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By: Barry Miller
Last August, FMG reported on Mosely v. Arch Specialty Fire Insurance, a case from the Court of Appeals of Kentucky that said courts cannot use an insurer’s conduct at mediation as evidence in a subsequent bad faith case. The Supreme Court of Kentucky has affirmed that result, but only after stating a more nuanced position on mediation evidence.
Mosely involved a wrongful death case at a surface coal mine. Two carriers insured multiple defendants. The wrongful death case settled after five years of litigation and two mediations. At the second mediation, a single attorney represented both carriers and made settlement offers using both carriers’ money. The plaintiffs characterized the settlement offers as “global” because the carriers conditioned them upon a release of all defendants. Plaintiffs complained that such offers constituted leveraging under the Unfair Claims Settlement Practices Act (“UCSPA”). They also said the use of a single attorney to represent both carriers was an act of bad faith.
The Court of Appeals affirmed summary judgment for both insurers on the bad faith claim, which the trial court granted without allowing the Plaintiffs to take discovery. It held that discovery into mediation conduct would not be fruitful because all such evidence would be inadmissible.
The Supreme Court of Kentucky affirmed, but its take on mediation evidence was different. The court noted that Kentucky law recognizes a distinction between a liability carrier’s litigation conduct while defending its insured and its settlement behavior. Evidence of how the carrier and defense counsel acted during litigation is not admissible because plaintiffs have procedural remedies to address such conduct (such as moving for sanctions for discovery abuse). But no procedural remedy exists for settlement conduct, so a jury in a bad faith case should be permitted to consider it.
But a jury can only consider “improper” settlement conduct. “In bad-faith actions, there is a heightened concern about the potential of prejudice to the insurer,” the Supreme Court held. “The trial court—the gatekeeper charged with excluding prejudicial evidence under KRE 403—should be on high alert when deciding what evidence may be admitted.”
The Supreme Court found the carriers’ mediation conduct was proper. Conditioning settlement offers on the release of all insureds did not constitute leveraging, which the UCSPA defines as settling a claim under one portion of a policy in an attempt to influence settlement under another coverage in the same policy. Furthermore, that practice is only prohibited where liability is clear, which was not the case here.
So the carriers’ mediation conduct case was not admissible because the UCSPA did not prohibit it. Even had it been improper, the court explained, the trial court still would have to analyze the evidence under Rule of Evidence 403 to determine if it was more probative than prejudicial.
While there is plenty for insurers to work with in this opinion, most industry observers would prefer a blanket prohibition against the use of mediation evidence. Without such a rule the question becomes what mediation evidence claimants may use to show bad faith and whether carriers might offer such evidence mediation to show the absence of bad faith. Either way, carriers cannot assume that—in Kentucky—what happens in mediation stays in mediation.