer owes any duty to a third party after that party commences a tort action against the insured. Cf. Palmer v. Ted Stevens Honda, Inc., 193 Cal.App.3d 530, 238 Cal.Rptr. 363, 368 (1987) (“[Ujnlike White, there was no continuing contractual relationship between plaintiff and defendant in the instant case and therefore no implied covenant to treat plaintiff fairly....”).

When the tort plaintiff commences the tort action against the insured tortfeasor, the insurer’s primary obligation is the defense of its insured. J. Graham Brown Found., Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279-80 (Ky.1991); Wolford v. Wolford, 662 S.W.2d 835, 838 (Ky.1984). If the insurer violates that duty, e.g., by failing to pay a reasonable settlement demand, Harvin v. U.S. Fid. & Guar. Co., 428 S.W.2d 213, 214-15 (Ky.1968), and such results in an excess judgment against the insured, the insurer can be liable to the insured for the excess, and the insured can make an assignment of the chose in action to the injured plaintiff. Manchester Ins. & Indem. Co. v. Grundy, 531 S.W.2d 493, 498 (Ky.1975). However, it makes no sense to say that the insurer is answerable to the tort plaintiff for the manner in which it performs its contractual duty to defend its insured against the tort action. The potential for a conflict of interest in that scenario is self-evident. Once suit is filed, the Rules of Civil Procedure control the conduct of the parties and provide remedies for any alleged abuses. Palmer, 238 Cal.Rptr. at 369 (“Litigation is governed by a different set of rules. It is for the law-and-motion judge and not the jury to assess whether a party should be penalized for bad faith discovery positions.”); Roussalis v. Wyo. Med. Ctr., Inc., 4 P.3d 209, 257 (Wyo.2000) (“The Rules of Civil Procedure control the litigation process and, in most instances, provide adequate remedies for improper conduct during the litigation process. Once the parties have assumed adversarial roles, it is generally for the judge in the underlying case and not a jury to determine whether a party should be penalized for bad faith tactics.”).

Thus, while Reeder permits a plaintiff to sue the tortfeasor’s insurer premised upon a violation of the UCSPA, a violation of the UCSPA cannot be premised upon actions occurring after the plaintiff sues the insured in tort. Thereafter, the insurer’s duty is to its insured, and the insurer can determine for itself how settlement negotiations enter into the defense strategy. (In Reeder, the insurer’s CR 12.02 motion to dismiss was granted, so the case did not address whether a UCSPA violation could be premised upon conduct occurring after suit was filed. 763 S.W.2d at 117. In Motorists Mutual Insurance Co. v. Glass, 996 S.W.2d 437 (Ky.1997), the actions giving rise to the bad faith claims all occurred prior to the commencement of the lawsuit except failure to pay a settlement demand in excess of policy limits, which, of course, could not constitute bad faith. Id. at 442-46.)

Each foreign case, save one, that has been cited in this action for the proposition that suit can be brought against an insurer for a violation of the UCSPA was a first-party claim. See Timberlake Const. Co. v. U.S. Fid. & Guar. Co., 71 F.3d 335, 338 (10th Cir.1995) (denial of coverage to insured under builder’s risk policy); Graham v. Gallant Ins. Group, 60 F.Supp.2d 632, 633 (W.D.Ky.1999) (UM and collision coverage claims); Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 935 S.W.2d 556, 557 (1996) (action to enforce denied automobile liability and collision coverage); White v. W. Title Ins. Co., 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309, 311 (1985) (action to enforce denied title insurance coverage); Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1766, 31 Cal.Rptr.2d 224, 225 (1994) (homeowner’s claim); Cal. Physicians’ Serv. v. Superior Court, 9 Cal.App.4th 1321, 12 Cal.Rptr.2d 95, 95-96 (1992) (claim under health insurance policy); Nies v. Nat’l Auto. & Cas. Ins. Co., 199 Cal.App.3d 1192, 245 Cal.Rptr. 518, 519 (1988) (UM claim); Palmer ex rel. Diacon v. Farmers Ins. Exch., 261 Mont. 91, 861 P.2d 895, 899 (1993) (UM claim); O’Donnell ex rel. Mitro v. Allstate Ins. Co., 734 A.2d 901, 902-03 (Pa.Super.Ct.1999) (homeowner’s claim). The only exception is Barefield v. DPIC Cos., Inc., 215 W.Va. 544, 600 S.E.2d 256 (2004). However, all of the cases cited by Barefield in support of its holding were also first-party actions. See Tucson Airport Auth. v. Certain Underwriters, 186 Ariz. 45, 918 P.2d 1063, 1064 (App.1996) (failure to defend); Gooch v. State Farm Mut. Auto. Ins. Co., 712 N.E.2d 38, 39 (Ind.Ct.App.1999) (UM claim); Federated Mut. Ins. Co. v. Anderson, 297 Mont. 33, 991 P.2d 915, 919 (1999) (denial of coverage); Palmer, 861 P.2d at 899 (UM claim); O’Donnell, 734 A.2d at 902-03 (homeowners’ claim). To date, no other jurisdiction has cited Barefield for the proposition that a third party tort claimant can bring a bad faith action against the tortfeasor’s insurer.

An overwhelming majority of jurisdictions that have addressed the issue do not allow any third-party bad faith actions whatsoever against insurers. E.g., O.K. Lumber Co., Inc., v. Providence Washington Ins. Co., 759 P.2d 523, 525-26 (Alaska 1988) (“The relationship between the claimant and an insurance carrier for a third party alleged to be liable is an adversary relationship giving rise to no fiduciary obligation on the part of such insurance carrier to the claimant. Any obligation to deal with settlement offers in good faith runs only to the insured.”); Page v. Allstate Ins. Co., 126 Ariz. 258, 614 P.2d 339, 340 (App.1980) (“The duty to settle is intended to benefit the insured, not the injured claimant.”); Murphy v. Allstate Ins. Co., 17 Cal.3d 937, 132 Cal.Rptr. 424, 553 P.2d 584, 586-87 (1976) (insured’s duty to settle runs to the insured, not to the injured claimant);¹ Scroggins v. Allstate Ins. Co., 74 Ill.App.3d 1027, 30 Ill.Dec. 682, 393 N.E.2d 718, 721-22 (1979) (insurer’s duty of good faith and fair dealing is owed to insured, not to third parties); Menefee v. Schurr, 751 N.E.2d 757, 761 (Ind.Ct.App.2001) (“The excess liability of [a Lability insurance] company arises out of the relationship between insured and company. Claimant is a stranger to that relationship.”).

See also Bates v. Allied Mut. Ins. Co., 467 N.W.2d 255, 258 (Iowa 1991) (“[W]hile an insurer has a fiduciary relationship with its insured, it has an adversarial relationship with a third-party claimant. Therefore, a tort victim, as a third-party claimant, cannot compel a tortfeasor’s insurer to negotiate and settle a claim in good faith anymore than he could compel the tortfea-sor to do so himself.” (Citation omitted.)); Linscott v. State Farm Mut. Auto. Ins. Co., 368 A.2d 1161, 1163 (Me.1977) (“The pretrial negotiations which may be conducted between a tort claimant and a defending insurance company are adversary in nature and, hence, will not give rise to a duty to bargain in good faith, as claimed by plaintiff. A ‘duty of good faith and fair dealing’ in the handling of claims runs only to an insurance company’s insured .... ”); Chavez v. Chenoweth, 89 N.M. 423, 553 P.2d 703, 709 (App.1976) (“The ‘bad faith dealing’ rule applies between an insurer and insured. Plaintiff’s dealings with State Farm in connection with damages based on [tortfeasorj’s alleged fault were not dealings between insurer and insured, but arm’s length dealings on the basis of plaintiffs claim against State Farm as the insurer of [tortfeasor].” (Citation omitted.)).

See also Niemeyer v. U.S. Fid. & Guar. Co., 789 P.2d 1318, 1322 (Okla.1990) (“Because Niemeyer is a third party claimant, she could not bring a bad faith action against USF & G.”); Auclair v. Nationwide Mut. Ins. Co., 505 A.2d 431, 431 (R.I.1986) (“The relationship between the claimant and the insurance carrier for a third party alleged to be liable is an adversary relationship giving rise to no fiduciary obligation on the part of such insurance carrier to the claimant. Any obligation to deal with settlement offers in good faith runs only to the insured .... ”); Caserotti v. State Farm Ins. Co., 791 S.W.2d 561, 566 (Tex.App.1990) (“The present cause is distinguishable from those cases where courts have imposed a duty of good faith and fair dealing upon insurance companies. The cases imposing such a duty all involve first-party claims, ie., suits by insureds pursuant to their oum insurance policies after their insurer wrongly denied or delayed recovery of the insureds’ claims.”); Pixton v. State Farm Mut. Auto. Ins. Co., 809 P.2d 746, 749 (Utah Ct.App.1991) (“[T]here is no duty of good faith and fair dealing imposed upon an insurer running to a third-party claimant, such as Pixton, seeking to recover against the company’s insured.”); Kranzush v. Badger State Mut. Cas. Co., 103 Wis.2d 56, 307 N.W.2d 256, 265 (1981) (“The insurer’s duty of good faith and fair dealing arises from the insurance contract and runs to the insured. No such duty can be implied in favor of the claimant from the contract since the claimant is a stranger to the contract and to the fiduciary relationship it signifies.”); Herrig v. Herrig, 844 P.2d 487, 491 (Wyo.1992) (“[C]ourts simply refuse to place an insurer in the untenable position of owing a duty of good faith and fair dealing to both the insured and the adversary of the insured, whether in the double-insured context or not”).

In Menefee v. Schurr, the Indiana Court of Appeals noted that “[ojnly four states, Kentucky [see Reeder ], Louisiana, Massachusetts, and West Virginia [see Barefield ] ... permit third-party direct action bad faith claims ... against insurers.” Menefee, 751 N.E.2d at 761 n. 2. Massachusetts created its right of direct action by a 1979 amendment of its Uniform Trade Protection Acts, Mass. Gen. Laws eh. 93A, § 9(1), under which UCSPA-type claims are litigated, to provide that “[a]ny person, other than a person entitled to bring action under section eleven of this chapter, who has been injured by another person’s use or employment of any method, act or practice declared to be unlawful by section two ... or any person whose rights are affected by another person violating the provisions of [G.L. c. 176D, § 3(9) ] may bring an action .... ” 1979 Mass. Acts ch. 406, § 1. Although Louisiana does permit a third-party direct action against an insurer for a violation of its Uniform Trade Practices Act, La.Rev.Stat. Ann. § 22:1220(A), which specifically contains language requiring a “reasonable effort to settle claims with insured or the claimant,” (emphasis added), it does not permit a third-party direct action against an insurer for a violation of the UCSPA, La.Rev.Stat. Ann. § 22:1214, which contains no such language. Theriot v. Midland Risk Ins. Co., 694 So.2d 184, 190-91 (La.1997).

Thus, Kentucky, Massachusetts, and West Virginia stand alone in permitting a third-party tort plaintiff to sue the tortfea-sor’s insurer for a UCSPA violation that occurs even prior to commencement of the tort action. Absent legislative authorization, I am unwilling to conclude that liability insurers owe a fiduciary responsibility both to its insured and to the tort plaintiff who sued its insured, thus triggering the insurer’s contractual duty to defend.

Accordingly, I dissent.

1 . The California Supreme Court subsequently held in Royal Globe Insurance Co. v. Superior Court, 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, 334 (1979), that both first-party and third-party bad faith actions against insurers were authorized. Royal Globe was overruled on both points by Moradi-Shalal v. Fireman's Fund Insurance Cos., 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58, 63, 66 (1988).