STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY, Plaintiff-Appellant,
LORI HARGIS, Defendant-Appellee
Argued April 23, 2015
[Copyrighted Material Omitted]
Appeal from the United States District Court for the Western District of Kentucky at Owensboro. No. 4:09-cv-00015--Joseph H. McKinley, Chief District Judge.
Tia J. Combs, FOWLER BELL PLLC, Lexington, Kentucky, for Appellant.
Michael Griffin, VANDERBILT APPELLATE LITIGATION CLINIC, Nashville, Tennessee, for Appellee.
Tia J. Combs, Barry Miller, FOWLER BELL PLLC, Lexington, Kentucky, for Appellant.
Alistair E. Newbern, VANDERBILT APPELLATE LITIGATION CLINIC, Nashville, Tennessee, Edmund Sauer, BRADLEY ARANT BOULT CUMMINGS LLP, Nashville, Tennessee, for Appellee.
Before: GUY, MOORE, and McKEAGUE, Circuit Judges.
RALPH B. GUY, JR., Circuit Judge.
This appeal presents two related issues: (1) whether it was error for the district court to dismiss the claim asserted by the insurance company against its insured for " reverse bad faith" because it has not been recognized in Kentucky (or any other jurisdiction); and (2) whether this court should certify the question of the viability of such a claim to the Kentucky Supreme Court. The insurance company in this case, State Auto Property and Casualty Insurance Company (" State Auto" ), argues that the district court erred by summarily dismissing the claim without attempting to predict what the state court would do. Reviewing the legal issue de novo, however, State Auto has not offered a convincing basis to conclude that the Kentucky Supreme Court would adopt a common law cause of action in tort by an insurer against its insured for breach of the implied duty of good faith and fair dealing (or " reverse bad faith" ). Although certification under the state court procedure is within this court's discretion, its use is disfavored when the party requesting certification does so only after an adverse judgment has been entered. For the reasons that follow, the motion for certification is denied and the district court's judgment is affirmed.
Lori Hargis's home located in Henderson, Kentucky, was insured by State Auto under a standard homeowner's policy when it burned to the ground in the early morning hours of December 9, 2007. No one was home at the time of the fire, but investigations by the Kentucky State Police and State Auto determined that the fire was intentionally set. Hargis filed what she would only later admit was a fraudulent insurance claim for approximately $866,000. State Auto paid out in excess of $425,000--including a mortgage payoff of $386,720.34--before commencing this action in state court to declare the policy void. State Auto alleged that Hargis caused or conspired to cause the fire and falsely inflated the property loss resulting from the fire in breach of the " intentional loss" and " concealment or fraud" provisions of the policy.
Hargis removed the case to federal court in early 2009, and asserted counterclaims against State Auto for breach of contract and for bad faith under the common law of Kentucky, the Kentucky Consumer Protection Act (KCPA), and the Kentucky Unfair Claims Settlement Practices Act (KUCSPA). See Ky. Stat. Ann. § § 367.170, 304.12-230 and 446.070. Hargis moved for partial summary judgment in her favor with respect to the competing breach of contract claims, but State Auto defeated that motion by presenting circumstantial evidence sufficient to create a genuine issue of material fact for trial on its defenses of arson and misrepresentation. The evidence summarized in the district court's April 2010 Order included circumstantial evidence that Hargis had the opportunity and financial motive to commit the arson.
Trial would not be necessary in the end, however, because 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. Specifically, the investigation resulted in the return of a federal indictment in January 2011 that charged Hargis and Leslie Veshaun White with conspiracy to use fire to commit wire fraud in violation of 18 U.S.C. § 844(h) and (m). Hargis pleaded guilty in January 2012, and admitted during the change-of-plea hearing that she solicited White to burn down her house for $10,000 from the insurance proceeds; that she called White on the day of the fire to tell him that she and her children would be out of the house; and that she knowingly filed the fraudulent insurance claim to collect the proceeds of the homeowner's policy. Hargis was sentenced to a 60-month term of imprisonment and was ordered to pay restitution to State Auto totaling $672,497.80. The restitution ordered was the full amount sought by State Auto and consisted of: $386,720.34 for the mortgage payoff; $11,500 for debris removal; $27,994.43 for living expenses; and $195,116.70 for investigation costs and attorney fees incurred by State Auto (including $80,000 that was attributable to the defense of Hargis's bad faith claim).
As soon as the indictment was returned against Hargis, State Auto moved for partial summary judgment in its favor with respect to Hargis's bad faith claims. The district court granted that motion because " State Auto's refusal to pay Hargis's claim was at least reasonably debatable" and " [t]he indictment simply provides further support for the Court's belief." State Auto also filed an amended complaint that added a statutory claim for damages for insurance fraud under Ky. Stat. Ann. § 304-47.020(3), and a common law tort claim for reverse bad faith under Kentucky law. A stay was entered pending resolution of the criminal case, after which State Auto moved for summary judgment in its favor on all of the remaining claims. Hargis only opposed summary judgment with respect to State Auto's claim for reverse bad faith.
In a one-page order entered December 12, 2012, the district court granted in part and denied in part State Auto's motion for summary judgment. Specifically, the district court: (1) declared that State Auto had no further obligations under the policy and that the policy was void ab initio ; (2) awarded damages for Hargis's fraudulent insurance acts to the extent State Auto is not fully compensated by the order of restitution; and (3) rejected the claim for reverse bad faith for the reasons stated in Houchin v. Allstate Indemnity Ins. Co., No. ...