The Point/ARC of Northen Kentucky, Inc. et al v. Philadelphia Indemnity Insurance Company
Filing
103
MEMORANDUM OPINION & ORDER: 1) Plf's Motion for Summary Judgment 90 is granted in full; 2) Def's Motion for Summary Judgment 91 is denied in full. Signed by Judge David L. Bunning on 12/22/2015.(ECO)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 09-81-DLB-CJS
THE POINT/ARC OF NORTHERN KENTUCKY, INC., ET AL.
vs.
PLAINTIFFS
MEMORANDUM OPINION AND ORDER
PHILADELPHIA INDEMNITY INSURANCE COMPANY
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DEFENDANT
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This breach of contract, bad faith, and Kentucky Unfair Claims Settlement Practices
Act action arises from Defendant Philadelphia Indemnity Insurance Company’s failure to
defend and indemnify Plaintiffs, The Point/Arc of Northern Kentucky, Inc., Judi Gerding,
and Jo Anne Mahorney, during and after the settlement of a tort case. The parties have
filed Cross-Motions for Summary Judgment (Docs. # 90 and 91). The matter is fully briefed
(Docs. # 93, 96, 100, and 101) and ripe for review. For the reasons stated below, Plaintiffs’
Motion for Summary Judgment is granted, and Defendant’s Motion for Summary Judgment
is denied.
I.
Factual and Procedural Background
The Point is a non-profit corporation which owns and operates eight group homes
for the developmentally disabled. Among these eight homes is Point Ridge Group Home
in Burlington, Kentucky. Joseph Daniel was a sixty-one-year-old mentally handicapped
man who resided at Point Ridge. While under The Point’s care, Daniel was allegedly
neglected and abused, physically and fiscally, by Mary Ellen Allen, a live-in manager at
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Point Ridge. Allen was accused of neglecting Daniel by failing to provide adequate
healthcare and nutrition and of misappropriating Daniel’s personal funds. Daniel was left
unsupervised and suffered multiple falls. He was also fed food that was over two years
out-of-date.
On April 19, 2006, two weeks after one of his falls, Daniel died. Concerned about
the circumstances surrounding Daniel’s death, The Point contacted their Directors and
Officers policy provider, Defendant Philadelphia Indemnity, and asked it to confirm its
responsibilities and intentions regarding defense and indemnity of The Point in the event
of a lawsuit or other claim against the company. Defendant denied any coverage for a
claim arising from Allen’s conduct or that of any other The Point employee.
On March 24, 2008, Carl Daniels,1 brother of Joseph Daniel, filed suit in Boone
County, Kentucky, Circuit Court, alleging, among other things, negligence by The Point in
supervising and auditing Daniel’s funds. After this suit was filed, The Point again contacted
Defendant to apprise them of the situation and to seek another opinion as to defense and
coverage of the Daniel Estate’s claim. Defendant again denied any duty to defend and all
responsibility for indemnifying a potential claim.
Meanwhile, Great American Insurance, which provided general liability coverage to
The Point, agreed to defend the company against Daniel’s suit. The case ultimately settled
in mediation for $350,000. Great American and The Point then executed a “Loan and
Prosecution Agreement” in which Great American agreed to loan The Point the settlement
funds in exchange for a promise to seek indemnity against Defendant.
1) Carl Daniels, Joseph Daniel’s brother, added an “s” to his surname.
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Following through with their promise to seek indemnity from Defendant, Plaintiffs
filed the instant action on June 15, 2009 (Doc. # 1). The Court previously found that
Defendant had breached its duty to defend Plaintiffs in the underlying tort case (Doc. # 12).
The remaining issues are: (1) whether Defendant is obligated to indemnify Plaintiffs for
some or all of the settlement amount; (2) if so, what amount do they owe Plaintiffs; (3)
whether Defendant must reimburse Plaintiffs’ defense costs; and (4) whether Defendant’s
conduct rises to the level of bad faith. Plaintiffs and Defendant have each moved for
summary judgment on these issues.
II.
Analysis
A.
Standard of Review
Summary judgment is appropriate 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 of law.”
Fed. R. Civ. P. 56(a). In deciding a motion for summary judgment, the Court must view the
evidence and draw all reasonable inferences in favor of the nonmoving party. Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The “moving party bears
the burden of showing the absence of any genuine issues of material fact.” Sigler v. Am.
Honda Motor Co., 532 F.3d 469, 483 (6th Cir. 2008).
Once the movant has satisfied its burden, the nonmoving party must “do more than
simply show that there is some metaphysical doubt as to the material facts,” Matsushita
Elec. Indus. Co., 475 U.S. at 586; rather, it must produce specific facts showing that a
genuine issue remains. Plant v. Morton Int’l, Inc., 212 F.3d 929, 934 (6th Cir. 2000). If,
after reviewing the record in its entirety, a rational fact finder could not find for the
nonmoving party, summary judgment should be granted. Ercegovich v. Goodyear Tire &
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Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998).
Importantly, the standard of review does not change simply because the parties
present cross-motions. Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991).
Such motions require the Court to “evaluate each motion on its own merits and view all
facts and inferences in the light most favorable to the non-moving party.” Beck v. City of
Cleveland, Ohio, 390 F.3d 912, 917 (6th Cir. 2004) (quoting Wiley v. United States, 20 F.3d
222, 224 (6th Cir. 2004).
B.
Defendant Philadelphia Indemnity’s Director & Officer’s Policy covers
the Daniel’s Settlement
The Court must now consider under what circumstances, and pursuant to what legal
standard, an insurer that has breached its duty to defend must indemnify its insured for the
costs of settlement. Neither Kentucky courts nor the Sixth Circuit have addressed the
precise question raised in this case, so the Court must survey related case law in order to
formulate an appropriate rule.
1.
Relevant Case Law
a.
Kentucky Case Law
If an insured asked its insurer to defend it in an action, the insurer has several
options. Of course, it can defend its insured. If, however, the insurer does not believe its
policy provides defense coverage for the underlying matter, it can either outright refuse to
defend or offer its defense under a reservation of rights. But the latter is the preferred
course of action, Philadelphia Indem. Ins. Co. v. Youth Alive, Inc., 732 F.3d 645, 652 (6th
Cir. 2013), and an insurer that elects not to defend its insured does so at its own peril.
Cincinnati Ins. Co. v. Vance, 730 S.W.2d 521, 522 (Ky. 1987). However, even defending
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under a reservation of rights involves some risk:
“If [the insurer] is correct in its position that the policy does not
afford coverage or has been breached in some way, then it
prevails regardless of whether the insured accepts the defense
[under a reservation of rights] – but it offers such a defense at
its peril, because if the insured refuses to accept it and elects
to defend himself, the [insurer] is bound by the result, in the
absence of fraud or collusion, unless it can establish that the
policy did not afford coverage or was breached by the insured.”
Medical Protective, 581 S.W.2d 25, 26-27 (Ky. Ct. App. 1979).
As a general matter, Kentucky courts have long recognized that an insurer that
breaches its duty to defend will be liable to its insured for judgments and settlements
obtained after that breach. See Interstate Cas. Co. v. Wallins Creek Coal Co., 176 S.W.
217, 219 (Ky. 1915). In more recent times the Kentucky Supreme Court has further
developed this rule by applying the reasonableness and absence-of-fraud provisions from
Medical Protective to breach of the duty to defend cases. Specifically, the Kentucky
Supreme Court has held that the insurer is bound by the result in the underlying case so
long as that result is within coverage and reached in the absence of fraud or collusion. See
O’Bannon v. Aetna Cas. & Sur. Co., 678 S.W.2d 390, 393 (Ky. 1984).
b.
Actual Versus Potential Legal Liability
The above-cited cases emphasize that the claim must come within policy coverage
in order to trigger indemnity. To determine whether the claim is within coverage, one must
look to the provisions of the indemnity agreement itself.2 See United States Fidelity &
2) At the outset, it is important to distinguish between common-law and contractual indemnity.
Common-law indemnity is a separate cause of action in which the party seeking indemnity must
demonstrate that it would have been actually legally liable to the third party. Thompson v. The
Budd Co., 199 F.3d 799, 806-07 (6th Cir. 1999). Common law indemnity is an action in which one
party has become liable to another and the liable party seeks restitution from a third party for that
liability. Id. (citing Crime Fighters Patrol, Inc. v. Hiles, 740 S.W.2d 936, 940 (Ky. 1987)). The
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Guar. Co. v. Napier Elec. & Const. Co., Inc., 571 S.W.2d 644, 646 (Ky. Ct. App. 1978).
Under Kentucky law, parties may contract “for indemnification for – among other things –
the costs incident to potential legal liability as well as for the legal liability itself.” See
Thompson v. The Budd Co., 199 F3d 799, 806-07 (6th Cir. 1999). Thus, there are two
conceivable bases for holding an insurer liable for insured’s legal liabilities – a judgment or
a contractual agreement covering potential legal liability. Martin Cnty. Coal Corp. v.
Universal Underwriters Ins. Co., 792 F. Supp. 2d 958, 961 (E.D. Ky. 2011) (holding that
there are only two conceivable bases for holding an insurer liable for its insured’s liabilities:
1) a judgment; or 2) a contractual agreement between the parties that the insurer would
pay for its “insured’s voluntary settlements no matter whether the insured could have
actually have been held liable.”).3
c.
Defendant’s Arguments Are Not Grounded in Law or
Sound Policy
Regardless of above-cited case law or its contractual agreement to the contrary,
Defendant insists that actual legal liability is the standard required for it to indemnify
Plaintiffs in this case. The Court disagrees. Defendant relies primarily on two recent Sixth
indemnity in common law cases, however, is based on the negligent acts or some other fault of that
third party. Id. Common law indemnity is thus much more akin to a tort action than one for contract.
The party seeking common law indemnity must demonstrate that it was or would have been actually
legally liable to the third party. The Budd Co., 199 F.3d at 806-07. This can be supported by
evidence of a judgment, or in the event of a settlement, by looking into the facts of the catalyst case
to determine if the indemnitee would have indeed been liable to a third party. Common law
indemnity is not an issue in this case, however, because the indemnity here is created by the terms
of an insurance contract.
3) In a recent decision, a sister court in the Eastern District of Kentucky held “Kentucky law
distinguishes between contractual and common law indemnity claims.” It also stated that
contractual indemnity may cover not only damages, but also “losses, expenses, and various other
liabilities and obligations” related to potential legal liability. Vaughn v. Konecranes, Inc., 2015 WL
3453457, at *2-3 (E.D. Ky. May 29, 2015).
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Circuit decisions interpreting Kentucky insurance law: Travelers Prop. Cas. Co. of Am. v.
Hillerich & Bradsby Co., 598 F.3d 257, 269-70 (6th Cir. 2010), and Martin Cnty. Coal Corp.
v. Universal Underwriters Ins. Co., 727 F.3d 589 (6th Cir. 2013). However, these cases do
not require actual legal liability in cases where the parties contracted for potential legal
liability. The Court will first review the cases relied upon by Defendant, and then highlight
the potential adverse consequences created by its proposed rule.
In Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co., the Sixth Circuit held
that the duty to indemnify arises only when “there is an actual basis for the insured’s liability
to a third party.” 598 F.3d at 269-70. It went on to say that the insured was required “to
show that it could have been held liable . . . for a covered claim if there had not been a
settlement.” Id. (emphasis added). Travelers also noted that, for the indemnitee to prevail,
it would need to demonstrate that it could have been held liable for a covered claim had the
case not settled, “which includes looking beyond the pleadings to the evidence presented
in [the indemnitee’s] case-in-chief.” Id. at 269-70. The court went on to state that it was
required to consider whether there was any evidence beyond the third-party pleadings
supporting the proposition that there was still a covered claim at the time of settlement.
The court seems to have not been applying the actual-legal-liability test, however, because
it stated that resolving the indemnity issue required: (1) looking at the third-party complaint
to determine if a covered claim was pled; and (2) deciding whether any covered claim was
still viable at the time of settlement. Determining whether a claim was still present at the
time of settlement is different than requiring proof of actual legal liability; instead, it is similar
to requiring proof that the settlement was for a claim within coverage, which is essentially
the same as what the Court is requiring here.
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The ”actual basis” language in Travelers led some courts to ponder if all indemnity
actions require proof of actual legal liability in the wake of Travelers. The district court in
Martin County Coal was aware of this issue and highlighted the point in its well-reasoned
opinion. Martin Cnty. Coal Corp., 792 F. Supp. 2d. at 960-63. But because the contract
at issue in Martin County Coal did require actual legal liability, the district court noted that
“[i]t need not decide whether settling insureds . . . must always show ‘actual liability,’ no
matter the terms of the policy.” Id. at 963.
Defendant relies heavily on the Sixth Circuit’s opinion in Martin County Coal for its
suggestion that actual legal liability is required in all indemnity actions. In Martin County
Coal, the court of appeals held that “[u]nder Kentucky law, an insured who has paid a
settlement to a third party must prove that it could have been legally compelled to pay the
settlement before the insured can get indemnity from its insurer.” Id. at 594. Stated
differently, the court said “if an insured settles with a third party, but the insured would not
have been actually legally liable to the third party, then the insurer does not have to
indemnify the insured for having paid a settlement to the third party.” Id. (emphasis added)
(citing Ky. Sch. Bds. Ins. Trust v. State Farm Mut. Ins., 907 F. Supp. 1036 (E.D. Ky. 1995),
and Barnes v. Pa. Cas. Co., 208 S.W.2d 314 (Ky. 1948)).
Thus, Martin County Coal took the “could” from the actual-basis analysis in Travelers
and seemingly declared that insureds must show that they “would” have been liable to the
third party. Does Martin County Coal hold that contractual indemnity actions always require
proof of actual legal liability? The Court thinks not. The insurance contract at issue in
Martin County Coal required that any coverage be premised on actual legal liability. Martin
Cnty. Coal, 727 F.3d at 595.
Thus despite its seemingly broad language, the court of
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appeals did not affirmatively state that, regardless of the contract terms, coverage of
settlements after a breach of the duty to defend requires actual legal liability. In fact, the
Court has been unable to find a case in which an insurer breached its duty to defend and
the insurance contract provided coverage for potential legal liability, but wherein the
deciding court still required actual legal liability.
Additionally, several policy considerations that are ingrained in Kentucky law
persuade the Court that this result is proper. First, the language of the parties’ contract
should govern. In the absence of ambiguity, a “written instrument will be enforced strictly
according to its terms.” See Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 106 (Ky. 2003)
(citing O’Bryan v. Massey-Ferguson, Inc., 413 S.W.2d 891, 893 (Ky. 1966). Enforcing the
contractual provision at issue here respects the freedom of contract between two
sophisticated parties. Holding otherwise would render the potential-legal-liability provision
a meaningless term, and the insurer would “receive something it neither bargained nor paid
for”, while the insured “would be required to pay for something it had contracted to avoid
in spite of fully performing its agreements.”
See Middletown Eng’g Co. v. Climate
Conditioning Co., Inc., 810 S.W.2d 57, 59 (Ky. Ct. App. 1991).
For example, imagine a case where the insurer did not breach its duty to defend and
the contract provided for coverage of potential legal liability. If a court was tasked with
determining coverage, would it ignore the terms of the contract and instead require actual
legal liability to be shown by the insured? Surely not. So why should the case be any
different where the insurer has previously breached a contractual provision? In essence,
holding that actual legal liability is required in cases where the contract provides coverage
for potential legal liability would be to say that those clauses are unenforceable. Such a
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holding would offend freedom of contract principles and wreak harm on insureds who have
bargained for coverage of potential legal liability.
Second, denying coverage where the contract provides for potential legal liability
would discourage settlement and encourage litigiousness, a result that is in conflict with
Kentucky’s longstanding preference for encouraging fair and reasonable settlements. See
Dexter v. Duncan, 265 S.W. 832, 832 (Ky. 1924). Imagine the catch-22 in which an insured
would be placed should the rule in this case be different. The insurer has denied coverage
and is refusing to defend. The insured is then uncertain about whether it will have to pay
the claim out of pocket. Knowing this, it will be encouraged to settle the case quickly and
for as little as possible (which are the exact same motivations the insurer would have
should it have chosen to defend). However, if the Court were to require the actual legalliability-rule, the insured would also have to worry about the case being sufficiently
developed so that more onerous standard could be met. While it is not clear that the
actual-legal-liability rule requires the Court to “try a case within case” in every instance, the
rule certainly requires a deep delving into the facts of the third-party claim that initiated the
coverage question. See Ky. Sch. Bds. Ins. Trust v. State Farm Mut. Ins., 907 F. Supp.
1036, 1037-38 (E.D. Ky. 1995) (holding that a subrogation claim required the parties to try
the case as a case-within-a-case to determine if the insured would have been liable to thirdparty plaintiff). The insured would then feel pressure to drag out the case in order to
develop a more complete record for the insurance-coverage claim, which, ironically, might
increase the amount that the insurer ultimately has to pay should coverage be found.
And finally, actual legal liability should be disfavored because it requires the Court
rummage through the facts of a prior dispute. Not only is the Court forced to weigh and
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decide evidence from a cold record, but because the cases in which this rule is applied
have all settled, they will also be at varying levels of development.
d.
Rule
The above analysis leads the Court to conclude that the rule in this case should be
this: where an insurer is found to have breached its duty to defend and the indemnity
contract provided coverage for potential legal liability, it will be liable for a judgment or
settlement stemming from the underlying action that necessitated the indemnity claim when
two requirements are met. First, the insured must show that the claim settled was in fact
covered by the policy. See Vance, 730 S.W.2d at 522; see also Medical Protective, 581
S.W.2d at 26-27; O’Bannon, 678 S.W.2d at 393. Second, the settlement must have been
reasonable and reached in the absence of fraud or collusion. Wallins Creek Coal, 176
S.W. at 219; see also Grimes v. Nationwide Mut. Ins. Co., 705 S.W.2d 926, 932 (Ky Ct.
App. 1985); Estate of Clem v. Western Heritage Ins. Co., 195 F. App’x 328, 332-33 (6th Cir.
2006) (per curiam) (holding that an insurer that “mistakenly fails to defend an insured is
liable for reasonable settlements under Kentucky law”).
Limiting this rule to only those cases where the insurance contract covered potential
legal liability and the insurer breached its duty to defend is in accord with the above-cited
Kentucky law and the holdings of the Sixth Circuit. The Court does not believe that one
sentence from Martin County Coal, which does not explicitly overrule the Sixth Circuit’s
holdings in The Budd Co. or Estate of Clem, is sufficient to overcome the mass of holdings
and sound policy that underpin Kentucky insurance law. Further, the Court believes it is
more likely that Travelers and Martin County Coal stand for the perfectly reasonable
proposition that, before an insurer is held liable for indemnity, the insured must show that
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claim settled was within a valid policy’s coverage. Such a rule prevents insureds from
converting every breach of the duty to defend into liability for subsequent settlements. And
in cases where actual legal liability was required by the insurance contract, the actuallegal-liability test will be a natural part of making this determination. Yet this rule also
prevents an insurer from nullifying a bargained-for contract provision, namely coverage for
potential legal liability, by means of a prior breach of its duty to defend.
2.
Application
In Kentucky, the interpretation of an insurance contract is a question of law for the
Court to decide. Kemper Nat’l Ins. Cos. v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 871
(Ky. 2002); see also Caudill Seed & Warehouse Co., Inc. v. Houston Cas. Co., 835 F.
Supp. 2d 329, 332 (W.D. Ky. 2011). Unless there is an ambiguity, “a written instrument will
be enforced strictly according to its terms, and a court will interpret a contract’s terms by
assigning language its ordinary meaning and without resort to extrinsic evidence.” Frear,
103 S.W.3d at 106; see also York v. Ky. Farm Bureau Mut. Ins. Co., 156 S.W.3d 291, 293
(Ky. 2005) (holding that “[t]he clear and unambiguous words of an insurance contract
should be given their plain and ordinary meaning.”). If, however, a contract is susceptible
to different interpretations by reasonable minds, any doubts must be resolved in favor of
the insured. Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 385 (Ky. Ct. App.
2002) (holding that a contract is ambiguous if a reasonable person would find it susceptible
to different or inconsistent interpretations); see also Wolford v. Wolford, 662 S.W.2d 835,
838 (Ky. 1984) (stating that any doubt must be liberally construed in favor of the insured).
Here, the insurance contract between The Point and Defendant unambiguously
covers potential legal liability, namely settlements. The contract indemnifies The Point for
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“Losses” which are comprised of “Damages” and “Defense Costs”. The D&O policy issued
defines “Damages” as “a monetary judgement, award or settlement including punitive,
exemplary or multiple portion thereof...”. (Doc. # 90-2, p. 29). Settlement, as it is ordinarily
understood, is an “agreement ending a dispute or lawsuit.” BLACK’S LAW DICTIONARY (10th
ed. 2014). By default, a settlement means that actual legal liability was not imposed;
indeed, the whole point of a settlement agreement is to avoid the uncertainty of a court
declaring a judgment. Because of the costs of litigation and the uncertainties of trial, most
cases settle. Thus, it comes as no surprise that an insurance contract that covers legal
claims against a corporation’s directors and officers would cover settlements as well as
actual legal liability.
Simply finding that the policy covers settlements, however, does not end the Court’s
analysis. It still must determine whether the insurance contract at issue covered settlement
of any of the types of claims settled by The Point with the Daniel Estate. If the settled
claims were not of the sort covered by the insurance contract, Defendant would not owe
any indemnity to The Point, notwithstanding the former’s breach of its duty to defend. The
Professional Services Exclusion of the insurance contract provides in pertinent part:
“. . . the Underwriter shall not be liable to make any payment
for Loss in connection with any Claim made against the
Insured based upon, arising out of, directly or indirectly
resulting from or in consequence of, or in any involving the
Insured’s performance of or failure to perform professional
services for others.
Provided, however, that the foregoing shall not be applicable
to any derivative action Claim alleging failure to supervise
those who performed or failed to perform such professional
services.”
(Doc. # 90-2, p. 42).
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Thus, under the policy, there was a negligent supervision carve-out to the
Professional Services Exclusion. The Daniel Estate’s allegation of negligent supervision
by The Point and its officers and directors in its Boone County Circuit Court complaint
comes within this negligent supervision carve-out. (See Doc. # 90-1, p. 5, paragraph F).
According to the complaint, the failure to engage in adequate record keeping and oversight
led to the embezzlement of Daniel’s personal funds by an employee of The Point. This
finding is consistent with the Court’s prior Memorandum Opinion and Order, which held that
“[a]lthough the allegation that Plaintiffs’ negligent supervision of Mary Ellen Allen caused
Daniel’s death likely falls outside the coverage of the insurance policy, the allegation that
Plaintiffs’ negligence led to the theft of Daniel’s life savings likely does not.” (Doc. # 12, p.
10).
3.
Philadelphia waived its consent provision when it breached its
duty to defend
Finally, Philadelphia argues that its insured must demonstrate actual legal liability
because it did not conform with the policy provisions requiring consent to any settlement.
The only instance in which actual legal liability must be shown despite the fact that the
policy otherwise covers potential legal liability is where the insured settles a case without
the consent of the insurer. 41 AM. JURISPRUDENCE 2d § 27; see also O’Bannon, 678
S.W.2d at 393; Medical Protective, 581 S.W.2d at 27. As the Court earlier observed, when
an indemnity contract covers settlements, the majority of jurisdictions require only that the
settlement be reasonable and that the underlying claim be a valid one within the coverage
of the contract. 41 AM. JURISPRUDENCE 2d § 27. Further, most jurisdictions do not require
actual legal liability when the contract provides coverage of potential liability, unless there
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was a lack of consent or notification by the insured. Id. In cases where the insured fails
to notify or settles without consent, the insured is required to show the presence of actual
legal liability in order to prevent insureds from taking advantage of their insurers.
Such a case is not present here, however, because Defendant waived its right to
require consent to the settlement when it breached its duty to defend. See Wallins Creek
Coal, 176 S.W. at 219. It is true that the policy between The Point and Defendant required
the latter’s consent before any settlement was reached. But it is equally true that, by
breaching its duty to defend, Defendant waived any right to enforce that provision of the
contract. Id. Breaching its duty to defend is not a valid way for an insurer to withhold its
consent.
Finding that Defendant waived its right to consent to the settlement is in harmony
with Kentucky law and common sense. In Wallins Creek Coal, an insurance company
sought to avoid paying a settlement because it was reached without its consent, as was
required by the insurance contract. That contract, like the one here, provided coverage for
potential as well as actual legal liability. And that contract, again as here, required that the
insurer consent to any settlement before coverage attached. When approached with a
potential claim, the insurance company in Wallins Creek Coal, besides a brief initial
investigation of the accident at issue, did nothing in the matter to help its insured. The
insurance company simply concluded that it did not have coverage of the claim and
neglected to do anything else. The Kentucky Supreme Court, relying heavily on the U.S.
Supreme Court case of St. Louis Dressed Beef & Provision Co. v. Md. Cas. Co., 201 U.S.
173 (1906), held that an insurance company cannot be allowed to escape liability for a
settlement to which it did not consent where that lack of consent was created by the
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unjustified inaction of the insurer.
Although the facts herein are not identical to Wallins Creek Coal, that case
influences its holding. Defendant informed The Point of its position and instructed it that
it did not believe that the policy provided coverage for any of the claims. This is more than
the defendant in Wallins Creek Coal did. Here, however, Defendant did not operate in an
open and fair way with its insured. In addition to wrongly declining to defend its insured,
it claimed that its contract with The Point contained no duty to defend in any form. This is
untrue. And just as the Wallins Creek Coal court observed, permitting Defendant to convert
the potential-legal-liability provision in the insurance contract into actual-legal-liability one
by wrongly failing to defend its insured and then claiming lack of consent would be to permit
the insurer “to perpetrate an intolerable fraud on the insured” by stealing its contractuallybargained-for rights. Wallins Creek Coal, 176 S.W. at 219.
This result is fair because Defendant could have defended under a reservation of
rights. Insurers that believe a claim is not within coverage have two options: defend under
a reservation of rights or refuse to defend at their own peril. Defending under a reservation
of rights would have permitted defendant to participate in the litigation and settlement, and
if it still contested coverage at time of settlement, to seek judicial determination of coverage
and reimbursement if the claim was not covered by the policy. See Travelers, 598 F.3d at
268. Defendant chose not to do so. Now that Defendant has gambled and lost, it will not
be allowed to rewrite the rules of the game.
Defendant complains that it is unknown what portion of the settlement was for the
negligent supervision claim as it relates to the misappropriation of funds and how much of
it was for other tortious conduct not covered by their policy. While these are seemingly
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reasonable complaints, most of Defendant’s gripes stem from injuries of its own making.
Had Defendant participated in the settlement negotiations, as it was repeatedly asked to
do, it could have informed those discussions and helped to shape the settlement. Instead,
Defendant chose to not to defend its insured and to make misrepresentations to its insured
and another insurance carrier about its duty to defend.
As a matter of law, the Court finds that the Daniel’s Settlement came within the D&O
policy’s coverage. Defendant also has not presented any evidence of fraud or collusion
between Plaintiffs and the Daniel Estate; accordingly, Plaintiffs are entitled to summary
judgment on that issue as well. It remains for a jury to determine, however, whether the
settlement was reasonable, and if so, what portion of that settlement should be indemnified
by Defendant.
C.
Philadelphia must reimburse The Point for defense costs incurred in
defending and settling the Daniel Estate’s claim
Defendant must also reimburse Plaintiffs for the defense costs they incurred in
defending and settling the Daniel Estate’s claim. Defendant makes two arguments why it
should not have to indemnify The Point for its defense costs. Both fail. First, it argues that,
under the terms of its contract with The Point, Defendant does not have to reimburse the
defense costs because another insurer provided defense coverage. Under the escape
clause in the contract, the argument goes, Defendant escapes liability because Great
American’s contract with The Point provided coverage for defense costs. Second, it argues
that, even if Defendant would otherwise owe defense costs to The Point, it does not owe
any in this case because the Loan and Prosecution Agreement executed by The Point and
Great American does not ask The Point to seek defense costs from Defendant. Each
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argument will be addressed in turn.
Kentucky courts have previously addressed the factual situation presented by
Philadelphia’s and Great American’s seemingly conflicting insurance policies. And the rule
from those cases is clear: an escape clause does not operate where the additional
insurance policy does not provide primary coverage.
The clause at issue in Defendant’s insurance policy provides that Defendant will
cover defense costs that are reasonable and necessary, but excluded are “any amounts
incurred in defense of any Claim for which any other insurer has a duty to defend,
regardless of whether or not such other insurer undertakes such a duty.” (Doc. # 90-2, p.
29). Such a provision is common in the insurance world and is known as an escape
clause.
As one might anticipate when multiple insurance companies are involved, terms and
clauses often conflict. Defendant’s escape clause is a “standard” one because “it is a
general disclaimer of risk solely due to the presence of other insurance.” See Great
American Assurance Co. v. American Cas. Co. of Reading, 511 F. App’x 431, 436 (6th Cir.
2013). Kentucky courts have routinely held that an escape clause such as the one in
Defendant’s policy is operative only where the other insurer provides primary coverage for
defense costs. Ohio Cas. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 511 S.W.2d 671, 674
(Ky. 1974); see also Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 453 (Ky. 1997).
Great American’s policy does not provide primary coverage; instead, it operates as excesscoverage clause, and provides coverage only when the primary insurer’s policy limits have
been reached. See Doc. # 90-3 at p. ID 1854.
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Under Kentucky law, “where a standard escape clause conflicts with an excess
clause, the insurer with the standard escape clause is not relieved of its obligation to
provide primary coverage.” Great American, 511 F. App’x at 438; see also Ohio Cas. Ins.
Co., 511 S.W.2d at 674. This is logical since the excess-coverage provider owes nothing
until the primary provider’s policy has been exhausted. To hold otherwise would convert
every excess-coverage clause into a primary-coverage clause by the mere existence of
another insurer’s standard escape clause. Accordingly, the Court finds that Defendant’s
escape clause is inoperative here because it was the sole provider of primary coverage for
The Point’s defense costs.
Defendant next argues that it owes nothing to its insureds because Great American
fronted defense costs to Plaintiffs and did not explicitly require The Point to seek
reimbursement for those costs.
However, the Loan and Prosecution Agreement is
irrelevant for the purposes of determining whether Defendant owes defense costs to The
Point. The simple fact of the matter is Defendant breached its duty to defend, and insurers
that breach their duty to defend are liable to their insureds for reasonable defense costs
incurred. The Point is entitled to recover these defense costs, and it may ultimately recover
some portion of the Daniel’s Settlement as well. But how much The Point ultimately owes
Great American is an issue between those parties.4
4) If The Point does not follow the requirements of the Loan and Prosecution Agreement, Great
American may institute a breach of contract action against it. The Court, however, is not tasked
with determining the rights and responsibilities under that contract. Instead, it is tasked with
adjudicating the claims that exist between The Point and Philadelphia, the only parties currently
before the Court.
19
Even if it were relevant, the Court disagrees with Defendant’s reading of the Loan
and Prosecution Agreement. In its third paragraph, that agreement states that The Point
agrees “that some or all of the defense and indemnity costs arising from or relating to the
Daniels Lawsuit and Daniels Settlement are covered by insurance policies issued by
insurance carriers other than Great American.” Doc. # 101-8 at p. 1. It also requires The
Point to recover these costs from the other insurance carriers. Accordingly, the Court
believes that the plain and ordinary meaning of the Agreement encompasses
reimbursement of defense costs.
Philadelphia breached its duty to defend, and as the sole primary carrier of
coverage for any defense costs incurred, must indemnify The Point. The proper amount
of defense costs is an issue that must be determined by a jury.
D.
The Point’s bad faith claims against Philadelphia are sufficient to
survive summary judgment and be presented to the jury
Kentucky law permits a bad faith claim predicated upon “failure to defend and to deal
with [the] insured in good faith.” Grimes, 705 S.W.2d at 932. Kentucky uses a three-part
test for bad-faith claims in insurance cases: (1) proof of an insurer’s obligation to pay a
claim; (2) a lack of a reasonable basis to deny the claim; and (3) knowledge or reckless
disregard towards coverage. Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993).
The first part of the test has been satisfied as a matter of law because the Court has
determined that Defendant owed a duty to defend The Point and that it must indemnify
some amount of the Daniel’s Settlement. As for the other two elements, the Court finds
that there is a genuine issue of material fact as to: 1) whether Defendant had a reasonable
basis for breaching its duty to defend and for denying coverage; and 2) whether it acted
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with knowledge or reckless disregard towards coverage. Specifically, The Point has shown
that Defendant instructed those involved in the mediation that its policy contained no duty
to defend. That is patently untrue. Whether this misrepresentation was a simple oversight
or a meanspirited lie is for a jury to determine.5
III.
Conclusion
Accordingly, for the reasons stated herein, IT IS ORDERED as follows:
1.
Plaintiffs’ Motion for Summary Judgment (Doc. # 90) is granted in full.
2.
Defendant’s Motion for Summary Judgment (Doc. #91) is denied in full.
This 22nd day of December, 2015.
G:\DATA\ORDERS\Cov09\09-81 Order Granting Plaintiffs' SJ.wpd
5) If the jury finds bad faith, it will have to calculate the appropriate damage award as well.
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