The Sixth Circuit rejected the insurer's claim for reverse bad faith against its insured who made a fraudulent claim after her home was destroyed by fire. State Auto Property and Cas. Ins. Co. v. Hargis, 2015 U.S. App. LEXIS 7475 (6th Cir. April 23, 2015).
The insured's home burned to the ground early one morning. She filed what she would later admit was a fraudulent insurance claim with State Auto for approximately $866,000. State Auto paid in excess of $425,000 before filing an action to declare the policy void. State Farm's investigation eventually led to the insured's admission that she had a friend burn down her house to collect insurance proceeds. An indictment was issued and the insured pled guilty. She was sentenced to a 60-month term and was ordered to pay restitution to State Auto totaling $672,497.
State Auto amended its complaint to add a common law tort claim for reverse bad faith under Kentucky law. The district court denied State Auto's motion for summary judgment, rejecting the claim for reverse bad faith. The Court awarded damages for the fraudulent insurance acts to the extent State Auto was not fully compensated by the order of restitution.
State Auto appealed and the Sixth Circuit affirmed. A common law tort claim for reverse bad faith had not been recognized in any jurisdiction, although only a handful of jurisdictions had addressed the issue. Appellate courts in Ohio, Iowa and California had rejected such a claim. These courts held that the insurer held the purse strings and had a built-in protection from such evils. On the other hand, the insured, who often was in dire financial straits after a loss, needed the equal footing provided by the ability to sue the insurer for bad faith.
Therefore, the Sixth Circuit predicted that the Kentucky Supreme Court would reject State Auto's invitation to adopt a common law tort claim for reverse bad faith by an insurer.
