In re Bramble

671 S.W.3d 347

ESTATE OF Lahoma Salyer BRAMBLE; Joan Angonese; Michael R. Anslem; Ginger Ashworth; Bernice Bailey; Henrietta Berry; Ruth Brock ; Melynda Hartman Coffee; Beaureda Colley; Amelia Craft; Charles V. Craft; Conroy Craft; Judy Downs Crockett; Betty Dobson; Doug Downs ; Carolyn Dykhuzien; Estate of Evalee Blaylock Edwards; Mary Fifield; Lillian Whitaker Floyd; Gwendonlyn R. Forge; Maxine French; Pauline Fritts; Jerry B. Gibbs; Paul B. Gibbs; Frederic Harwell, Administrator of the Estate of Ronald Harwell; Gemalea Salyer Havens; Myrtle Howard; Pam Howard; Mayola Humes; Gail Kahley; Christine Madison Kelley; Linda Krontz; Harold Lovely; Neva Louise Lovely; Sandy Downs Zimmerman Lynch; Karen J. Lyon; Mark Manning; Oneda Marchetti; David Martin ; Kimberly D. McCord; Audrey Minix; Earnestine Minix; Lillian Minix; James Phares; James R. (Jamie) Phares; Jason Phares; Cheryl L. Piper; Ina Salyer Pyles; Mollie W. Richardson; Wanda Gaye Rokosz; Ramey Salyer, Jr.; Bill Salyer; Chandler "Happy" Salyer; David Ron Salyer; Emory Cain Salyer; Ford Salyer; Gary Salyer; Glen Salyer ; James Salyer; Kelly Salyer; Larry Keith Salyer; Larry R. Salyer; Mark Steven Salyer; Mary E. Salyer ; Patchel Salyer; Robert E. Salyer ; Rothel Salyer; Roy Ward Salyer; Timmy Odell Salyer; Vena Salyer; Wisemond Salyer; Lavinia Whitaker Smith; Barbara Stalbaum; Vaness Eason Vanhyning; Lavarvia Beddingfield Webie; Daniel E. Whitaker; Daryl Lawrence Whitaker; Jack Whitaker ; Marvin Whitaker; Jamie Whitworth; Darrell G. Williams ; Den Delbert Williams; Gary Williams ; Geraldine Williams; Greg Williams; Randall Williams; and Karen Wortman, Appellants

v.GREENWICH INSURANCE COMPANY, Appellee

2022-SC-0043-DG

Supreme Court of Kentucky.

June 15, 2023

COUNSEL FOR APPELLANTS: Philip Gray Fairbanks, Lexington, Mendel Austin Mehr, Mehr Fairbanks Trial Lawyers, PLLC.

COUNSEL FOR APPELLEE: Mindy Barfield, Lexington, Shadette Page Johnson, Dinsmore & Shohl, LLP, Susan L. Maines, Casey Bailey & Maines, PLLC, Lexington.

OPINION OF THE COURT BY CHIEF JUSTICE VANMETER

By statute and case law, insurance companies must deal fairly with both their insureds and claimants under their policies. Failure to do so may result in a bad faith action against the insurance company. By case law, however, a bad faith action may not be maintained if a policy does not cover a claim. The threshold issue we resolve in this case is whether the Court of Appeals erred in holding that because an insurance company's coverage under its policy had never been finally adjudicated, a third-party claimant's bad faith claim was premature, in reliance on Pryor v. Colony Insurance Co. , 414 S.W.3d 424, 427 (Ky. App. 2013). We hold that the Court of Appeals did err and therefore reverse its opinion and remand to that court for determination of the other issues raised in Greenwich Insurance Company's appeal.

I. Facts and Procedural Background

In early 2007, the heirs of Ben and Lillian Salyer (collectively "Salyer Heirs"), filed this action against J. D. Carty Resources, LLC, and Anaconda Drilling of Kentucky, LLC alleging that these defendants had trespassed on their land, drilled natural gas wells, and thereby damaged their land and deprived the heirs of mineral royalties. The alleged trespass began in 1993. In March 2008, based on surveys, Carty admitted that its wells had drawn natural gas from under the Salyer Heirs property and, subsequently, the trial court entered a partial summary judgment as to liability. In December 2008, Carty entered an agreed judgment with the Salyer Heirs to pay $628,000, with payments to be made in monthly installments over the course of 2009. Carty defaulted almost immediately.

Greenwich, insurer of Carty during two policy years, July 2005 to July 2007, had defended Carty under a reservation of rights and without admitting its policy covered the conversion of the natural gas, offered to contribute $20,000 to Carty towards payment of Carty's agreed judgment with the Salyer Heirs.¹ In negotiating this payment with the Salyer Heirs’ counsel, Carty's counsel, who had been retained by Greenwich to represent Carty, advised the Salyer Heirs’ counsel of Carty's release in favor of Greenwich.

Following Carty's default, the Salyer Heirs sought payment by Greenwich of their agreed judgment with Carty and sought and were granted leave to file their fourth amended complaint to assert claims against Greenwich and Bituminous Casualty Company, insurers, respectively, of Carty and Anaconda. The claims were for violation of the UCSPA and common law bad faith. Greenwich was aware of the litigation when it was filed in early 2007. In August 2010, Greenwich filed a motion to sever the claims against it from the remaining issues in the case. It reaffirmed that it had been defending the underlying case under a reservation of rights and that before a bad faith claim could proceed, coverage and an obligation to pay had to be established. Thereafter, the parties filed cross motions for summary judgment with respect to whether the policy covered the Salyer Heirs’ claims

In early 2011, the trial court entered an Order granting the Salyer Heirs’ motion for partial summary judgment, holding Greenwich's policies covered Carty's actions which formed the basis of the Salyer Heirs’ complaint and subsequent judgment. In so ruling, the trial court stated that the Salyer Heirs had established the first element of Wittmer v. Jones , 864 S.W.2d 885, 890 (Ky. 1993). The trial court made this Order final and appealable. CR ² 54.02. Greenwich timely appealed this determination, but on its review, the Court of Appeals granted the Salyer Heirs’ motion to dismiss the appeal as interlocutory. Bituminous Cas. Corp. v. Est. of Bramble , 2011-CA-0542-MR, 2011-CA-0643-MR, 2014 WL 685453 (Ky. App. Feb. 21, 2014) disc. rev. denied and ordered not to be published , 2014-SC-0150-D (Ky. Feb. 11, 2015).³ As a result, no final determination was made as to whether the insurance policies cover Carty's actions and the Salyer Heirs’ claims. This lack of final decision remains true to this point.

On remand, litigation as to the bad faith claims resumed. In November 2017, Greenwich again moved to dismiss the fourth amended complaint on the grounds that Kentucky case law prohibits a third party from pursuing a claim under the UCSPA for the purposes of determining coverage, and that a third party may not pursue a common law bad faith claim. The Salyer Heirs filed a motion to file a fifth amended complaint to assert a declaration of rights that the insurance policies covered their claims. The trial court granted the Salyer Heirs’ motion in April 2018, and also scheduled a jury trial to begin that September.

Following the trial, the jury awarded the Salyer Heirs $834,000 in compensatory damages and $14,300,000 in punitive damages, and the trial court entered a judgment accordingly. This judgment was in addition to the trial court's order that Greenwich was liable on the original agreed judgment between the Salyer Heirs and Carty, which, including interest, totaled in excess of $1,500,000 by November 2018. Greenwich then filed two notices of appeal, which the Court of Appeals consolidated.

The Court of Appeals issued an opinion summarizing the procedural history of the case from inception through the 2018 jury trial. In a plurality decision, in which one authoring judge concurred, one judge concurred in result only without opinion and one judge dissented without opinion, the Court of Appeals, relying on Pryor , held that "the circuit court improperly permitted the [Salyer Heirs] to pursue their bad faith claims against it in violation of Pryor because coverage had not been established when they filed their third-party bad faith complaint." Greenwich , at *9.⁴ The Court of Appeals did not address any issues relating to policy coverage or the Magoffin Circuit Court trial. The Salyer Heirs filed a motion for discretionary review, which we granted.

II. Standard of Review

For purposes of this review, and the posture of the case before us, we are confronted with a pure question of law, i.e. , whether a third-party may pursue a bad faith claim against an insurance company prior to a coverage determination being made. In all such cases, our review is de novo. See, e.g., Ford Motor Co. v. Jobe , 544 S.W.3d 628, 631 (Ky. 2018) (de novo review of questions of law). We, thus, afford no deference to the decisions of the lower courts. Commonwealth v. B.H. , 548 S.W.3d 238, 242 (Ky. 2018).

III. Analysis

For over thirty-five years, our case law has recognized the ability of a third-party claimant to file a bad faith action against an insurance company. See State Farm Mut. Ins. Co. v. Reeder , 763 S.W.2d 116, 118 (Ky. 1988) (holding that "private citizens are not specifically excluded by the statute from maintaining a private right of action against an insurer by third-party claimants. KRS 446.070 and KRS 304.12–230 read together create a statutory bad faith cause of action[ ]"). Our seminal case defining the cause of action, Wittmer v. Jones , was a third-party bad faith action. The elements of bad faith were set out in Wittmer , as follows:

(1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed.

864 S.W.2d at 890.

In Davidson v. American Freightways, Inc. , 25 S.W.3d 94 (Ky. 2000), a case involving a bad faith claim against a self-insured transportation company, we summarized the development of our bad faith jurisprudence to that point. While we held that a self-insured company was not subject to the UCSPA, we stated,

The gravamen of the UCSPA is that an insurance company is required to deal in good faith with a claimant, whether an insured or a third-party, with respect to a

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