Wellman et al v. Safeco Insurance Company of America et al
MEMORANDUM OPINION & ORDER: Plaintiff's claims of bad faith and violation of KRS 304-12.320, et seq. fail as a matter of law. Accordingly, IT IS HEREBY ORDERED that Defendant Safeco Insurance Company of America's Motion for Summary Judgment DE 34 be SUSTAINED. Signed by Judge Henry R. Wilhoit, Jr on 7/20/17.(KSS)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
Civil Action No. 14-166-HRW
CARL AND DENICE WELLMAN,
MEMORANDUM OPINION AND ORDER
SAFECO INSURANCE COMPANY OF AMERICA.,
This matter is before the Court upon Defendant Safeco Insurance Company of America's
Motion for Summary Judgment [Docket No. 34]. The motion has been fully briefed by the
parties. For the reasons stated herein, the Court finds that Defendant is entitled to judgment as a
matter of law as to Plaintiffs Carl and Denice
Wellman's remaining claims for bad faith and violation of Kentucky's Unfair Claims Settlement
This case arises out of a July 30, 2012 fire that occurred at the residence of Plaintiffs Carl
and Denice Wellman, located at 2030 West Hearthstone Lane in Ashland, Kentucky. The
Plaintiffs' home was a total loss.
At the time of the fire, Safeco insured Plaintiffs' residence and personal property subject
to the terms, conditions, and exclusions of policy number OK5622106.
As this Court has already ruled, the Policy required Safeco to "pay the difference between
actual cash value and replacement cost only when the damaged or destroyed property is repaired
or replaced." This is what Safeco did, paying Plaintiffs a total of $315 ,915 ,54 as they rebuilt
Consistent with the terms of the Policy, Safeco offered Plaintiffs three options after the
fire: purchase another home, rebuild their old home, or take a lump-sum settlement from Safeco
reflecting the actual cash value of their home.
Despite the fact that Plaintiffs had listed their home for sale immediately prior to the fire,
Plaintiffs elected to rebuild their home at the same location. In accordance with their decision to
rebuild, Safeco's adjuster, Mandy Savage, provided the Plaintiffs with an estimate reflecting the
Actual Cash Value of the home and Replacement Cost Value of the home.
Plaintiffs did not dispute either estimate.
Safeco then issued the Plaintiffs checks for $199,550.67 and $4,761.96, which
represented the Actual Cash Value of the home. Thereafter, Plaintiffs were paid, pursuant to the
terms of the policy, as they showed that repairs were complete. Construction began on the
Plaintiffs' new residence.
Subsequently, Citizens National Bank informed the Plaintiffs that it was accelerating the
approximately $190,000 outstanding on Plaintiffs' mortgage loan on their prior home that had
burned. Safeco had no involvement in the bank's decision to accelerate the Plaintiffs' loan or the
bank's decision to take Plaintiffs' funds. Despite the fact that the bank had taken most of
Safeco's Actual Cash Value payment to the Plaintiffs, Plaintiffs decided not to apply for another
mortgage to completely rebuild their home in 2012. Instead, in order to finance the construction,
Plaintiffs allege that they chose to sell their vehicles, borrowed money from family members, and
put the money from their personal property settlement that had been paid to them by Safeco
toward rebuilding their home.
Ultimately, Plaintiffs allege that they were unable to pay some of the contractors they
hired to rebuild portions of their home. During construction, Plaintiffs also decided to make
various "upgrades" to their rebuilt home, including installing more expensive countertops,
heating units, upgraded lighting, and more expensive flooring, which was not provided for under
the Policy and increased their costs.
In the end, Plaintiffs finished the rebuilding of their home themselves. The estimated
value of Plaintiffs' new home was $336,400.00, compared to $237,500.00 of their old home.
Plaintiffs filed suit against Safeco in Boyd Circuit Court alleging breach of the Policy,
bad faith, and violation of Kentucky's Unfair Claims Settlement Practices Act, KRS § 304.12230, et seq. ("UCSP A"). The case was removed to this Court.
Plaintiffs' breach of contract claims arose from Plaintiffs allegations that Safeco
should provide "advances" on the replacement cost payments they needed to finish the rebuild of
their home before the repair or replacement work was complete. However, the express terms
of the Policy stated that Safeco could only provide additional funds to the Plaintiffs once the
Plaintiffs submitted receipts showing that the repairs were complete.
Safeco moved for partial summary judgment on Plaintiffs' breach of contract claim.
Safeco argued that Plaintiffs' demand for advanced replacement cost payments was contrary to
the terms of the Policy, which clearly states that Safeco could only provide additional funds to
the Plaintiffs once the destroyed property was repaired or replaced.
This Court sustained Safeco's Motion for Partial Summary Judgment, finding that Safeco
had not breached the Policy. The Court further found that Safeco reimbursed the Plaintiffs for the
repairs upon receipt of documentation from Plaintiffs showing the completed repairs in
accordance with the terms of the Policy.
In seeking dismissal of what remains of this case, Safeco argues that because this Court
has already determined that Safeco paid Plaintiffs in accordance with the terms of their insurance
policy, Plaintiffs cannot establish that Safeco improperly denied any claim by Plaintiffs.
According to Safeco, nor can Plaintiffs possibly show that Safeco acted with the malice, evil
motive, or reckless disregard necessary to establish a bad faith claim under Kentucky law.
Safeco points out that it has already been determined that Safeco acted within the terms of its
Plaintiffs urge this Court to overrule Safeco's Motion for Summary Judgment on the
basis that many genuine issues of material fact exist with respect to Plaintiffs' claims.
Specifically, they argue that Safeco continues to mischaracterize Plaintiffs' case as one that is
only about the failure of Safeco to pay on their homeowner' s policy. However, as both Mr. and
Mrs. Wellman testified in their depositions and as their discovery responses made clear,
Plaintiffs' claims against Safeco arise under provisions of the UCSP A that do not require a denial
of payment. In this respect, Plaintiffs contend that summary judgment should not be granted
because a jury could find, and should be permitted to find, that Safeco violated the UCSPA and
acted in bad faith with respect to adjusting the claim. According to Plaintiffs, this is an
independent violation of the UCSPA that does not require, as Safeco argues, a denial payment of
the policy proceeds.
STANDARD OF REVIEW
Summary judgment should be granted "if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter oflaw." Fed. R.
Civ. P. 56(a). A genuine issue of material fact exists only when, assuming the truth of the nonmoving party's evidence and construing all inferences from that evidence in the light most
favorable to the non-moving party, there is sufficient evidence for a trier of fact to find for that
party. A non-moving party cannot withstand summary judgment, however, by introduction of a
"mere scintilla" of evidence in its favor. See Ciminillo v. Streicher, 434 F .3d 461, 464 (61h Cir.
The tort of bad faith for breach of an insurer's obligation in the area of first-party
insurance was first recognized by a court of last resort in 1973 in Gruenberg v. Aetna Insurance
Co. 510 P.2d 1032 (Cal. 1973). In doing so, the Supreme Court of California created an entirely
new cause of action against insurers regarding first-party coverages. Prior to this time, the courts
followed the common-law rule that damages for breach of contract were, with rare exception,
limited to those in the contemplation of the parties at the time the bargain was struck. As a
general rule, consequential damages were more exclusively within the realm of tort law than that
of contract, and it was no tort for a party to breach a contract, even when the breach was
intentional. Now, more than forty years later, the law regarding the obligation of an insurer in
first-party situations is still evolving and expanding. In almost all jurisdictions, insurers not only
are exposed to consequential damages for economic loss and emotional distress for failing to deal
with their insureds fairly and in good faith, but they also may be subject to substantial awards of
punitive damages. Moreover, most states have enacted statutory bad faith, appurtenant to the
The foundation of the modem common-law bad faith action was laid by the Kentucky
Supreme Court in Wittmer v. Jones. 864 S.W.2d 885 (Ky. 1993). It was there that the court set
forth the three elements required to sustain a cause of action for bad faith against an insurer:
( 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;
(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 base existed.
Id. at 890.
In other words, the plaintiff/insured must show not only that the insurer had an obligation
to pay under the terms of the policy, but also that the insurer had no reasonable basis in law to
deny the claim and either knew or should have known that there was no such basis.
As Kentucky Supreme Court Justice William Cooper observed, "Wittmer gathered all of
the bad faith liability theories under one roof and established a test applicable to all bad faith
actions, whether brought by a first-party claimant or a third-party claimant, and whether premised
upon common law theory or a statutory violation". Davidson v. American Freightways, Inc., 25
S.W.3d 94, 100 (Ky. 2000).
The failure to show any one of the Wittmer elements eliminates Plaintiffs' bad faith
claims as a matter of law.
Safeco contends that is entitled to summary judgment on Plaintiffs' bad faith claims
in this case because (1) this Court has already determined that Safeco paid Plaintiffs in
accordance with the terms of the Policy; (2) Safeco therefore did not lack a reasonable basis for
"denying" Plaintiffs' claim; (3) Safeco did not act with malice or reckless disregard for the
Plaintiffs' rights; and (4) Plaintiffs have produced no evidence of their alleged damages related to
Safeco's claims handling.
At the core of every bad faith case, of course, is the policy. Indeed, the first Wittimer
element requires a showing that the policy, by its very terms, required the insurer to pay.
In this case, the policy provides, in pertinent part:
5. Loss Settlement. Covered property losses are settled as follows:
a. Replacement Cost. Property under Coverage A or B at
replacement cost, not including those items listed in 5.b.(2) and (3)
below subject to the following:
( 1) We will pay the full cost of repair or replacement,
but not exceeding the smallest of the following
the limit of liability under the policy applying to Coverage
the replacement cost of that part of the
damaged building for equivalent
construction and use on the same premises
as determined shortly following the loss;
the full amount actually and necessarily
incurred to repair or replace the damaged
building as determined shortly following the
the direct financial loss you incur; or
our pro rata share of any loss when divided
with any other valid and collectible
insurance applying to the covered property
at the time of loss.
When more than one layer of siding or roofing exists for Building Property
We Cover, we will pay for the replacement of one layer only. The layer to
be replaced will be at your option. The payment will be subject to all other
policy conditions relating to loss payment. When more than one layer of
finished flooring exists we will pay for the finish of only one layer.
If the cost to repair or replace is $1,000 or more, we will pay the difference
between actual cash value and replacement cost only when the damaged or
destroyed property is repaired or replaced.
You may disregard the replacement cost loss settlement provisions and
make claim under this policy for loss or damage to buildings on an actual
cash value basis but not exceeding the smallest of the following amounts:
the applicable limit of liability;
the direct financial loss you incur; or
our pro rata share of any loss when divided
with any other valid and collectible
insurance applying to the covered property
at the time of loss.
You may still make claim on a replacement cost basis by notifying
us of your intent to do so within 180 days after the date of loss.
[Docket No. 18-3 at p. 12].
As set forth at the beginning of this opinion, pursuant to the language of the policy,
Safeco offered Plaintiffs three options after the fire: purchase another home, rebuild their old
home, or take a lump-sum settlement from Safeco reflecting the actual cash value of their home.
[Deposition of Carl Wellman, Docket No. 18-7, pp. 99-100].
Plaintiffs elected to rebuild their home at the same location. Id.
In accordance with their decision to rebuild, Safeco's adjuster, Mandy Savage, provided
them with an estimate reflecting the Actual Cash Value of the home and the Replacement Cost
Value of the home. Neither estimate was disputed by Plaintiffs. Id. at p. 111.
Disputes arose, however, when Plaintiffs demanded that Safeco advance the replacement
cost payments they needed to finish the rebuild before the repair or replacement work was
In his deposition, Mr. Wellman explained his claim during this colloquy with
Q.... And it's my understanding - correct me if I'm wrong - your claim
is that [Safeco] didn't advance the extra money to get the contractors paid
so they would continue working; is that correct?
Q. And they didn't do that because ... the damaged property hadn't been
repaired or replaced yet. They weren't going to advance the money,
A. Correct. There was no way to keep the workers there working if we
did not have the money to pay them to stay and work and buy the
materials and supplies and they needed to do it.
Id. at pp. 39-40.
However, in accordance with the terms of the Policy, Safeco could only provide
additional funds to the Plaintiffs once the Plaintiffs submitted receipts showing that the repairs
were complete. Mr. Wellman testified:
A. ... we had requested money from Safeco, but we were told no.
Q. Who told you no?
A. Mandy Savage.
Q. Did you send her any proof that you had repaired or replaced anything at the
A. That is when we started putting all of our stuff into the spreadsheets, so that we
send that to her.
Q. Did she say you had to do that before you could be paid?
A. She said we had to do that before she could request an advance.
Id. at pp. 32-33.
Upon receipt of such documentation, Safeco reimbursed the Plaintiffs for the repairs in
accordance with the Safeco Policy. Id. at p. 33. In total, Safeco reimbursed the Plaintiffs
$315,915.54 to rebuild their residence, which represented the full amount of the agreed cost of
In their Complaint, Plaintiffs allege that Safeco breached the contract of insurance in
three instances: first, "[W] hen advances were needed by contractors [Safeco ]4 refused to
advance funds that were provided for in the approved bid by [Safeco's] selected contractor Jeff
Wolf of JWI Restoration" [Complaint, Docket No. 1-1,
if 12]; second,
"[Safeco] forced the
Plaintiffs to use their personal savings to fund the rebuilding of the home" Id. at if 13; and,
finally, "[Safeco] forced the Plaintiffs to borrow money from friends and relatives in order to
provide for themselves and their child." Id.
Yet, as this Court unequivocally found, the Policy explicitly provides: "[i]f the cost to
repair or replace is $1,000 or more, we will pay the difference between actual cash value and
replacement cost only when the damaged or destroyed property is repaired or replaced." [Docket
No. 18-3, p. 21] (emphasis added). The Policy forbids "advancing" replacement cost value
payments before the property was actually repaired or replaced.
The Court has already determined that Safeco acted in accordance with the terms of the
Policy and in accordance with Kentucky law in not paying "advances" until the property was
repaired or replaced. Safeco did not delay payment. It timely paid once payment became due.
Safeco acted in accordance with the terms of the Policy, the facts, and Kentucky law when
paying Plaintiffs' claim. Plaintiffs attempts to refashion their denial claim as a "delay" claim
does not change the fact that Plaintiffs were not owed "advances" under the terms of the Policy
and Kentucky law and thus were not paid them.
Moreover, the policy language at issue was approved by the Kentucky Department of
Insurance and upheld by this Court, the Sixth Circuit, and virtually all courts. See e.g. Hampton
v. Safeco Ins. Co. ofAm., 614 F. App'x 321, 324 (6th Cir. 2015) (finding an argument that
Plaintiff "reasonably expected" that "replacement cost coverage would be there to use toward
restoring a normal life after a devastating fire" to be "not compelling."); Snellen v. State Farm
Fire & Cas. Co., 675 F. Supp. 1064, 1067 (W.D. Ky. 1987); Vakas v. Hartford Cas. Ins. Co., 361
F. App'x 1, 4 (10th Cir. 2010); Kolls v. Aetna Cas. & Sur. Co., 503 F.2d 569, 571 (8th Cir. 1974);
Bourazakv. N River Ins. Co., 379 F.2d 530, 532 (7th Cir. 1967); Higginbotham v. Am. Family
Ins. Co., 493 N.E.2d 373, 375 (Ill. App. 1986); Hess v. N Pac. Ins. Co., 122 Wash. 2d 180, 182,
859 P.2d 586, 587 (Wash. 1993) (')oin(ing) the virtually unanimous holdings in other
jurisdictions which have considered the same or similar replacement clauses" and requiring
actual repair or replacement prior to payment).
If Safeco timely paid once payment became due, where is the bad faith? Plaintiffs' only
response to Safeco' s Motion for Summary Judgment is that a denial of payment is not necessary
for a cause of action to arise; a delay will suffice. They assert that by failing to pay "advances"
Safeco caused a "delay" and, ergo, acted in bad faith.
Yet, it is axiomatic that before a delay can occur, there must be an obligation to pay under
the terms of the Policy. The obligation to pay only arises when the damaged or destroyed
property has been repaired or replaced. The Court has already found that Safeco honored its
To claim, as Plaintiffs do, that a "delay" could occur before an insurer's obligation to pay
even arises would violate Kentucky law. The Kentucky Supreme Court recently reiterated its
position that in Kentucky there is a "basic and fundamental liberty to contract and create
personal insurance policies." Philadelphia Indem. Ins. Co., Inc. v. Tryon, No. 2014-SC-000354DG, 2016 WL 6125679, at *5 (Ky. Oct. 20, 2016). Holding that Safeco is in bad faith for failing
to pay Plaintiffs prior to Plaintiffs incurring costs would rewrite the parties' Policy and violate
the parties' right to contract. The Policy language at issue here has been upheld by this court and
many others, and Plaintiffs cite to no case law or even provide a convincing policy argument for
rewriting the Policy to include "advances."
Without using the exact words, Plaintiffs urge the Court to ignore Wittmer. According to
Plaintiffs, where a "delay" claim is being made, the elements of bad faith, as set forth in Wittmer,
can be disregarded. In doing so, Plaintiffs cite the unpublished opinion in Ellis v. Arrowwood
Indemnity Company, 2015 WL 2061936 (E.D. Ky. April 30, 2015).
In Ellis, the defendant insurer argued that there was no denial (and, therefore, no bad
faith) where the insurer did not pay a claim for seven years while the amount of damages was
being litigated, despite the insurer allegedly having clear liability to pay under the terms of the
policy. 2015 WL 2061936, at *1-5.
Ellis is distinguishable from this case in three salient aspects: first, here, unlike in Ellis,
Safeco was not required to pay "advances" under the terms of the Policy; second, there is no
dispute that Safeco paid Plaintiffs exactly what Plaintiffs were owed once liability was
reasonably clear; and, finally, the seven-year delay of payment in Ellis for amounts clearly owed
could be considered, in effect, a denial of amounts owed under the terms of that policy, thus
satisfying the second Wittmer element requiring a denial of the claim.
As for Ellis heralding the death of Wittmer, this is a reading of the opinion that stretches
the bounds of credibility. In Ellis, Judge Thapar remarked that Wittmer was written in terms of
"denial", as opposed to delay because those were the facts of the case. Yet, nowhere in the
opinion did Judge Thapar denounce Ellis. to the contrary, he explicitly stated that all three
Wittmer elements are required to prevail in a bad faith claim. Thus, Plaintiffs attempt to cast
Ellis and their case an indictment in Wittmer is unavailing.
While a delay may be regarded as bad faith, there is no delay in this case. The Court has
already determined that Safeco acted in accordance with the terms of the Policy and in
accordance with Kentucky law in not paying "advances" until the property was repaired or
replaced. Safeco did not delay payment. It timely paid once payment became due. Safeco acted in
accordance with the terms of the Policy, the facts, and Kentucky law when paying Plaintiffs'
claim. Plaintiffs attempts to refashion their denial claim as a "delay" claim does not change the
fact that Plaintiffs were not owed "advances" under the terms of the Policy and Kentucky law
and thus were not paid them.
Notably, in response to Defendant's dispositive motion, Plaintiffs make no mention,
much less argument, pertaining to their alleged claims under Kentucky's Unfair Claims
Settlement Practices Act. As such, the claim cannot withstand summary judgment.
As this Court discussed in its earlier opinion, Plaintiffs have not identified
any recoverable damages. When asked, via interrogatory, to explain their damages Plaintiffs
stated that they could not answer. [Docket No. 34-2]. Safeco moved to compel full responses
from Plaintiff and, on the day that Safeco filed the Motion for Summary Judgment, Plaintiffs
were ordered to fully respond to discovery. [Docket No. 33]. Even after the Court allowed
Plaintiffs to clarify their responses, and after Safeco had pointed out in its Motion that Plaintiffs
had offered no proof of damages, Plaintiffs chose not to supplement, stating that their responses
were complete. [Docket No. 35].
Instead, Plaintiffs claim they are entitled to "punitive
damages" despite their being no evidence to support a claim for punitive damages and no claim
for actual damages. Plaintiffs' claim for damages is the type of pure conjecture not allowed under
Plaintiffs' claims of bad fath and violation ofKRS 304-12.320, et seq. fail as a matter of
Accordingly, IT IS HEREBY ORDERED that Defendant Safeco Insurance Company of
America's Motion for Summary Judgment [Docket No. 34] be SUSTAINED.
This~ day of July, 2017.
Henrx R. Wllholt Jr.
United States Dl1trlct Judg1
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