Insurer Is Not Absolved of Its Duty to Fairly Adjust Claim Just Because the Claim is a “Fairly Debatable Loss” | SLG

When filing a bad faith lawsuit against a carrier, there are many defenses that a policyholder’s attorney can expect the insurer to assert. Those defenses that are asserted by insurers are assumedly those which are specific to the allegations asserted in the Complaint. Those defenses, however, do not affect the obligations of the insurer to promptly and fairly evaluate an insured’s claim. The Supreme Court of Kentucky in Farmland Mutual Ins. Co. v. Johnson, et al., 36 S.W.3d 368 (KY 2000) was faced with the insurer’s defense that the loss at issue was fairly debatable. The foregoing defense, however, does not absolve the insurance company of its duty to comply with the mandates of Kentucky’s Unfair Claims Settlement Practices Act (“KUCSPA”).

In Farmland, the insureds sued their commercial property insurer for breach of contract and violation of the KUCSPA arising out of a fire insurance claim. The insured stipulated that the amount of the loss was fairly debatable and the insurer contended that, as a result, a claim against it for bad faith under KUCSPA was foreclosed. The insurance company argued that the bad faith claim should have been dismissed as a matter of law because the insured stipulated that reasonable persons could have different opinions as to the value of the loss and whether the damaged structure should be repaired or replaced.

If a particular claim is “fairly debatable,” the insurer is entitled to debate that claim regardless of whether the debate concerns a matter of fact or one of law…An insurer is entitled to challenge a claim which is fairly debatable on the law of the facts.

Having taken the foregoing into consideration, the fact that an insurer can debate the claim does not mean that the insurer does not have to comply with applicable standards and regulations for handling the claim. An insurer is entitled to assert the defenses that it deems proper in response to the allegations asserted against the carrier in the Complaint. However, the insurer’s right to assert appropriate defenses in no way negates its obligation under the insurance contract and applicable law, statutes and regulations to promptly and fairly investigate a claim.

Although matters regarding investigation and payment of a claim may be “fairly debatable,” an insurer is not thereby relieved from its duty to comply with the mandates of the Kentucky UCSPA. Although there may be differing opinions as to the value of the loss and as to the merits of replacing or repairing the damaged structure, an insurance company is still obligated under the Kentucky UCSPA to investigate, negotiate, and attempt to settle the claim in a fair and reasonable manner.

The Supreme Court of Kentucky held that the insured’s stipulation that the amount of the loss was fairly debatable did not foreclose the bad faith claim against the insurance company. As such, if a case is in Kentucky, it is important to keep in mind that an insurer will still be bound by its duty to promptly and fairly handle a claim despite the defenses asserted by the insurer in response to a complaint.

Please tune in next week for another bad faith analysis.

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