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Indiana Insurance Co. v. Demetre

Supreme Court of Kentucky

August 24, 2017



          COUNSEL FOR APPELLANT: Donald Lee Miller, II Kristin M. Lomond, Quintairos, Prieto, Wood & Boyer, P.A., Michael D. Risley Bethany A. Breetz Stites & Harbison, PLLC

          COUNSEL FOR APPELLEE: Kevin Crosby Burke Burke Neal PLLC Robert Edward Sanders Justin Aaron Sanders The Sanders Law Firm Jeffrey Sanders Jeffrey M. Sanders PLLC


          COUNSEL FOR AMICUS CURIAE, KENTUCKY JUSTICE ASSOCIATION: Hans George Poppe, Jr. Warner Thomas Wheat The Poppe Law Firm



         Appellee James Demetre sued his insurer, the Indiana Insurance Company (hereafter "Indiana Insurance"), for bad faith arising from breach of his insurance contract, violation of the Kentucky Unfair Claims Settlement Practices Act, and violation of the Kentucky Consumer Protection Act. These claims stemmed from a vacant property owned by Demetre that had operated decades earlier as a gas station. When Demetre received notice that a family occupying a nearby residence was pursuing environmental claims against him for alleged migration of petroleum and other substances, he notified his liability carrier, Indiana Insurance, which provided a defense and eventually settled the family's claims. Indiana Insurance maintains that, having provided a defense and indemnification, Demetre has no viable bad faith claim but the trial court and the jury viewed the evidence of what occurred in the more than three years from notice of the family's claims to settlement of their lawsuit in an altogether different light. After an eight-day trial, the jury awarded Demetre $925, 000 in emotional distress damages and $2, 500, 000 in punitive damages. The trial court denied post-trial motions and Indiana Insurance appealed to the Court of Appeals, which rejected Indiana Insurance's allegations of error and affirmed the trial court's judgment in its entirety.

         On discretionary review, Indiana Insurance makes the following allegations of error:. 1) the trial court erred in not granting its motions for directed verdict and judgment notwithstanding the verdict; 2) there was insufficient evidence of Demetre's emotional distress to sustain the jury's award of damages; and 3) the trial court erred by barring two of Indiana Insurance's witnesses from testifying at trial and by erroneously instructing the jury. The second issue requires us to consider whether expert testimony is ' necessary to support an emotional distress damage award in a bad faith insurance claim, a potential application (or more accurately extension) of our relatively recent decision in Osborne v. Keeney, 399 S.W.3d 1 (Ky. 2012). After careful consideration of the record and law, we affirm the Court of Appeals and thus affirm the trial court's judgment upon jury verdict.


         In 2006, Demetre contracted with Indiana Insurance to provide coverage for his condominium residence and automobile. At the same time, Demetre obtained an excess liability or "umbrella" policy to provide him with additional coverage. These bundled policies provided Demetre with approximately $2, 500, 000 in liability coverage. Demetre expanded his coverage in 2008 by adding liability coverage for two parcels of real estate, one in Kenton County and the other in Campbell County. Indiana Insurance's coverage of the Campbell County property was the genesis of the case at bar.

         Until 1962, the Campbell County property was the site of an active Texaco gas station. The station remained dormant until the 1990s, when efforts were made to remove the station and its fixtures from the property. In 1998, the station's underground gasoline storage tanks were removed and, the next year, the station's building was torn down and all remaining materials were hauled away. As such, when Demetre acquired the Campbell County property from his in-laws in 2000, the property had been reduced to an empty lot. Despite the removal of the gas station and tanks, the Commonwealth of Kentucky's Department for Environmental Protection continued monitoring of the property for some time.

         In April 2008, Demetre contacted Indiana Insurance to obtain coverage for the Campbell County property. Demetre informed Gwendolyn Rich, an Indiana Insurance agent, that the lot had previously been the site of a gas station. When later deposed, Rich confirmed that she had informed Indiana Insurance's underwriting department of the lot's prior use as a gas station. Indiana Insurance agreed to insure the Campbell County property and added it to Demetre's liability coverage in April. At this time, a major misstep occurred internally at Indiana Insurance because although the property was insured it was apparently underwritten as though it was residential property.[1] Shortly thereafter, on June 29, 2008, renewed Demetre's insurance policy for another year.

         On September 4, 2008, Demetre received a letter from an attorney representing Mahannare Harris, her partner Dorian Cosby, and Harris's five minor children (collectively, the "Harris family"). The Harris family had moved into a house on a lot adjoining the Campbell County property in 2004. In the letter, Paul Dickman, the lawyer for the Harris family, alleged that members of the family had suffered injuries due to gasoline emissions from the Campbell County property including "significant medical damages" and a loss in the fair market value of their residence. Demetre immediately notified his agent of the letter and, on September .11, 2008, the agent notified Indiana Insurance of the Harris family's claims.

         Indiana Insurance initially assigned Demetre's case to adjuster Allen Geisinger. On September 17, 2008, Geisinger sent an "alert" to Indiana Insurance's Special Claims Unit, which handled environmental claims and toxic torts. Eighty-eight minutes later, Geisinger received a response from David Cowles of the Special Claims Unit, instructing him to work with adjuster Paula Matheny and stating that "[i]t appears their (sic) may not be coverage under the Insured's condo policy for this matter."

         On October 30, 2008, Geisinger sent Demetre a letter by certified mail informing him that Indiana Insurance had questions as to whether the Harris family's claims were covered by his insurance policy and would "handle this matter under a reservation of rights." This letter was sent approximately two weeks after Geisinger acknowledged in an email to a co-worker that he was unsure whether there would be coverage for the Harris family's claims, while at the same time admitting "I don't know what claims are being made against the insured by the attorney."

         Subsequently, Geisinger directed Indiana Insurance's Field Investigation Unit to interview Demetre and to conduct an investigation of the Campbell County property. This investigation included obtaining from Shield Environmental Associates-the contractor monitoring groundwater underneath the Campbell County property for the Commonwealth-all environmental records, information, data, and testing documents related to the Commonwealth's monitoring of the property. These efforts were directed to determining whether Demetre knew of the Harris family's claims before the Campbell County property was added to Demetre's insurance policy.

         While Geisinger thoroughly investigated Demetre, his investigation of the Harris family's claims was practically non-existent. When asked what he had done to assist Demetre, Geisinger explained that he "undertook this investigation/responded to Mr. Dickman's letters, hired or assigned a Field Investigation Unit to do sitework." Geisinger acknowledged that while he had spoken to Dickman early in the case, the attorney knew very little about his clients or their alleged injuries. When asked about following up on the Harris family's claims, Geisinger explained that he was waiting for the Harris family's attorney to respond to him. There was no effort to interview the Harris family members, request medical records, seek medical exams, inspect or sample the soil near the Harris residence or otherwise determine the validity and nature of the claims being asserted against Demetre.

         Despite this inaction, Geisinger wrote a letter to Demetre on March 23, 2009 (more than six months after Indiana Insurance had received notice of the Harris family's claims), where he stated "[p]lease recall that we are investigating the claims being made by Ms. Harris and her family. Their attorney has not provided us with any information regarding those claims." Geisinger then proceeded to ask questions about the status of the storage tanks from the Campbell County property. In closing his letter, Geisinger reminded Demetre that "[Indiana Insurance] continues to handle this matter under a reservation of rights."[2]

         On March 27, 2009, Demetre's case was reassigned from Geisinger to Karen Shields Glardon.[3] Despite the change in personnel, Indiana Insurance was consistent in its lack of progress in assessing the Harris family's claims. When questioned during the subsequent litigation, Glardon admitted to doing nothing to protect Demetre's interests during her handling of the case file. She did not seek information about the Harris family or their claims nor did she recall ever speaking with Demetre or Dickman.[4]

         Despite Glardon's inaction, two significant developments occurred during her handling of the case. On June 29, 2009, Indiana Insurance renewed Demetre's insurance policy for another year. The second and more critical development came to pass on August 14, 2009, when the Harris family filed suit alleging trespass, nuisance and negligence claims against Demetre, and- a third-party bad faith claim against Indiana Insurance. After consulting with the Special Claims Unit, Glardon engaged Tim Schenkel to represent Demetre and Don Lane to represent Indiana Insurance.[5] Although Glardon engaged Schenkel to represent Demetre, she-admitted that she never spoke to him during her management of the case.

         On September 25, 2009, Demetre's case was reassigned yet again to James Magi. Magi had significant experience handling toxic tort claims, to such an extent that he was considered the "go-to-guy" in the Special Claims Unit for this type of work. This reputation was likely in part derived from his success in closing 72% of his assigned insurance claims without paying any money to claimants. Further, on those cases where payment was made, 31% of them took an average of ten years to process (from the date a claim was made until the claim was closed and payment made). Magi was assigned Demetre's coverage claim and was also designated by Indiana Insurance to simultaneously handle the Harris family's liability claims.

         Bruce Frederick, the unit leader of the Special Claims Unit and Magi's supervisor, explained that in Magi's role as insurance adjuster, he controlled and directed the activities of the attorneys involved in the case-Lane who represented Indiana Insurance and Schenkel who represented Demetre. As such Lane and Schenkel had to request permission from Magi to take necessary actions in representing their clients. To further demonstrate this, Magi testified that it was correct that, "[s]teps taken in litigation, whether to file a motion for summary judgment, whether to file a motion to bifurcate something, or take any other significant step in the conduct of litigation, " had to be suggested by counsel to him, discussed with him, and approved by him, prior to the lawyer being permitted to take action.

         In October 2009, Schenkel and Magi discussed hiring an expert to "determine the status" of the Campbell County property with the state environmental agency. With Magi's permission, Schenkel asked his associate Jason Morgan to find an expert to check the state regulatory records. On October 21, 2009, Morgan informed Schenkel that he had spoken to Bill Johnson, an environmental engineer in Louisville, who informed Morgan that the Campbell County property was "in Site Investigation NOT Corrective Action." In a memorandum to Schenkel, Morgan explained that "it seems to me that if the site is in Site Investigation and not Corrective Action, it is unlikely that the [Harris family]'s claims are legitimate."

         On November 4, 2009, Magi noted in an internal data management system that he "[s]poke to D/C, he is in the process of retaining an expert from Louisville. He will send me the CV and rates." Given the context of the diary and the date of the entry, it would appear that this message was referring to Schenkel, in his role as defense counsel, and Johnson, as the expert from Louisville. Additionally, in copies of email messages between Schenkel and Magi that were admitted as evidence in trial, Schenkel reiterates that Magi should "be assured that I will keep you informed of all future developments in this matter." Yet, in his trial testimony Magi denied haying any knowledge of Morgan's memorandum about the questionable nature of the Harris family's claims.

         Magi seemingly focused his full attention on attempting to deny coverage. On December 11, 2009, Magi sent a second Reservation of Rights letter to Demetre, in which he noted that defense counsel had been provided to Demetre and "Indiana [Insurance] shall continue such defense until a determination is made that no coverage exists for the [u]nderlying [c]laim. ..." Thus fifteen months after Demetre notified Indiana Insurance of the Harris family's claims, there was still no determination as to coverage.

         Shortly after Magi sent this letter to Demetre, Indiana Insurance internally separated the Harris family's claims file, the bad faith file, and the coverage file. William Ambrose was assigned to handle the Harris family's claims, while Magi retained control over the coverage and bad faith files. Despite the split in management of the files, Schenkel continued to update Magi about any developments he learned of in the handling of the Harris family's claims.

         On January 22, 2010, Indiana Insurance answered the Harris family's amended complaint and filed a declaratory judgment cross-claim, under Kentucky Revised Statutes (KRS) 418.045, against its insured, Demetre. Indiana Insurance claimed that while Demetre contacted Indiana Insurance's agent to insure the Campbell County property, "the parties have been unable to identify an actual endorsement that was appended to the [p]olicy adding coverage for the [p]roperty to it." Second, Indiana Insurance alleged that '[a]t the time that Demetre sought to insure the [p]roperty, he was aware that investigations concerning possible contamination of the [p]roperty had been ongoing for several years and failed to inform the [a] gent or Indiana [Insurance] of contamination on the [p]roperty before seeking to insure it."

         On May 4, 2010, Demetre filed an answer to Indiana Insurance's cross-claim and raised his own cross-claims alleging bad faith breach of contract, unfair claims settlement practices and violations of the Kentucky Consumer Protection Act. Demetre asserted that Indiana Insurance had wrongly asserted a reservation of rights, and he requested a declaration of his rights and duties under the liability policy.

         On September 23, 2010, Indiana Insurance filed a motion for a declaratory judgment seeking a summary ruling that it had no duty to defend or indemnify Demetre for the Harris family's claims under any insurance policies issued to Demetre by Indiana Insurance. Indiana Insurance argued that "[j]udgment is appropriate because the Harris claim results from a loss in progress under the relevant insurance coverage, and therefore, this loss' cannot be covered as a matter of law." The loss-in-progress doctrine relieves the insurer of a coverage obligation where the insured was aware of an ongoing progressive loss at the time the policy became effective. While the loss-in-progress doctrine has never been recognized by this Court or the Kentucky Court of Appeals, Indiana Insurance relied on a decision from the United States District Court for the Western District of Kentucky. See Pizza Magia Int% LLC v. Assurance Co. of America, 447 F.Supp.2d 766, 776 (W.D. Ky. 2006). That Court opined that the Kentucky Supreme Court would adopt the loss-in-progress doctrine.[6]

         On December 8, 2010, the trial court, after reviewing Indiana Insurance and Demetre's detailed pleadings, denied Indiana Insurance's motion for a declaratory judgment. The trial court determined that a declaratory judgment would not be appropriate as "Indiana [Insurance] is essentially asking the [trial court] to adopt factual defenses in order to grant judgment in their favor." After noting that there was no controversy regarding whether the policy would cover the type of third-party loss that was the subject of the underlying Harris litigation or that Indiana Insurance had a duty to defend, the trial court explained:

Indiana [Insurance] is asking this Court to declare that its public policy based defense under the known loss rule or loss in progress doctrine excludes them from having to indemnify Demetre should [the Harris family] succeed at trial. However, there is a controversy between Demetre and Indiana [Insurance] regarding whether Demetre knew of the loss at the time he sought coverage. Nonetheless, this is a fact-based question which goes directly to . the proof of Indiana [Insurance]'s defense that cannot be disposed of through a declaratory judgment. The question is best reserved for the trier of fact and not "appropriate for judicial determination as a matter of law unless the Known Loss Rule or the Loss in Progress Doctrine applies to the present case.

(emphasis in original).

         Additionally, the trial court acknowledged the cited federal authority but concluded, "the Courts of the Commonwealth have [had] the opportunity to adopt the known loss rule and have not exercised that authority. Instead, the Kentucky appellate courts have recognized the fortuity doctrine." The trial court refused to recognize the known loss rule or the loss-in-progress doctrine and further noted that "even if [it] were to adopt the rule, Indiana [Insurance] has not provided sufficient facts to warrant summary judgment in its favor as a matter of law under the known loss rule or the loss in progress doctrine or even the fortuity doctrine."[7]

         On January 21, 2011, Demetre moved to discharge Schenkel as counsel.[8] Demetre sought an. order "declaring that the lack of measureable progress by the attorney assigned to defend him in the tort action over the past 17 months and the conflict of interests between Indiana [Insurance] and Demetre in the tort action over-rides Demetre's duty to cooperate with Indiana [Insurance] found in his homeowner's policy." Accordingly, Demetre sought the discharge of the law firm assigned by Indiana Insurance and to proceed with independent counsel.

         After Demetre's motion was filed, Indiana Insurance elected to abandon all insurance policy defenses, with the exception of the "time-on-loss" defense. In a February 10, 2011 response opposing Demetre's motion regarding counsel and seeking declaratory judgment in his favor regarding the coverage issue, Indiana Insurance stated that [a]fter investigation, Indiana [Insurance] waived [insurance policy defenses] because the investigation revealed that they may not apply, and Indiana chose to resolve all doubts in favor of James Demetre."[9] (Emphasis supplied). While the August 2010 Chikar affidavit supporting Indiana Insurance's motion for declaratory judgment had alleged that Demetre misled the insurer about the Campbell County property and its former use, in this response Indiana Insurance acknowledged it did not believe Demetre had ever intentionally obtained coverage on a false basis. The remaining insurance policy defense, “time-on-loss, " was described by Indiana Insurance as "whether the [Harris family's] injuries, if any, occurred during the policy period, as opposed to occurring during a period in which Demetre chose not to insure the property."[10]

         On March 7, 2011, while Demetre's motion for a declaratory judgment was still pending, Schenkel filed a motion requesting leave to withdraw as counsel. Schenkel explained that Demetre, "alleges that a conflict of interest has developed between and among the undersigned and himself which precludes further representation in this matter." The trial court granted Schenkel's motion to withdraw on March 22, 2011. Also, on the same day Schenkel moved to withdraw as counsel, three attorneys from Frost Brown Todd entered their appearance as Indiana Insurance's appointed counsel for Demetre.

         On September 28, 2011, more than three years after Indiana Insurance was first notified of the Harris family's claims and over two years after the family filed suit against Demetre, Mahannare Harris was finally deposed. All depositions which concerned the Harris family's claims were completed on December 19, 2011. In addition to the depositions, medical records of the Harris family were obtained, independent medical exams on the adult plaintiffs were conducted, and inspections of the Harris residence were performed. Based on this investigation (which took less than ninety days), Philip J. Schworer, an attorney with Frost Brown Todd, concluded in his December 16, 2011 pre-mediation statement for Demetre that the Harris case "is a nuisance value case." The attorney concluded there was no evidence that the Harris family had suffered or would suffer harm from any substances associated with the Campbell County property. Schworer's conclusion about the merits of the Harris family's claims was similar to that reached by Morgan two years earlier in his October 2009 memorandum where he stated that, based on his consultation with an environmental engineer about the Campbell County property, "it is unlikely that the [Harris family]'s claims are legitimate." On January 23, 2012, Indiana Insurance elected to settle the Harris family's case -for $165, 000.[11]

         With the resolution of the Harris family's claims, Demetre moved on February 7, 2012, to dismiss Indiana Insurance's cross-claim against him and that cross-claim was dismissed with prejudice on February 17, 2012. By that point, Demetre had spent a significant amount of his own money litigating with Indiana Insurance. The sum total of Demetre's personal legal fees and expenses from August 27, 2009, to February 17, 2012, was approximately $397, 541.04. However, the dismissal of Indiana Insurance's cross-claim against Demetre was not the end of the case, as Demetre continued to litigate his claims against Indiana Insurance.

         On April 13, 2012, Indiana Insurance requested summary judgment on Demetre's bad faith claim, stating that it had "fully defend[ed] and indemnified] [Demetre], " which included taking "reasonable and necessary steps to protect Mr. Demetre." Further, Indiana Insurance argued that Demetre was unable to prove that it acted in bad faith or breached a contractual obligation, "because he cannot show that Indiana [Insurance], failed to pay the claim; cannot deny that he has failed to prove any damages related to the improper manner in which he alleges that Indiana [Insurance] handled the claim; and cannot show that Indiana [Insurance] acted with malice or. ill will toward him (emphasis in original)."

         In denying Indiana Insurance's motion for summary judgment, the trial court noted that Indiana Insurance presented a legal argument, without specific evidentiary support, to establish that "the company did not act in bad faith and fulfilled all fiduciary duties owed Demetre." Further, the trial court interpreted Indiana Insurance's motion as a request to find as a matter of law that, because Indiana [Insurance] provided Demetre a defense and indemnity, it fulfilled its obligations to Demetre.'" The trial court was unwilling to . construe the Unfair Claims Settlement Practices Act ("the UCSPA") and Demetre's related causes of action so narrowly. Further, the trial court was persuaded that an insurer's unreasonable delay could be. the basis of a claim under the UCSPA, if there was evidence to demonstrate that the delay was prompted to deceive the insured with respect to coverage or part of an attempt to extort a more favorable settlement.

         In September 2012, the bad faith case went to trial. During Demetre's case-in-chief, he called Magi to testify. In his deposition prior to trial, Magi had claimed that there was a factual basis for Indiana Insurance to assert that Demetre knew about contamination on the Harris family's property prior to his obtaining insurance in April 2008. Specifically, Magi alleged the existence of a document, identifying soil vapors that existed on the Harris family's property and moreover that document was located in the claims file. After Magi was asked if that document had been provided to Demetre's counsel, Lane interjected saying "111 just state for the record the entirety of the claim file has been produced." During that deposition, Demetre's counsel and Magi had the following exchange:

Q - So, If I look at the claims file that's been produced by Indiana Insurance Company in this case, I'm going to find proof of soil contamination on Mrs. Harris's property prior to April 30th, 2008; correct?
A - Correct.
Q - That's the position of Indiana Insurance Company; correct?
A - Correct.
Q - I'm going to find a document confirming or verifying or identifying groundwater contamination underneath Mrs. Harris's house or Mrs. Harris's property prior to April 30th, 2008, in the file . correct?
A - Correct.
Q - That's the position of Indiana Insurance Company; correct?
A - Correct.
Q - I'm going to find in the file documentation identifying soil vapors on her property, on Mrs. Harris's property, existing prior to April 30th, 2008, in the file; correct?
A - Correct.
Q - And, again, that's the position of Indiana Insurance ...

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