In a recent appellate decision, Philadelphia Indemnity Insurance Co. v. Youth Alive, Inc., 732 F.3d 645 (6th Cir. 2013), a panel of the Federal Sixth Circuit tried to answer an open question of State law in Kentucky. The question is still open in Kentucky after this opinion.
The question is whether a "fairly and reasonably debatable" defense to a claim of bad faith failure to settle the underlying claim will be extended to a third-party insurance company's interpretation of coverage under its policy, at a time when the liability insurer is faced with settlement decisions in a claim in suit against its insured. Unfortunately, this case did not fairly present that question.
In Youth Alive, the liability insurance company did not deny coverage. Instead, the liability insurer defended its insured under a reservation of rights. Simultaneously the carrier filed and prosecuted a declaratory judgment action ("DJA") to argue its coverage position and request a declaration of no coverage from a Court, but the carrier settled the underlying case before it received a declaration one way or the other on its coverage interpretation. The liability insurer participated in or agreed to a settlement of the underlying case against its insured, and the carrier paid the settlement amount, all before coverage was determined.
The Youth Alive panel opinion on this question is made dicta by the record facts. This question of first impression in Kentucky still awaits a definitive answer, preferably from the Kentucky State Courts. Parenthetically, in some other jurisdictions in the United States, the answer to this question is a resounding "yes" in first-party cases, 2 Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 11:17, "Fairly or Reasonably Debatable Claims" (Third Edition and 2013 Supplement Thomson Reuters West), and also a "yes" in some cases in some jurisdictions even in third-party cases. Id. volume 1, §5:16, "Fairly or Reasonably Debatable Claim". See also id., volume 1, §§ 5:26 and 5:51.
Related features of the Youth Alive panel opinion were the subjects of an article on Sunday, November 10, 2013 in Insurance Claims and Bad Faith Law Blog.
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