State Auto Property & Casualty Insurance v. Hargis, 785 F.3d 189

State Auto insured Lori Hargis’s home, which was intentionally set on fire in 2007; Hargis later admitted soliciting the arson and pleaded guilty to federal charges.
State Auto paid over $425,000 under the policy before suing to declare the policy void for intentional loss and fraud; Hargis counterclaimed for breach of contract and bad faith.
Criminal conviction led to an order of restitution to State Auto for $672,497.80, covering mortgage payoff, living expenses, investigation costs, and attorney fees (including defense of Hargis’s bad faith claim).
State Auto amended its complaint to add a statutory fraud claim and a novel common-law tort claim alleging "reverse bad faith"—that an insurer may sue its insured for breach of the implied covenant of good faith and fair dealing.
The district court rejected the reverse bad faith tort as unrecognized in Kentucky (citing similar authorities); State Auto sought certification to the Kentucky Supreme Court after adverse rulings.
The Sixth Circuit reviewed de novo whether Kentucky would recognize reverse bad faith and whether certification was appropriate.

Issue	Plaintiff's Argument (State Auto)	Defendant's Argument (Hargis)	Held
Whether Kentucky recognizes a common-law tort of "reverse bad faith" (insurer suing insured for breach of implied covenant)	Kentucky should adopt the tort as a principled extension of the mutual covenant of good faith; insurers need a remedy (including potential punitive damages) to deter and recoup costs from fraudulent insureds	Kentucky has no precedent recognizing such a tort; insurers already have remedies (criminal prosecution, fraud, statutory claims, common-law fraud, restitution); adoption is a substantive innovation better left to state courts/legislature	Denied — Sixth Circuit predicts Kentucky Supreme Court would reject recognizing reverse bad faith and affirms dismissal of that claim
Whether the Sixth Circuit should certify the novel state-law question to the Kentucky Supreme Court	Certification appropriate because issue is one of first impression in Kentucky and determinative	Certification inappropriate when sought after an adverse district-court decision; federal courts should predict state law where a reasonably clear path exists	Denied — certification disfavored post-judgment; the court predicts state law outcome instead

Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (federal diversity choice-of-law principle)
Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176 (Ky. 1989) (Kentucky recognized first-party common-law bad faith)
Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993) (elements required to prove bad faith)
Tokles & Son, Inc. v. Midwestern Indem. Co., 605 N.E.2d 936 (Ohio 1992) (refused to recognize reverse bad faith)
Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995) (declined to adopt reverse bad faith)
Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521 (6th Cir. 2006) (discussion of Kentucky bad-faith law and statutes)