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Wellman v. Safeco Insurance Co. of America

United States District Court, E.D. Kentucky, Northern Division, Ashland

July 20, 2017

CARL AND DENICE WELLMAN, PLAINTIFFS,
v.
SAFECO INSURANCE COMPANY OF AMERICA., DEFENDANT.

          MEMORANDUM OPINION AND ORDER

          Henry R. Wilhoit United States District Judge

         This matter is before the Court upon Defendant Safeco Insurance Company of America's Motion for Summary Judgment [Docket No. 34]. The motion has been fully briefed by the parties. For the reasons stated herein, the Court finds that Defendant is entitled to judgment as a matter of law as to Plaintiffs Carl and Denice Wellman's remaining claims for bad faith and violation of Kentucky's Unfair Claims Settlement Practices Act.

         I. BACKGROUND

         This case arises out of a July 30, 2012 fire that occurred at the residence of Plaintiffs Carl and Denice Wellman, located at 2030 West Hearthstone Lane in Ashland, Kentucky. The Plaintiffs' home was a total loss.

         At the time of the fire, Safeco insured Plaintiffs' residence and personal property subject to the terms, conditions, and exclusions of policy number OK5622106.

         As this Court has already ruled, the Policy required Safeco to "pay the difference between actual cash value and replacement cost only when the damaged or destroyed property is repaired or replaced." This is what Safeco did, paying Plaintiffs a total of $315, 915, 54 as they rebuilt their home.

         Consistent with the terms of the Policy, Safeco offered Plaintiffs three options after the fire: purchase another home, rebuild their old home, or take a lump-sum settlement from Safeco reflecting the actual cash value of their home.

         Despite the fact that Plaintiffs had listed their home for sale immediately prior to the fire, Plaintiffs elected to rebuild their home at the same location. In accordance with their decision to rebuild, Safeco's adjuster, Mandy Savage, provided the Plaintiffs with an estimate reflecting the Actual Cash Value of the home and Replacement Cost Value of the home.

         Plaintiffs did not dispute either estimate.

         Safeco then issued the Plaintiffs checks for $199, 550.67 and $4, 761.96, which represented the Actual Cash Value of the home. Thereafter, Plaintiffs were paid, pursuant to the terms of the policy, as they showed that repairs were complete. Construction began on the Plaintiffs' new residence.

         Subsequently, Citizens National Bank informed the Plaintiffs that it was accelerating the approximately $190, 000 outstanding on Plaintiffs' mortgage loan on their prior home that had burned. Safeco had no involvement in the bank's decision to accelerate the Plaintiffs' loan or the bank's decision to take Plaintiffs' funds. Despite the fact that the bank had taken most of Safeco's Actual Cash Value payment to the Plaintiffs, Plaintiffs decided not to apply for another mortgage to completely rebuild their home in 2012. Instead, in order to finance the construction, Plaintiffs allege that they chose to sell their vehicles, borrowed money from family members, and put the money from their personal property settlement that had been paid to them by Safeco toward rebuilding their home.

         Ultimately, Plaintiffs allege that they were unable to pay some of the contractors they hired to rebuild portions of their home. During construction, Plaintiffs also decided to make various "upgrades" to their rebuilt home, including installing more expensive countertops, heating units, upgraded lighting, and more expensive flooring, which was not provided for under the Policy and increased their costs.

         In the end, Plaintiffs finished the rebuilding of their home themselves. The estimated value of Plaintiffs' new home was $336, 400.00, compared to $237, 500.00 of their old home.

         Plaintiffs filed suit against Safeco in Boyd Circuit Court alleging breach of the Policy, bad faith, and violation of Kentucky's Unfair Claims Settlement Practices Act, KRS § 304.12-230, et seq. ("UCSPA"). The case was removed to this Court.

         Plaintiffs' breach of contract claims arose from Plaintiffs allegations that Safeco should provide "advances" on the replacement cost payments they needed to finish the rebuild of their home before the repair or replacement work was complete. However, the express terms of the Policy stated that Safeco could only provide additional funds to the Plaintiffs once the Plaintiffs submitted receipts showing that the repairs were complete.

         Safeco moved for partial summary judgment on Plaintiffs' breach of contract claim. Safeco argued that Plaintiffs' demand for advanced replacement cost payments was contrary to the terms of the Policy, which clearly states that Safeco could only provide additional funds to the Plaintiffs once the destroyed property was repaired or replaced.

         This Court sustained Safeco's Motion for Partial Summary Judgment, finding that Safeco had not breached the Policy. The Court further found that Safeco reimbursed the Plaintiffs for the repairs upon receipt of documentation from Plaintiffs showing the completed repairs in accordance with the terms of the Policy.

         In seeking dismissal of what remains of this case, Safeco argues that because this Court has already determined that Safeco paid Plaintiffs in accordance with the terms of their insurance policy, Plaintiffs cannot establish that Safeco improperly denied any claim by Plaintiffs. According to Safeco, nor can Plaintiffs possibly show that Safeco acted with the malice, evil motive, or reckless disregard necessary to establish a bad faith claim under Kentucky law. Safeco points out that it has already been determined that Safeco acted within the terms of its policy.

         Plaintiffs urge this Court to overrule Safeco's Motion for Summary Judgment on the basis that many genuine issues of material fact exist with respect to Plaintiffs' claims. Specifically, they argue that Safeco continues to mischaracterize Plaintiffs' case as one that is only about the failure of Safeco to pay on their homeowner's policy. However, as both Mr. and Mrs. Wellman testified in their depositions and as their discovery responses made clear, Plaintiffs' claims against Safeco arise under provisions of the UCSPA that do not require a denial of payment. In this respect, Plaintiffs contend that summary judgment should not be granted because a jury could find, and should be permitted to find, that Safeco violated the UCSPA and acted in bad faith with respect to adjusting the claim. According to Plaintiffs, this is an independent violation of the UCSPA that does not require, as Safeco argues, a denial payment of the policy proceeds.

         II. STANDARD OF REVIEW

          Summary judgment should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A genuine issue of material fact exists only when, assuming the truth of the non-moving party's evidence and construing all inferences from that evidence in the light most favorable to the non-moving party, there is sufficient evidence for a trier of fact to find for that party. A non-moving party cannot withstand summary judgment, however, by introduction of a "mere scintilla" of evidence in its favor. See Ciminillo v. Streicher, 34 F.3d 461');">434 F.3d 461, 464 (6th Cir. 2006).

         The tort of bad faith for breach of an insurer's obligation in the area of first-party insurance was first recognized by a court of last resort in 1973 in Gruenberg v. Aetna Insurance Co. 32');">510 P.2d 1032 (Cal. 1973). In doing so, the Supreme Court of California created an entirely new cause of action against insurers regarding first-party coverages. Prior to this time, the courts followed the common-law rule that damages for breach of contract were, with rare exception, limited to those in the contemplation of the parties at the time the bargain was struck. As a general rule, consequential damages were more exclusively within the realm of tort law than that of contract, and it was no tort for a party to breach a contract, even when the breach was intentional. Now, more than forty years later, the law regarding the obligation of an insurer in first-party situations is still evolving and expanding. In almost all jurisdictions, insurers not only are exposed to consequential damages for economic loss and emotional distress for failing to deal with their insureds fairly and in good faith, but they also may be subject to substantial awards of punitive damages. Moreover, most states have enacted statutory bad faith, appurtenant to the tort.

         The foundation of the modern common-law bad faith action was laid by the Kentucky Supreme Court in Wittmer v. Jones. 864 S.W.2d 885 (Ky. 1993). It was there that the court set forth the three elements required to sustain a cause of action for bad faith against an insurer:

(1) the insurer must be obligated to pay the insured's claim under the ...

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