Insured’s Bad Faith Claims Survive Motion to Dismiss While Negligence Claim Fails

    The federal district court applying Kentucky law denied the insurer's motion to dismiss bad faith claims, but granted the motion for dismissal of the insured's negligence claim. Smith v. Am. Strategic Ins., 2025 U.S. Dist. LEXIS 140900 (W.D. Ky. July 23, 2025).

    The Smiths purchased a homeowners policy from American Strategic Insurance for their property. The policy included protections for damages to property and structures resulting from coal mine subsidence.

    The Smiths made a claim for coal mine subsidence damage to the property. American hired NV5, a technical engineering consulting firm, to investigate the reported damages to determine whether they were caused by coal mine subsidence. NV5 determined the damage was not caused by mine subsidence. American denied the claim. 

    After speaking with the Kentucky Division of Abandoned Mine Lands, the Smiths asked American to re-open their claim. American did so and performed a second investigation through NV5. An independent adjuster with NV5 told the Smiths the property had "the worst coal mine subsidence" he had ever seen. NV5 reviewed several drill logs and maps of mining activities and borings on the Smiths' property. American had access to state information, including a state request tor bids for the "Gwen Smith Subsidence Project.'" The project sought to grout under the property to fix mining subsidence and prevent future damage. The bid stated that the property was damaged by mining subsidence and/or mining influenced slope instability. 

    The winning bid for the Gwen Smith Subsidence Project was awarded with the total cost of the grouting exceeding $1.8 million. Despited this information, American again denied the claim "due to the exclusions for wear and tear, deterioration, earth movement, settling cracking of foundations, floors, walls or ceilings and existing damages." 

    The Smiths sued for breach of contract, negligence, and bad faith. American moved to dismiss. 

    The court found that the Smiths adequately alleged that American had knowledge of mine subsidence to the property from both official state records as well as their own investigators. The court agreed that the Smits sufficiently alleged that American lacked a reasonable basis to deny their claim. Further, the Smiths properly pled that American knew the Smiths' property damage was covered by the policy and intentionally denied a claim they knew was valid to avoid paying the Smiths. This was an intentional and willful disregard of an insured's rights which bad faith claims were specifically aimed at stopping. After discovery, American could contest the facts to show that it possessed a reasonable basis to deny the claim, or that it did not knowingly or recklessly deny the claim without a reasonable basis. But evidence to defeat a claim for bad faith was not yet present before the court.

    The negligence claim alleged that American owed a duty to the Smiths including "conducting a reasonable investigation, accurately estimating repair costs in both the claim process and the underwriting process, and promptly paying money owed under the policy consistent with the duties of an insurance company to its policyholder." The duties that the Smiths alleged American breached were all contractual obligations from the policy. The damages suffered from this alleged breach were the same damages that the Smiths would recover from their breach of contract claim. Therefore, the negligence claim was barred by the economic loss doctrine.