In Wright v. Grange Mut. Cas. Co., No. 3:13-CV-00747, 2015 U.S. Dist. LEXIS 35733 (W.D. Ky. March 23, 2015), the insured owned a U.S. Tobacco Outlet convenience store in Kentucky that sold tobacco products and accessories. On July 2, 2011, a fire engulfed the store, and the property and its contents were destroyed. During the insurer’s investigation of the fire, the insurer reviewed the plaintiff’s financial records, and questioned the plaintiff during a lengthy examination under oath. During that examination, the insurer asked the plaintiff about his involvement in setting the fire, as well as the profitability of the store. According to the insurer, the plaintiff misrepresented the profitability of the store, as well as the amount of cash and coins on the premises at the time of the fire. The plaintiff also falsely denied loaning any money to the store from his own bank accounts, even though he had transferred $13,000 to the store from his personal checking account just 37 days prior to the fire. The U.S. District Court for the Western District of Kentucky found that those were material misrepresentations concerning the insurer’s investigation of the fire, as they would tend to show a potential motive for arson. Based on the material misrepresentations by the insured, the court found that the policy was voided and the insurer had no obligation to cover the property loss.
Because the insurer’s denial of coverage was proper, the court also concluded that the insurer could not have acted in bad faith under either statutory or common law. First, the plaintiff could not maintain a bad faith claim under the Kentucky Consumer Protection Act (KCPA). That statute only protects purchase of a service—which would include insurance—for personal, family, or household purposes. The plaintiff’s purchase of commercial insurance for U.S. Tobacco Outlet, therefore, did not qualify him as the class of persons permitted to pursue KCPA claims.
Second, under Kentucky law, an insurer cannot be liable for bad faith unless it is first obligated to pay the claim under the terms of the insurance policy. See Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 100 (Ky. 2000); Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993). Here, where the policy was voided by the plaintiffs’ misrepresentations and the insurer therefore properly denied any coverage for the fire, the plaintiff could not satisfy the first element of a bad faith claim under Kentucky law.
In analyzing the elements of a bad faith claim under Kentucky law, the court held the insured voided his coverage by intentionally misrepresenting facts concerning the loss. Therefore, while the insurer’s conduct is typically the focus of a bad faith analysis, it is important to remember that the insured’s conduct should be a consideration as well.