RENDERED: JUNE 17, 2021 TO BE PUBLISHED
Supreme Court of Kentucky 2018-SC-0586-DG
CRYSTAL LEE MOSLEY, INDIVIDUALLY APPELLANTS AND AS ADMINISTRATRIX OF THE ESTATE OF RHETT LEE MOSLEY, DECEASED AND RHETT MOSLEY, JR., A MINOR, BY AND THROUGH HIS MOTHER AND NEXT FRIEND, CRYSTAL LEE MOSLEY
ON REVIEW FROM COURT OF APPEALS V. NO. 2017-CA-1252 HARLAN CIRCUIT COURT NO. 2011-CI-00349
ARCH SPECIALTY INSURANCE COMPANY APPELLEES AND NATIONAL UNION FIRE INSURANCE COMPANY
OPINION OF THE COURT BY CHIEF JUSTICE MINTON
AFFIRMING
We accepted discretionary review in this third-party bad-faith case to
determine whether Arch Specialty Insurance Company and National Union Fire
Insurance Company acted in bad faith while mediating negligence and
wrongful death claims asserted by Crystal Lee Mosley against insureds of Arch
and National Union after her husband’s death in a coal mining accident. The
trial court summarily dismissed bad-faith claims against both companies, and
the Court of Appeals affirmed. We likewise affirm. I. FACTUAL AND PROCEDURAL BACKGROUND
While working the night shift at a surface mine, Rhett Mosley was killed
when the lube truck he was operating crashed and overturned, crushing him
underneath the truck. After the accident, a Mine Safety and Health
Administration (MHSA) investigation revealed the lube truck’s brakes were
improperly maintained and malfunctioned at the time of the accident. MSHA
also noted Rhett was not wearing a seatbelt. MSHA ultimately concluded that
these two circumstances—along with mine management’s failure to conduct
preoperational equipment checks—were the root causes of Rhett’s fatal
accident.
Crystal Lee Mosley, in her individual and representative capacities,
brought a negligence and wrongful-death action against four companies
involved in the mining operation: (1) Rex Coal Company, owner of the mine; (2)
Jean Coal Company, operator of the mine; (3) Regional Contracting, Rhett’s
employer, an employee-leasing company that provided employees to Jean Coal;
and (4) Dixie Fuels, owner of the lube truck. Mosley also sued Terry Loving,
the owner and sole managing member of Regional Contracting and Dixie
Fuels.1 Loving, Jean Coal, and Regional Contracting were insured by Arch.
Rex Coal and Dixie Fuels were insured by National Union. Rex Coal and Dixie
Fuels were indemnitees under the Arch policy insuring Jean Coal, Regional
Contracting, and Loving.
1 Loving and his family members own all the entities involved in this mining operation. Rex Coal and Jean Coal are both owned by Karen Loving, Terry Loving’s wife; Joe Bennett, Karen Loving’s brother; and several other relatives.
2 During the several years following the filing of Mosley’s complaint, the
parties undertook discovery, disputed liability, and filed summary judgment
motions. The litigation was complex and slow moving. Regional Contracting,
Rhett’s employer, argued that all claims against it were barred by the
exclusivity provisions of Kentucky’s Workers’ Compensation Act. Jean Coal,
the company that contracted with Regional Contracting for employees, asserted
it was entitled to up-the-ladder immunity under the Workers’ Compensation
Act. Dixie Fuels, owner of the lube truck, argued Mosley’s claims against it
were misplaced under the law of bailments because Jean Coal had possession
and control of the lube truck at the time of the accident, relieving it of any
obligation to maintain the truck. And Rex Coal argued it was not involved in
the mining operation at the time of the accident, so it owed no duty to Rhett.
All defendants asserted that they were entitled to an apportionment instruction
based on Rhett’s own negligence in failing to wear an available seat belt.
The trial court dismissed Mosley’s claims against Regional Contracting,
finding its payment of workers’ compensation benefits on Rhett’s behalf barred
suit against it. The remaining parties were ordered to attempt mediation and
mediated on two separate occasions.
At the first mediation, Arch offered its $1 million policy limits to settle all
claims against its insureds. Mosley refused to accept less than National
Union’s $6 million policy limits as well, which National Union was unwilling to
contribute because of its insureds’ available defenses. The first attempt at
mediation failed.
3 At the second mediation, an attorney representing all defendants and an
adjuster for National Union attended. Arch did not send an adjuster to
negotiate but again offered its full $1 million policy limits toward a global
settlement. Mosley demanded $1 million from Arch to settle the claims against
Jean Coal, but not the claims against Loving. Arch refused to settle, insisting
that it had an obligation to both of its insureds and could not exhaust its policy
limits to protect only one of its insureds, leaving the other exposed. Mosley
continued to demand National Union’s $6 million policy limits. So the second
mediation failed. But shortly after that, Mosley reached a settlement with
Arch, accepting the full $1 million policy limits to settle all claims against its
insureds, Jean Coal and Loving. Later, National Union settled its claims on
behalf of Rex Coal and Dixie Fuel for $2 million.
Following the second failed mediation, Mosley filed third-party bad-faith
claims against Arch and National Union. Mosley claimed that Arch and
National Union acted in violation of the Kentucky Unfair Claims Settlement
Practice Act (KUCSPA)2 and engaged in a civil conspiracy during the mediations
of the wrongful-death action. Arch and National Union contested these claims
and filed motions to dismiss. The trial court denied the motions, allowing the
bad-faith claims to proceed, however, discovery for the bad-faith action was
stayed until the underlying wrongful-death action was fully resolved.
2 Kentucky Revised Statute (KRS) 304.39.12–230.
4 Upon settlement with National Union, Mosley moved for discovery on the
bad-faith claims. Arch responded with a motion for judgment on the pleadings,
and National Union moved for summary judgment. Mosley, in turn asked the
trial court for an opportunity for discovery on their bad-faith claims.
The trial court granted Arch’s motion for judgment on the pleadings. The
trial court explained that accepting the face of Mosley’s complaint as true,
Arch’s alleged conduct was legally insufficient to prosecute a claim for bad-
faith because of violations of KUCSPA, civil conspiracy, and punitive damages.
The trial court later granted National Union’s summary judgment motion after
it found Mosley had failed to establish a cause of action for bad faith under
Kentucky law. Additionally, the trial court held that even if additional
discovery was granted, no genuine issue of material fact exists because
National Union’s insureds’ liability was never beyond dispute.3
Mosley appealed both dismissals, arguing the trial court erred in denying
her discovery motion because a proper bad-faith cause of action had been
pleaded against Arch and that a genuine issue of fact did exist under the claim
against National Union.
Mosley argues to this Court, as he did below, that Arch and National
Union acted in bad faith during the two mediations, both together and
separately. Mosley insists that the insurance companies leveraged claims by
forcing global settlements instead of negotiating each claim individually.
3 “Beyond dispute” is a legal term use to describe one of the elements of a bad
faith cause of action in Kentucky.
5 Mosley also contends that the companies acted in bad faith by sending only
one attorney to the second mediation to negotiate for both insurers and their
respective insureds. Finally, Mosley claims that Arch and National Union
would not settle unless she reduced their settlement request from National
Union. Overall, Mosley argues this conduct constituted bad faith and violated
the KUCSPA.
II. ANALYSIS
A. The trial court did not err in dismissing the third-party bad-faith claims.
Under the KUCSPA, an insurance company must deal in good faith with
a claimant in determining whether the company is contractually obligated to
pay the claimant.4 This is true whether the claimant is the company’s own
insured, or the company insures the claimant’s tortfeasor. Kentucky, unlike
many states, allows a third-party to bring a cause of action for claims of bad-
faith, and this Court explained the standard for such claims in Wittmer v.
Jones.5 The Court held that a plaintiff has a “steep burden” of satisfying three
requirements before a trial court should find the plaintiff to have brought a
viable bad-faith claim.6 Those requirements are:
(1) the insurer must be obligated to pay the insured's claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and
4 Davidson v. American Freightways, Inc., 25 S.W.3d 94, 100 (Ky. 2000). 5 864 S.W.2d 885, 890 (Ky. 1993). 6 Id. at 890.
6 (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.7 The failure to show any of these elements eliminates the bad-faith claim as a matter of law.8
B. Standard of Review
In response to Mosley’s complaint, Arch filed a motion for judgment on
the pleadings based on her failure to state a claim of bad faith under Kentucky
law, and the trial court granted the motion.9 A motion for judgment on the
pleadings “should be granted if it appears beyond doubt that the nonmoving
party cannot prove any set of facts that would entitle him/her to relief.”10
These motions are based purely on whether the plaintiff has stated a cause of
action as a matter of law and do not require or permit the trial court to make
any findings of fact.11 Because a trial court’s ruling on a motion for judgment
on the pleadings is a question of law, appellate review of a judgment on the
pleadings is de novo.12 So in this instance we will review the trial court’s
7 Id. at 890. 8 Id. Kentucky One Health, Inc. v. Reid, 522 S.W.3d 193, 194 (Ky. 2017) (“Under 9
[Kentucky Rule of Civil Procedure (CR) 12.03], a judgment based on a motion for judgment on the pleadings is reserved for those cases in which the pleadings demonstrate that one party is conclusively entitled to judgment.”). 10 City of Pioneer Vill. v. Bullitt Cnty. ex rel. Bullitt Fiscal Ct., 104 S.W.3d 757,
759 (Ky. 2003). 11 James v. Wilson, 95 S.W.3d 875, 883–84 (Ky. App. 2002). CR 12.03 may be
treated as a motion for summary judgment, Schultz v. Gen. Elec. Healthcare Fin. Servs. Inc., 360 S.W.3d 171, 177 (Ky. 2012). 12 Scott v. Forcht Bank, NA, 521 S.W.3d 591, 594 (Ky. App. 2017).
7 decision that Mosley’s claim failed to state a claim without deference to the
lower courts.
Like Arch’s motion, the trial court granted National Union’s motion for
summary judgment on Mosley’s bad-faith claim. We review such grants de
novo as “[t]he standard of review on appeal of summary judgment is whether
the trial court correctly found there are no genuine issues of material fact and
the moving party is entitled to judgment as a matter of law.”13 We therefore
review for whether there was a genuine issue of fact bearing on National
Union’s alleged bad faith conduct under the analysis established in Wittmer.
C. Wittmer Analysis
The three elements for a third-party bad-faith cause of action under
Wittmer are determinative for determining if granting both National Union’s and
Arch’s dispositive motions was appropriate. The bad faith conduct must go
beyond a technical violation of KUCSPA, and the plaintiff must allege she
suffered actual damage that was outrageous because of the insurance carrier’s
conduct.14 Further, the plaintiff’s complaint must sufficiently allege that the
insurance company acted outrageously towards her.15 Unless all these factors
13 Carter v. Smith, 366 S.W.3d 414, 419 (Ky. 2012) (citing Blankenship v. Collier,
302 S.W.3d 665, 668 (Ky. 2010)). 14 Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 452 (Ky. 1997), as modified
(Feb. 18, 1999), and holding modified by Hollaway v. Direct Gen. Ins.Co. of Miss., Inc., 497 S.W.3d 733 (Ky. 2016). 15 Holloway v. Direct Gen. Ins. Co. of Miss., 497 S.W.3d 733, 738 (Ky. 2016).
8 are present, a trial court may not allow a third party’s bad faith claim to
proceed to the jury.16
1. Plaintiff must show an obligation to pay under the contract’s policy.
The first element Mosley must establish is the insurance company’s
obligation to pay under the policy. It appears from the arguments raised the
existing case law is unclear about what must be shown under Wittmer’s first
prong. To be clear, an obligation to pay requires proof that the insured’s policy
requires the insurer to pay, not that there is liability under the contract, which
is analyzed under Wittmer’s second requirement.17
Here, as the Court of Appeals stated, Arch had no duty to pay Mosley
because of express exclusionary language in the policy.18 As Arch averred in
its response to Mosley’s amended complaint, and later again in its motion for a
judgment on the pleadings, Arch had no contractual duty to pay the claims
against Jean Coal and Loving because Arch’s policy expressly excluded “bodily
injury to an employee of the insured arising out of and in the course of
employment by the insured; or (b) performing duties related to the conduct of
the insured’s business.” Under the policy, the term employee included leased
16Id. (“Absent such evidence of egregious behavior, the tort claim predicated on bad faith may not proceed to a jury.” (citing United Services Auto. Ass'n v. Bult, 183 S.W.3d 181, 186 (Ky. App. 2003), as modified (June 27, 2003)). 17 Id. (“Beginning with liability under the policy, we think it is important to clarify that realistically there are two distinct questions of law in assessing Direct General's duty to compensate Hollaway.”). 18 The policy’s exclusion did not require Arch to cover bodily injury sustained by
a leased employee.
9 employees like Rhett. The trial court had already determined that Rhett was a
leased employee, or an employee who suffered bodily injury. Thus, Arch did
not have a contractual obligation to pay under its policy.
National Union conflates the first two prongs of Wittmer, and instead
focuses most of its argument on persuading the Court that its liability was not
beyond dispute, which will be discussed below. But, for purposes of analyzing
Mosley’s claim against National Union under the entire Wittmer test, Mosley
has satisfied the first prong of a third-party-bad-faith claim against National
Union, as even the insurer states it never denied Mosley’s claim.
Additionally, it should be noted that Mosley’s bad faith claim against
Arch fails completely at this juncture because Mosley’s claim cannot satisfy the
first prong of this analysis. Because of the paucity of guidance in our
third-party-bad-faith precedent, we will analyze Mosley’s claim against both
Arch and National Union under all Wittmer elements.
2. Plaintiff must show that the insured’s liability was beyond dispute.
After the plaintiff has shown that the insurance company has an
obligation to pay, the plaintiff must establish that the insured’s liability is
beyond dispute.19 An insurer has an obligation to make a good-faith effort in
effectuating “prompt, fair and equitable settlements of claims in which [its
insured's] liability has become reasonably clear[.]”20 This Court has interpreted
19 Wittmer, 864 S.W.2d at 890. 20 KRS 304.12–230(6).
10 “reasonably clear” to mean “beyond dispute[.]”21 But when an insured’s
liability is unclear, bad-faith claims fail as a matter of law because the insurer
has a reasonable basis for challenging the claim.22 So, in this instance, unless
liability of the parties insured by Arch and National Union was beyond dispute,
Mosley’s claim must also fail the second prong of the Wittmer test.
Holloway v. Direct General Insurance Company of Mississippi discussed
the beyond-dispute-liability requirement of Wittmer.23 We found in Holloway
that because the insurer was not willing to concede liability of its insured, the
liability insurer was under no absolute duty to pay the plaintiff’s claim.24 As
stated in Holloway, a liability dispute entitles the insurance carrier to forgo any
effort to settle and to take a dispute about liability to a jury.25 Additionally, the
Court in Holloway concluded that “settlements are not evidence of legal
liability, nor do they qualify as admissions of fault[,]” under Kentucky law.26
Arch insured Jean Coal and Loving. Under the Workers’ Compensation
Act, Jean Coal could claim immunity from tort liability. Jean Coal’s motion for
summary judgment arguing its entitlement to immunity in the wrongful death
action was pending at the time Arch and Mosley settled. So it cannot be said
21 Coomer v. Phelps, 172 S.W.3d 389, 395 (Ky. 2005). 22 Holloway, 497 S.W.3d at 739. 23 Id. (“Because Direct General's absolute duty to pay her claim is not clearly established, this alone would be enough to deny her bad-faith claim under Wittmer.”). 24 Id. 25 Id. 26 Id.
11 that Arch’s liability was reasonably clear because its insured may have been
immune from Mosley’s claims. Further, because Arch’s policy excluded bodily-
injury coverage for employees, both Jean Coal and Loving had a legitimate
basis to contest liability. And while Jean Coal and Loving’s liability was not
beyond dispute, Arch offered $1 million in settlement consistently throughout
the litigation. The only connection to “liability” Arch had was because of its
settlement, and as stated, settlements are not evidence of legal liability.
We similarly find that National Union’s insureds’ liability was not beyond
dispute. National Union provided coverage for Dixie Fuel and Rex Coal.
National Union’s motion for summary judgment contended the liability of its
insureds was disputed because of the potential allocation of fault among the
parties, including the potential for fault apportioned to Rhett himself. For
example, Rex Coal was potentially entitled to immunity. Dixie Coal maintained
that it was merely the bailor of the truck Rhett was driving when the accident
occurred, and that Jean Coal was liable for its maintenance and use. Finally,
because most of the issues in the underlying wrongful-death action had yet to
be resolved, it was possible a jury would not apportion fault to Rex Coal and
Dixie but instead to other defendants. Dixie Fuel’s or Rex Coal’s liability was
debatable.
In Messer v. Universal Underwriters Insurance Company, a panel of the
Court of Appeals explained that “before an insurer can be liable for bad faith,
12 the underlying liability must be established.”27 In Messer, the plaintiff’s bad-
faith claim failed to survive summary judgment because the plaintiff was
unable to show the insured’s liability was beyond dispute. While the plaintiff
offered evidence that the insured might be liable, the plaintiff “never eliminated
the reasonable possibility that a jury could find [the plaintiff] 100% at fault for
colliding with Mountain Ford's vehicle.” Because of uncertainty over the
insured’s liability, no bad-faith claim could stand as a matter of law against the
insurance company. As National Union argues, it would not be legally
obligated to pay Mosley until a jury ultimately determined liability on the part
of Dixie Fuel or Rex Coal. We find the facts as recited in National Union’s
summary judgment motion make it reasonable for it to challenge liability under
Mosley’s claim because National Union’s insureds’ liability was contested, and
therefore, Mosley failed to meet the second prong of Wittmer.
Mosley argues that Farmland Mut. Ins. Co. v. Johnson28 allows for a bad-
faith claim to proceed even where the underlying claim was “fairly debatable.”29
We disagree. Farmland involved a first-party bad faith claim where the
insurance company’s liability was undisputed and the only issue litigated was
the amount owed to the plaintiff.30 In fact, the “fairly debatable” language
relied on by Mosley refers to the amount of coverage owed to the plaintiff and
27 598 S.W.3d 578 (Ky. App. 2019). 28 36 S.W.3d 368, 374-75 (Ky. 2000). 29 Id. at 376. 30 Id. at 374–75.
13 not the liability of the insurance company.31 As the Court of Appeals in the
present case stated, “When liability is clear or ‘beyond dispute,’ a claim must
be paid . . . . But when liability is not clear or disputed, an insurer may pursue
its defense and contested liability until its duty under KUCSPA is triggered.”
We find the circumstances here to be unlike those in Farmland because
liability and the amount of coverage were uncertain. Until Arch and National
Union’s insureds’ liability became reasonably clear, the insurers had the right
to contest liability. So no bad-faith claim can succeed as a matter of law.
As the Court of Appeals in Messer stated, the “tall burden” of bringing a
third-party bad-faith claim:
requires a claimant to demonstrate it was unreasonable for the insurer to argue the insured's conduct was not a substantial factor in causing the accident. Kentucky courts will not allow a jury to apportion fault to persons whose conduct was not a substantial factor in causing an accident. The insurer can challenge the claimant's ability to meet that burden by filing a motion for summary judgment.32
We find that Arch and National Union properly challenged Mosley’s ability to
meet her burden of proof. Arch did not act unreasonably in challenging the
claimant’s ability to meet that burden because its policy provided an exclusion
for injury caused by its insureds. And it was not unreasonable for National
Union to contest liability where its insureds’ fault was unclear because of the
31 Id. at 376. 32 Messer, 598 S.W.3d at 588.
14 complex relationships among the parties and the potential defenses asserted by
each.
3. The plaintiff must show that the insurer’s conduct resulted in actual damage and was outrageous.
Mosley’s claim against Arch and National Union also fails because the
alleged bad-faith conduct was not outrageous, and no proof of actual damage
has been shown. The final requirement under Wittmer for a third-party bad-
faith claim is that the plaintiff show that the insurance company’s conduct was
outrageous and caused the plaintiff actual damage.33 The alleged conduct
must go beyond negligence and justify the imposition of punitive damages.34 In
Holloway, we stated that “absent evidence of punitive conduct, an insurer is
entitled to a directed-verdict for any bad faith claims levied against it.”35
We find the plaintiffs have failed to show they suffered actual damage
and that the alleged conduct by the insurance companies was outrageous.
Mosley has not stated any damage amount owed because of the alleged bad
faith conduct by Arch or National Union. The allegations of bad faith include
Arch’s refusal to pay its $1 million policy limit. But a mere two weeks after the
last mediation, the parties settled, and Mosley received the amount. Arch
offered its policy limits in two mediations, but Mosley refused. Additionally,
National Union later settled the claims against its insureds for $2 million.
Mosley’s amended complaint does not allege any damage caused by Arch and
33 Id. at 592; Zurich Ins. Co. v. Mitchell, 712 S.W.2d 340 (Ky. 1986). 34 Wittmer, 864 S.W.2d at 890. 35 Messer, 598 S.W.3d at 592 (quoting Holloway, 497 S.W.3d. at 739).
15 National Union’s conduct. At most, their conduct caused a delay in settlement,
but we have held that mere delay in settlement does not rise to bad-faith
conduct.36
Further, the alleged conduct does not appear outrageous or in reckless
indifference to Mosley’s rights. KUCSPA requires the insurers to act reasonably
in negotiating claims.37 To find bad faith, the evidence of bad faith must be
sufficient to establish that a tort has occurred.38 Mosley specifically argues
that Arch and National Union unfairly leveraged claims by making only global
offers of settlement and that Arch acted in bad faith by offering only global
offers of settlement because it would only pay its policy limit for Jean Coal if
Loving was released. We find though, as did the courts below, this conduct is
not prohibited by the KUCSPA.
KRS 304.12-230(13) defines prohibited leveraging as a situation when an
insurance company, when liability is clear, attempts to force settlement under
one portion of the policy to influence settlement under another portion of the
policy. Here, however, Arch was not conditioning the settlement of its $1
million policy limit to avoid another portion of the policy. Instead, because
Jean Coal and Loving were both defendants insured by Arch, both of which
Arch owed a duty to indemnify, it only conditioned a settlement of a sum that
would exhaust policy limits on the condition that both insureds receive a full
36 Zurich Ins. Co. v. Mitchell, 712 S.W.2d 340 (Ky. 1986). 37 Holloway, 497 S.W.3d at 739. 38 Guaranty Nat. Ins. Co. v. George, 953 S.W.2d 946, 949 (Ky. 1997).
16 release of liability in exchange for such payment. This does not constitute
leveraging. Of course, KRS 304.12-230(13) only applies if the insurer’s liability
is reasonably clear, which, as discussed above, was not the case for either Arch
or National Union.39
Further, we do not find it that it was outrageous or improper for one
attorney to represent Arch and National Union at the second mediation. As the
Court of Appeals explained, the impropriety of the conduct Mosley argues is a
conflict of interest, but when all parties had agreed to joint representation, as
was the case here, no issue exists. Such conduct does not rise to a level of bad
faith. Arch and National Union tried to settle at both mediations. Mosley
refused, which she had the right to do. She cannot now complain of the delay
in settlement when she refused to budge from her settlement demand.
D. The Court of Appeals did not err in affirming the trial court’s denial of Mosley’s discovery motion.
Mosley argues the Court of Appeals erred in affirming the trial court’s
denial of her discovery motion because the denial prevented her from proving
her bad-faith claim. The trial court stayed discovery on the bad-faith claims
until the underlying wrongful-death action was resolved. When the trial court
granted Arch and National Union’s dispositive motions against the third-party
bad-faith claim, the court also denied Mosley’s discovery motion.
39 KRS 304.12-230(13) (“Failing promptly to settle claims, where liability has become reasonably clear, under one (1) portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage”).
17 The trial court denied Mosley’s discovery motion on the grounds that the
discovery Mosely sought in the motion could only lead to evidence of the
insurer’s mediation conduct which is classed as confidential litigation conduct
and is inadmissible under Kentucky Rule of Evidence (KRE) 408. Further, the
trial court reasoned that even if mediation conduct were admissible, the
evidence plaintiff sought would not save her failed bad-faith claims because
she had not met the threshold requirement of pleading the existence of a
genuine issue of material fact to support her bad-faith allegations. Finally, the
trial court concluded, given the length of time this litigation had been pending,
Mosley had ample opportunity to conduct discovery. The Court of Appeals
accepted the trial court’s reasoning and affirmed.
Mosley argues here that the trial court erred when it granted National
Union’s summary judgment motion and that the trial court abused its
discretion by denying discovery because the bad-faith conduct evidence she
sought was not rendered inadmissible by KRE 408. We review a trial court’s
evidentiary rulings for abuse of discretion.40 We will reverse the ruling if it was
arbitrary, unfounded in law, or unreasonable.41
The matter before us invites examination of the complex interplay
between KRE 408 and bad-faith claims. KRE 408 reads:
Evidence of: (1) Furnishing or offering or promising to furnish; or (2) Accepting or offering or promising to accept a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not
40 Goodyear Tire and Rubber Co. v. Thompson, 11 S.W.3d 575, 581 (Ky. 2000). 41 Id. at 581.
18 admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.”42
This Court in Knotts v. Zurich Ins. Co.,43 addressed admissible evidence
in bad-faith cases.44 Knotts involved potential bad-faith litigation conduct by
an insurance company as compared to the insurers’ pre-litigation conduct at
issue in the present case.45 The insurer in Knotts argued that because the
alleged conduct occurred after litigation had commenced, the KUSCPA’s
protections against bad-faith conduct did not apply.46 But a majority of this
Court found that both evidence of the insurance company’s settlement
behavior and evidence of the litigation tactics deployed by the insurance
company were admissible as an exception to the general rule that evidence of
settlement negotiations is excluded.47 We reasoned that KRS 304.12–230 did
42 (Emphasis added.) 43 197 S.W.3d 512 (Ky. 2006). 44 Id. at 514. 45 Id. at 515. 46 Id. at 516. 47 Id. at 518 (“Recognizing the existence of a continuing duty of good faith,
however, is not the end of our inquiry. We must also address the further question of what sorts of post-filing conduct by an insurer will be admissible in a bad faith action. This is truly an issue of first impression in this state, so we turn to other jurisdictions for guidance. Treatment of this issue can be divided broadly into two camps: (1) allowing only evidence of the insurance company's settlement behavior and (2) allowing that evidence plus evidence of the litigation tactics, strategies, and techniques employed on behalf of the insurance company.”).
19 not confine its applicability to pre-litigation conduct, and because the statute
applies to claims, the duty of good faith applies to an insurer so long as a claim
is in play.48 So evidence of an insurer's settlement behavior “throughout the
litigation may be examined and presented in order to establish an insurer's bad
faith to encourage good faith and fair dealing on behalf of all parties.”49
Even more relevant to the present case is our discussion in Knotts
concerning the type of conduct admissible to prove that a party was acting in
bad faith.50 As we explained, two different classes of potentially admissible
evidence arise in bad-faith litigation.51 The first class consists of evidence of
the insurance company’s settlement behavior, and the second class includes
evidence of the litigation tactics, strategies, and techniques employed on behalf
of the insurance company.52
We held in Knotts that public policy forbids admitting evidence of the
second class because admission would disrupt the judicial process and impede
the insurer’s vigorous advocacy on behalf of the insured.53 Our opinion stated:
The most serious policy consideration in allowing evidence of the insurer's post-filing conduct is that it punishes insurers for pursuing legitimate lines of defense and obstructs their right to contest coverage of dubious claims . . . . [I]f defending a questionable claim were actionable as bad faith,
48 Id. 49 Id. (see Hamilton Mut. Ins. Co. of Cincinnati v. Buttery,220 S.W.3d 287 (Ky.
App. 2007). 50 Knotts, at 518. 51 Id. 52 Id. at 519. 53 Id.
20 it would impair the insurer's right to a zealous defense and even its right of access to the courts.54
We explained that the difference in the two classes of evidence is that the Rules
of Civil Procedure provide remedies for discovery abuses in matters that fall
into the second-class conduct, but no formal procedural rules govern the first
class.55 For example, when a party refuses to turn over certain evidence under
a claim of privilege, the party seeking to discover the evidence at issue may
seek the intervention of the trial court for procedural relief. Because of the
availability of trial court intervention and procedural relief for the alleged
offensive conduct, the Knotts court would treat the above conduct as
inadmissible evidence in the bad-faith context because only offensive conduct
for which there is no available procedural relief can support a bad-faith claim.
In contrast, Knotts points out, “If a litigant refuses to settle or makes low offers,
his adversary cannot avail himself of motions to compel, argument, or cross-
examination to correct his failure.”56
Because there is no recognized process for trial court intervention or
procedural relief available for bad-faith settlement conduct, evidence of such
conduct may be admitted as proof in a bad-faith claim. But even then, the trial
54 Id. at 520. 55 Id. (“The Rules of Civil Procedure provide remedies for the latter. To permit the jury to pass judgment on the defense counsel's trial tactics and to premise a finding of bad faith on counsel's conduct places an unfair burden on the insurer's counsel, potentially inhibiting the defense of the insurer. An insurer's settlement offers, on the other hand, are not a separate abuse of the litigation process itself.”). 56 Id. at 523.
21 court must be chary of the admission of proper settlement conduct as evidence
of bad faith. The Knotts court worried that admitting proper settlement
conduct in a bad-faith claim would create the same policy problem that
requires litigation conduct to be inadmissible because the jury would be able to
scrutinize the insurer’s acts and then, “without the assistance of insight into
litigation techniques, could second guess the defendant's rationales for taking
a particular course.”57 So only evidence of improper settlement behavior is
admissible. Like Knotts, we caution future litigants and courts alike that even
if the proof is of the first class and the conduct is purely settlement conduct, it
is not automatically admissible.58 In bad-faith actions, there is a heightened
concern about the potential of prejudice to the insurer.59 The trial court—the
gatekeeper charged with excluding prejudicial evidence under KRE 403—
should be on high alert when deciding what evidence may be admitted.60
In summary, Knotts established that for evidence of bad faith to be
introduced it must be evidence of the insurer’s settlement behavior that
occurred throughout the litigation and the proffered evidence must be more
highly probative than prejudicial, and, even then, the courts must cautiously
57 Id. at 520. 58 Id. at 523 (“Such evidence is not automatically admissible. Evidence of post- filing conduct may often be of limited relevance to a claim of bad faith and raises distinct concerns about prejudice to the insurance company.”). 59 Id. (“While resolution of the tension between the competing considerations of probative value and prejudice is an unquestioned requirement of the law of evidence, see KRE 403, we note that there has been heightened concern about this issue, as it applies to post-filing conduct, since courts began considering such evidence of bad faith.”). 60 Id.
22 admit it. We find the trial court in the present case properly denied Mosley’s
discovery motion because the evidence Mosely sought from Arch and National
Union, if any was produced, would not be admissible to prove her bad-faith
claim. We, too, find the evidence inadmissible but for different reasons than
the lower courts. The lower courts reasoned that the discovery motions would
only produce evidence of inadmissible litigation conduct and therefore
discovery should be denied. We find, though, that Mosley sought to discover
evidence of settlement conduct, not litigation conduct, but because she has
alleged only that the discovery will uncover evidence of proper settlement
conduct, her motion was properly denied. We will explain our reasoning using
the Knotts rubric.
To begin, we note the evidence sought was evidence of conduct that
occurred throughout the litigation, a time when both insurers had a duty to act
in good faith. The conduct Mosley sought to discover occurred long after the
commencement of the wrongful-death litigation, and no party disputes that the
insurers were then under an obligation to deal in good faith.
Next, we are to decide if the evidence Mosley sought to discover would be
probative of Arch’s and National Union’s litigation techniques, which are not
discoverable, or settlement conduct, which is discoverable. We find that
Mosley sought to discover evidence of both classes. For example, Mosley
sought to obtain the claim file compiled by National Union. Any information in
National Union’s claim file would potentially be privileged—either as work-
product or attorney-client—and, if the trial court had ruled it discoverable,
23 Mosley would have had a potential remedy through trial court intervention if
National Union refused production for any reason. Because of the availability
of trial court oversight, under Knotts the production of the claim file would be
classed as part of the litigation process and off limits to prove Mosley’s bad-
faith claim.
Significantly, though, we find that the discovery sought of the specific
interactions between the parties at the settlement conversations to be of the
first-class of evidence discussed in Knotts. Kentucky’s Model Mediation Rules
state that “[m]ediation should be regarded as settlement negotiations for
purposes of [KRE] 408.”61 There is no procedural device under the law to
remedy National Union’s and Arch’s potential bad-faith conduct that occurred
at these mediations. For example, if the companies had been unfairly
leveraging claims in the mediation process, as Mosley asserts, the only way to
show this would be through evidence about the actual mediations. So Arch’s
and National Union’s mediation conduct is considered settlement conduct
under Knotts for purposes of evidence available to prove Mosley’s bad faith
claim and is potentially admissible.
While some of the evidence Mosley seeks is of the first-class, we find it is
ultimately inadmissible because it has no probative value. As instructed by
Knotts, even if the evidence is of the first-class and not litigation conduct, it is
61Rule 12.B. Model Mediation Rules were adopted by the Supreme Court of Kentucky in the “Order Amending Rules of the Supreme Court,” 99-1, effective February 1, 2000.
24 not to be automatically admitted. Instead the trial court is to look closely at
what the evidence will show if admitted and carefully assess if it is probative of
a bad-faith claim.62 As the trial court stated, Mosley only alleges proper claim
negotiation techniques, not improper leveraging of claims. So even if the
evidence was admitted, it would not be probative that the insurers acted in bad
faith because Mosley’s discovery motion only sought more evidence of
permissible settlement negotiation techniques, which cannot be probative of
bad faith in a disputable underlying claim. In contrast, if Mosley’s discovery
motion had alleged that the evidence would show, for example, that National
Union and Arch conspired against Mosley or that they ever denied Mosley’s
underlying bad-faith claim, then discovery would be permitted because this
would be improper settlement conduct that potentially rises to bad-faith
conduct. But because Mosley only alleges that discovery will provide more
evidence of proper settlement conduct, the discovery motion was properly
denied.
Mosley relies on several cases where settlement conduct was admitted,
but that evidence arises in the context of a trial, the trial court having denied a
defense motion for summary judgment in which the trial court had analyzed
the sufficiency of evidence as a matter of law. For example, in Hamilton Mut.
Ins. Co. of Cincinnati v. Buttery,63 the admitted evidence included proof that the
insurer had tried to find ways to evade the plaintiff’s claims, that it monitored
62 Knotts, 197 S.W.3d at 523. 63 220 S.W.3d 287.
25 the plaintiff’s financial situation in order to leverage its own bargaining
position, and that the company intended to refuse to satisfy the claim until the
plaintiff released the company from liability.64
The evidence Mosley sought was neither relevant or probative of bad faith
because she only sought discovery of proper settlement conduct. Therefore,
any evidence sought would be insufficient to support her claim as a matter of
law. For this reason, Mosley’s discovery motion was properly denied as it
would not produce anything relevant to Mosley’s bad-faith claim.65
E. Mosley’s Civil-Conspiracy Claim was properly dismissed.
Mosley’s amended complaint also alleged a claim of civil conspiracy
against Arch and National Union. Although appellees argues this was not
preserved, we disagree, as the trial court’s grant of Arch’s motion for judgment
on the pleadings and National Union’s motion for summary judgment were also
dispositive of Mosley’s civil-conspiracy claim. A civil-conspiracy claim requires
the plaintiff to show “a corrupt or unlawful combination or agreement between
two or more persons to do by concert of action an unlawful act, or to do a
64 Id. at 293 (“Proof indicating that Hamilton Mutual's entire investigation was focused on finding a way to evade satisfying his claim . . . the company monitored his financial struggles closely so as to leverage its bargaining position; and that Hamilton Mutual intended to refuse to satisfy the claim until Buttery released the company from liability arising from its misconduct.”). 65 Hamilton Mut. Ins. Co. of Cincinnati v. Barnett, Nos. 2007-CA-000029-MR &
2007-CA-000064-MR, 2008 WL 3162321, at *3 (Ky. App. Aug. 8, 2008) (“Hamilton Mutual attempts to define all its settlement discussions as litigation conduct. We, however, agree with the trial court's sound reasoning that most of the alleged litigation conduct was actually settlement discussions, and is therefore admissible both before and after the December 6, 1996, order.”).
26 lawful act by unlawful means.”66 The burden lies with the plaintiff to prove
every element of conspiracy.67 We find Mosley was unable to meet the high
burden of proof as a matter of law.
For her civil-conspiracy claim, she only alleges that Arch and National
Union used one attorney during a mediation session. This alone does not
establish conspiracy. And, as the Court of Appeals states, “Mosley did not
establish a scintilla of evidence of an unlawful agreement to perform an
unlawful act” and failed to “provide a factual basis of an agreement to act
overtly unlawful in furtherance of the agreement.” Because Mosley did not
provide the trial court with any evidence that Arch and National Union had
agreed to act against her in a tortious manner, Arch and National Union’s
dispositive motions were appropriately granted. Finally, as the trial court
stated, Plaintiff’s civil-conspiracy claim is predicated on her ability properly to
assert bad-faith claims, which she has failed to do.68
III. CONCLUSION
For the reasons discussed above, we affirm the decision of the Court of
Appeals.
All sitting. All concur.
66Peoples Bank of N. Kentucky, Inc. v. Crowe Chizek and Co. LLC, 277 S.W.3d 255, 261 (Ky. App. 2008) (quoting Smith v. Bd. of Edu. of Ludlow, 264 Ky. 150, 94 S.W.2d 321, 325 (1936)). 67 James v. Wilson, 95 S.W.3d 875, 896–902 (Ky. App. 2002). 68 James, 95 S.W.3d at 896.
27 COUNSEL FOR APPELLANTS:
Kellie Marie Collins J. Dale Golden Golden Law Office, PLLC
Kenneth R. Friedman Friedman Rubin
Jeffrey Reed Morgan Jeffrey R. Morgan & Assoc PLLC
COUNSEL FOR APPELLEE, ARCH SPECIALTY FIRE INSURANCE COMPANY:
Mindy Barfield Shadette Page Johnson Dinsmore & Shohl LLP
COUNSEL FOR APPELLEE, NATIONAL UNION FIRE INSURANCE COMPANY:
Christopher S. Burnside Christopher Glade Johnson Griffin Terry Sumner Frost Brown Todd LLC
COUNSEL FOR AMICUS CURIAE, INSURANCE INSTITUTE OF KENTUCKY:
Ronald Lee Green Green Chesnut & Hughes PLLC