Is There a Viable Cause of Action for Reverse Bad Faith Against an Insured?

In a recent case from Kentucky, the insured suffered a fire loss at her home.¹ Although no one was home at the time of the fire, investigators found that the fire was intentionally set. The insured made an insurance claim for $866,000 of which approximately $425,000 was paid by the insurance company. Eventually, the insurance company sued in state court to declare the policy void and alleged that the plaintiff/insured caused the fire and inflated the loss in breach of the “intentional loss” and “concealment or fraud” provisions of the policy. The plaintiff removed the case to federal court and asserted claims against the insurance company for breach of contract and bad faith, among others.

The plaintiff eventually admitted that she solicited a friend to burn down her house to collect the insurance proceeds. The plaintiff and her friend were indicted on charges of conspiracy to use fire to commit wire fraud. Plaintiff pled guilty and confessed to filing a fraudulent insurance claim and received a sentence of five years and was ordered to pay $672,497.80 in restitution to the insurance company.

The insurance company moved for partial summary judgment and the court granted the motion finding that the insurance company’s refusal to pay the claim was ‘reasonably debatable.’ The insurance company then filed an amended complaint and added claims for damages due to insurance fraud and a common law tort claim for reverse bad faith. The court found that the policy was void, awarded damages to the insurance company and rejected the claim for reverse bad faith.

On appeal to the 6th Circuit Court of Appeals, the insurance company argued that the court should recognize a cause of action for reverse bad faith and award damages to the insurance company for plaintiff’s fraudulent claim. It claimed a public policy against allowing insureds to profit from wrongdoing and subjecting the insurance company to expend money to investigate and defend litigation. It requested to have the question certified and sent to the Kentucky Supreme Court so it could be decided whether to allow a cause of action for reverse bad faith. The court declined to do so.

The implied covenant of good faith and fair dealing imposes duties on both contracting parties. The insurance company argued that it is ‘unjust’ for the law to allow a plaintiff to assert a common law tort claim for bad faith without having to face a reciprocal claim for reverse bad faith. “The strongest argument for recognizing a reverse bad faith cause of action can be made where the insured commits fraud when making a claim under a first-party policy.”²

In Kentucky, the parties to a contract must do everything necessary to carry out the terms of the contract.³ A claim for breach of that duty is permitted when there is a special relationship between the parties and where there is unequal bargaining power, among other things.⁴ First party bad faith claims have existed in Kentucky since 1989.⁵ “From cradle to grave individuals willingly pay premiums to insurance companies to obtain financial protection against property and personal loss. Without a reasonable means to assure prompt and bargained-for compensation when disaster strikes, the peace of mind bought and paid for is illusory.”⁶ Insureds are in need of protections, insurers are not.

There are no jurisdictions that currently recognize a claim for reverse bad faith. An Ohio court⁷ found:

This court has never recognized such a tort and refuses to do so now. As the holder of the purse strings, the insurer has a certain built-in protection from such evils. On the other hand, the insured, who often finds himself in dire financial straits after the loss, must have the equal footing which is provided by the ability to sue the insurer for bad faith. There are other avenues for the insurer to pursue in the event that an insured submits a fraudulent claim. An insurer drafts the policy, can refuse the insured’s claim, and could assert a cause of action against the insured for fraud.

In Iowa, the supreme court declined to adopt a cause of action for reverse bad faith but acknowledged that some commentators are discussing it as a potential cause of action.⁸ Insurance companies can always seek sanctions for the filing of a frivolous claim. Oklahoma also rejected a cause of action for reverse bad faith due to the insured’s non-feasance but expressed no opinion whether an insured’s malfeasance could constitute a tort or contributory bad faith.⁹ In California, a court held there is no claim for breach of the covenant of good faith and fair dealing.¹⁰ Tennessee has a limited reverse bad faith statutory claim in which a policyholder is liable to an insurance company for a sum not to exceed 25% of the amount of loss claimed if the suit was not brought in good faith.¹¹

Although there are no causes of action against insureds for reverse bad faith, insurance companies continue their attempt to change that landscape. Courts continue to find that insurers have unequal bargaining power and find no persuasive arguments for adding a cause of action against an insured for bad faith. Hopefully this will continue.

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¹ State Auto Prop. & Cas. Ins. Co. v. Hargis, No. 13-2050, 2015 WL 2081922 (6th Cir. May 6, 2015).
² Douglas R. Richmond, The Two–Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 LOY. U. CHI. L.J.J. 95, 142 (1996).
³ Farmers Bank & Trust Co. of Georgetown, Ky. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005) (citing Ranier v. Mount Sterling Nat’l Bank, 812 S.W.2d 154, 156 (Ky.1991)).
⁴ Quoting Ennes v. H & R Block E. Tax Serv., Inc., No. 3:01–cv–447–H, 2002 WL 226345, at *2 (W.D.Ky. Jan.14, 2002).
⁵ Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176, 178 (Ky.1989).
⁶ Hargis, No. 13-2050, 2015 WL 2081922 (6th Cir. May 6, 2015).
⁷ Tokles & Sons, Inc. v. Midwestern Indem. Co., 65 Ohio St.3d 621, 605 N.E.2d 936, 945 (Ohio 1992).
⁸ See Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203, 208 (Iowa 1995) (citing law review articles).
⁹ See First Bank of Turley v. Fidelity and Deposit Ins. Co. of Md., 928 P.2d 298, 308 (Okla.1996).
¹⁰ Agricultural Ins. Co. v. Superior Court, 70 Cal.App.4th 385, 82 Cal.Rptr.2d 594, 595 (Cal.Ct.App.1999).
¹¹ Tenn.Code Ann. § 56–7–106.