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Insurance Law

Federal Appeals Court Provides Detailed Discussion Of “Reverse Bad Faith”

So-called “reverse bad faith” is a double-edged sword for Coverage Opinions. On one hand, it is an issue that does not arise too often. And CO seeks to focus on cases that could have wide impact. On the other hand, because reverse bad faith does not come about every day, its uniqueness makes it an attractive case for CO. Uniqueness wins out.

In State Auto Property and Casualty Ins. Co. v. Hargis, No. 13-5020 (6th Cir. May 6, 2015), [enhanced version available to subscribers], the Sixth Circuit Court of Appeals provided a detailed discussion of “reverse bad faith.” Bottom line -- the court held that a common law tort claim by an insurer, against an insured, for reverse bad faith, is not recognized under Kentucky law. In fact, the Hargis court also observed that it is “not aware of any jurisdiction that has recognized a cause of action for reverse bad faith.”

Hargis arose out of a fire claim under a homeowner’s policy. Lori Hargis’s home, located in Henderson, Kentucky, was insured by State Auto under a homeowner’s policy. The home burned to the ground. Hargis filed an insurance claim for approximately $866,000. State Auto paid the claim and subsequently commenced an action to declare the policy void, alleging that Hargis caused or conspired to cause the fire and falsely inflated the property loss resulting from the fire.

Hargis asserted counterclaims against State Auto for breach of contract and bad faith under Kentucky common law, the Kentucky Consumer Protection Act and the Kentucky Unfair Claims Settlement Practices Act. State Auto’s investigation eventually led to Hargis’s admission that she had solicited a friend to burn down her house to collect the insurance proceeds. Hargis pleaded guilty and was sentenced to 60 months in prison and ordered to pay restitution to State Auto.

After the indictment was returned against Hargis, State Auto moved for partial summary judgment and Hargis’s bad faith claims were dismissed. State Auto also filed an amended complaint that added a statutory claim for damages for insurance fraud and a common law tort claim, under Kentucky law, for reverse bad faith. State Auto’s argument, in support of reverse bad faith, was that “there is a strong public policy against allowing insureds to profit from their own wrongdoing while simultaneously subjecting insurers to inordinate increased costs for investigation, defense, and litigation.”

The District Court rejected the insurer’s claim for reverse bad faith. The Sixth Circuit agreed. At the outset, the court noted that State Auto cited no Kentucky case that has adopted a claim, by an insurer, for reverse bad faith against an insured. Further, the court stated that it was “not aware of any jurisdiction that has recognized a cause of action for reverse bad faith.”

Despite State Auto’s inability to point to any decisions in Kentucky (or elsewhere) that have recognized a common law claim for reverse bad faith, “State Auto argue[d] that there was no reason to conclude the Kentucky Supreme Court would not decide to allow tort recovery ( i.e., compensatory and punitive damages) for an insured’s bad faith since the implied covenant of good faith and fair dealing imposes contractual obligations on both parties. That is, State Auto contends, it is ‘unjust’ for Kentucky law to allow Hargis to assert a common law tort claim for bad faith without having to face the threat of a reciprocal tort claim for reverse bad faith.”

Nonetheless, for a host of reasons, the Sixth Circuit predicted that the Kentucky Supreme Court would reject State Auto’s invitation to adopt a common law tort claim for reverse bad faith by an insured. These were as follows:

• The reasons articulated by the Kentucky Supreme Court in recognizing first-party common law bad faith. Namely, that a fiduciary relationship existed between the insurer and its insured.

• A prior rejection, by the Kentucky Supreme Court, of an insurance company’s challenge to the fact that the Kentucky Unfair Claims Settlement Practices Act affords rights and remedies to an insured but provides no reciprocal rights or remedies to insurers.

• The standards for proving a claim of bad faith.

• The availability of other remedies for the damages incurred as a result of an insured’s fraud under Kentucky law. More specifically, the court explained: “State Auto repeatedly returns to the theme that it is ‘unjust’ for Kentucky law to allow Hargis to escape the consequences of her intentionally fraudulent conduct. But, she plainly did not. Her fraudulent conduct resulted in a civil judgment against her for all of the damages incurred by State Auto and subjected her to incarceration and an order of restitution to State Auto. The criminal conviction simplified State Auto’s proofs by establishing both breach of contract and the statutory claim for insurance fraud. . . . Further, even if the prosecution had not gone forward, there is no suggestion that State Auto could not have brought a common law claim for fraud. Finally, to the extent that State Auto claims that the threat of punitive damages is necessary to deter such fraudulent conduct, it is hard to imagine that a possible claim for reverse bad faith would be a deterrent if the threat of criminal prosecution was not.”

• The absence of support in other jurisdictions for reverse bad faith.

What I found most interesting was the court’s observation that it was “not aware of any jurisdiction that has recognized a cause of action for reverse bad faith.” Is that really the case?

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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