In my last post, I began my evaluation of a decision in the Kentucky Court of Appeals called Hamilton Mutual Insurance Company of Cincinnati v. Buttery, 220 S.W. 3d 287. The decision evaluated by the Kentucky Appellate Court in Hamilton initially arose when Mr. Buttery’s home was vandalized. He filed a claim with his insurance company, Hamilton Mutual. The adjuster sent by Hamilton to Mr. Buttery’s home told Mr. Buttery that he would receive payment for the claim within ten days. After almost one year of providing a tremendous amount of information and documentation and submitting to four examinations under oath, Mr. Buttery received no payment on his claim. He filed a bad faith lawsuit against Hamilton basing his complaint on Hamilton’s failure to act in a timely fashion to settle his claim. Hamilton appealed a jury verdict in Mr. Buttery’s favor. My last post provided the factual and procedural background for how the case came before the Kentucky Appellate Court. I would now like to pick up where I left off and address some of those defenses asserted by Hamilton.

In its defense, in part, Hamilton argued that:

[I]t relied upon the advice of its counsel in refusing to pay Buttery’s claim. Accordingly, it seeks to justify its alleged misconduct and to circumvent UCSPA [Kentucky’s Unfair Claims Settlement Practices Act] consequences by shifting responsibility to its attorney. Claiming that it relied entirely upon the attorney’s advice, Hamilton Mutual therefore contends that Buttery could not possibly have shown that it acted with an evil motive or a reckless disregard for his rights.

The Kentucky Court of Appeals provided a very logical analysis when disagreeing with Hamilton:

While an insurer may most assuredly seek the advice of counsel, it remains ultimately responsible for its own non-delegable statutory duty to properly investigate claims and adjust them in harmony with the terms and conditions of its policy.

That explanation makes sense. It makes tremendous sense because, frankly, that’s what attorneys are for. Lawyers provide guidance as to the legal options available and the potential ramifications of winning or losing on the various options. Any client should and must rely on advice of counsel, but that reliance cannot be used as a shield from acts that are against public interest and intentionally harmful.

An insurer cannot engage in the subterfuge of avoiding its duties by the shield of retaining an attorney. Reliance on the advice of counsel must be reasonable, and the insurer retains its obligations to exercise its own independent judgment in assessing an insured’s rights under a policy.

Hamilton also argued that the trial erred in considering Hamilton’s conduct after Buttery filed suit to enforce coverage of his claim. However, an insurance company’s duty of good faith and fair dealing is not extinguished merely because a lawsuit was filed. The Kentucky Court of Appeals relied on the Supreme Court of Kentucky’s reasoning on this issue:

[T]he [Kentucky Supreme] Court held that evidence of an insurer’s settlement behavior throughout the litigation may be examined and presented in order to establish an insurer’s bad faith. The Court held that the provisions of Kentucky’s UCSPA cannot be read so narrowly or restrictively as to relieve insurers from their obligation to deal fairly with insureds – even after litigation has been instituted against them…[B]oth settlement discussions and litigation are equally viable means of addressing a claim that both are amenable to USCPA. They are alternate means of relief, and they are not mutually exclusive.

The foregoing legal analysis, including others not addressed in my blog, were relied upon by the Kentucky Court of Appeals to affirm the lower court’s holding that Hamilton acted in bad faith. Please consider that this holding and analysis is specific to this Kentucky Court of Appeals.

Please tune in next week for another bad faith discussion.