State Farm total-loss offers in Kentucky: how the appraisal clause works

Kentucky regulates first-party automobile total losses through four layered authorities: the Unfair Claim Settlement Practices Act at KRS § 304.12-230 (with a UCSPA private right of action recognized in State Farm Mutual Automobile Insurance Co. v. Reeder, 763 S.W.2d 116 (Ky. 1988)), the prompt-payment statute at KRS § 304.12-235 (12% interest when the insurer fails to make a good-faith attempt to settle within 30 days), the implementing claim-handling regulation at 806 KAR 12:095 (which itself does not create a private cause of action — see Section 2(4)'s express disclaimer), and the common-law first-party bad-faith tort recognized by the Kentucky Supreme Court in Curry v. Fireman's Fund Insurance Co., 784 S.W.2d 176 (Ky. 1989). KRS § 304.12-230 — Unfair Claim Settlement Practices. The statute makes it an unfair claims settlement practice for any person to commit or perform any of a list of acts or omissions, including: misrepresenting pertinent facts or insurance policy provisions; failing to acknowledge and act with reasonable promptness on claim communications; failing to adopt and implement reasonable standards for the prompt investigation of claims; refusing to pay claims without conducting a reasonable investigation; failing to affirm or deny coverage of claims within a reasonable time; not attempting in good faith to effectuate prompt, fair, and equitable settlements when liability is reasonably clear; and compelling insureds to institute litigation to recover amounts due by offering substantially less than the amounts ultimately recovered in actions brought by such insureds. The Kentucky Supreme Court held in State Farm Mutual Automobile Insurance Co. v. Reeder, 763 S.W.2d 116 (Ky. 1988), that claimants may maintain a private right of action against an insurer for violating the statute. KRS § 304.12-235 — Time of Payment of Claims. Claims must be paid not more than thirty days from the date notice and proof of claim, in the substance and form the policy requires, are furnished to the insurer. If the insurer fails to make a good-faith attempt to settle within that time, the value of the final settlement bears interest at twelve percent (12%) per annum from the end of the thirty-day period. 806 KAR 12:095 — Unfair Claim Settlement Practices Regulation. The regulation (at Section 7) establishes claim-handling standards for first-party automobile total-loss settlements; Section 2(4) provides that a violation "shall be found only by the commissioner" and that the regulation "shall not create or imply a private cause of action for violation of this administrative regulation." The principal substantive provisions include: Section 7(1)(b) — Cash settlement. A cash settlement is based on the actual cost, less any deductible, to purchase a comparable motor vehicle, determined by one of three methods: 1. the cost of a comparable motor vehicle in the local market area, if one is available there; 2. if not, one of two or more quotations obtained from two or more qualified and licensed dealers located within the local market area; or 3. a source for determining statistically valid fair market values that gives consideration to the values of vehicles in the local market area (it may also consider data on vehicles outside the area), produces values for at least eighty-five (85) percent of all makes and models for the last eight (8) model years, and produces fair market values based on current data available from the local market area where the vehicle was principally garaged, or a necessary expansion of parameters such as travel time and area to assure statistical validity. Section 7(1)(d) — Deviations. A settlement that deviates from these methods must be supported by documentation giving particulars of the motor vehicle's condition, and any deductions from the cost, including deduction for salvage, must be measurable, discernable, itemized, and specified as to dollar amount. Section 7(1)(c) — Right of recourse. If the insurer is notified within thirty-five (35) days of the insured's receipt of the settlement check that the insured cannot purchase a comparable motor vehicle for the fair market value determined under Section 7(1)(b)3 (the statistically valid valuation source), the insurer must reopen its claim file. It must then locate a comparable motor vehicle through licensed dealers, pay the difference on a comparable the insured located (or buy it for the insured), or conclude the loss settlement under the policy's appraisal provision. An appraisal used this way is binding against both parties but does not waive either party's other rights under the policy or the law. Curry v. Fireman's Fund Insurance Co., 784 S.W.2d 176 (Ky. 1989), is the case in which the Kentucky Supreme Court established a common-law right to recover in tort when an insurer acts in bad faith in dealing with its own insured. Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993), articulated the three-element test for a bad-faith claim against an insurer: (1) the insurer was obligated to pay the claim under the policy; (2) the insurer lacked a reasonable basis in law or fact for denying the claim; and (3) the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Kentucky applies that single test to bad-faith claims whether they are brought under the common law or the statute. Compensatory and punitive damages are available on appropriate factual showings. KRS § 186A.520 — Salvage Title Threshold. The owner must obtain a salvage title when the total estimated or actual cost of parts and labor to rebuild the vehicle to its pre-accident condition, not counting reinstallation of a deployed airbag system, exceeds 75% of its retail value as set by a nationally accepted used car valuation guide or tool.