LM Insurance Corporation et al v. Canal Insurance Company

Filing 32

OPINION & ORDER: 1) 19 MOTION for Summary Judgment is GRANTED and summary judgment will be entered in favor of Liberty Mutual for the amt of $421,925.51 plus prejudgment interest. 2) 21 MOTION for Partial Summary Judgment is DENIED. 3 ) 31 JOINT MOTION to Amend/Correct 14 Scheduling Order is DENIED AS MOOT. 4) PTC currently set for 4/19/2012 and bench trial currently set for 5/15/2012 are SET ASIDE. 5) WITHIN 10 DAYS OF ENTRY OF THIS ORDER, Liberty Mutual shall submit a proposed Judgment, including amounts for prejudgment interest. Signed by Judge Karl S. Forester on 3/22/2012.(SCD)cc: COR,D

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
CIVIL ACTION NO. 11-81-KSF
LM INSURANCE CORPORATION
and LIBERTY MUTUAL FIRE
INSURANCE COMPANY

v.

PLAINTIFFS

OPINION & ORDER

CANAL INSURANCE COMPANY

DEFENDANT

********
The plaintiffs, LM Insurance Company (“LM”) and Liberty Mutual Insurance Company
(“Liberty Mutual”)(collectively “Liberty Mutual”), filed this action for declaratory relief pursuant
to 28 U.S.C. § 2201 et seq. and Rule 57 of the Federal Rules of Civil Procedure against the
defendant, Canal Insurance Company (“Canal”). Specifically, Liberty Mutual seeks a ruling
declaring the scope of Canal’s duties respect to a lawsuit brought against Liberty Mutual and Canal’s
insured, Hinkle Contracting Corporation (“HCC”), in Bourbon Circuit Court, captioned Pamela
Henney, individually and as Executrix of the Estate of Charles Henney v. Hinkle Contracting
Corporation, et al., Civil Action No. 09-CI-000325 (the “Henney action”). Currently before the
Court are the parties’ cross motions for summary judgment [DE ##19, 21].
I.

FACTUAL AND PROCEDURAL BACKGROUND
The facts underlying this matter are not in dispute. On May 25, 2006 HCC entered into a

contract (the “Hauling Contract”) with William Henderson, dba Henderson Trucking (“Henderson”),

1

to “provide hauling-trucking services as needed by HCC upon demand” [DE #19-3]. The Hauling
Contract further provided that Henderson would carry automobile liability insurance in an amount
not less than $1 million and would name HCC as an additional insured on a primary and noncontributory basis. In addition, Henderson agreed to indemnify and hold harmless HCC to the fullest
extent permitted by law for all liabilities, including defense costs and attorney’s fees, “arising out
of the work performed by Contractor [Henderson] under this agreement” [DE #19-3].
Canal subsequently issued a Business Auto insurance policy in Kentucky to Henderson,
Policy Number PIA01501401, with a policy period of June 7, 2008 to June 7, 2009 (the “Canal
Policy”). HCC was made an additional insured of the Canal Policy by way of a Designated Insured
endorsement purchased by Henderson [DE #19-9].
HCC also maintained two insurance policies during the relevant time. LM issued a
commercial General Liability insurance policy to HCC, Policy Number TB5-151-288776-028, with
a policy period April 1, 2008 to April 1, 2009 (the “LM CGL Policy”) [DE #19-8]. Liberty Mutual
issued a Business Auto policy to HCC, Policy Number AS2-151-288776-018, with a policy period
of April 1, 2008 to April 1, 2009 (the “Liberty Mutual Auto Policy”) [DE #19-7].
On October 30, 2008, Henderson was involved in an accident with Charles Henney while
hauling materials for HCC pursuant to the Hauling Contract. Henney died as a result of the accident.
After the accident, Liberty Mutual and Canal exchanged correspondence, but apparently never
reached a true agreement about coverage. The Henney action was subsequently filed on October 28,
2009 in Bourbon Circuit Court [DE#1-1].
The Complaint in the Henney Action alleged, inter alia, six counts against Henderson, HCC,
and other defendants. In Count I, the plaintiff alleged that Henderson negligently and/or grossly
2

negligently operated his dump truck as an agent of HCC, and that HCC was vicariously liable for
the acts of Henderson. In Count II, the plaintiff alleged that Henderson, with the knowledge of HCC,
operated the dump truck while it was overloaded, and that HCC was vicariously liable for the acts
of Henderson. In Count IV, the plaintiff alleged that HCC negligently and/or knowingly overloaded
Henderson’s dump truck, which contributed to the accident. Count V alleged that all of the
defendants engaged in knowing and/or grossly negligent conduct in overseeing Henderson’s dump
truck, entitling the plaintiff to punitive damages. Finally, in Counts VII and VIII, the plaintiff alleged
that all of the defendants engaged in a joint enterprise or a conspiracy to overload dump trucks.
Liberty Mutual defended HCC in the Henney action. On January 19, 2011, Henney’s claims
against HCC were dismissed as settled [DE #19-6]. The case proceeded to trial against Henderson,
and on January 25, 2011, the jury found Henderson liable for Henney’s death and awarded damages
of approximately $4 million [DE #19-11]. Canal has not contributed or reimbursed Liberty Mutual
for the cost of defending HCC against the claims asserted in the Henney Action. As a result, Liberty
Mutual filed this action, alleging that it spent $415,544.45 to defend HCC, as well as costs which
have since been incurred. Specifically, LM and Liberty Mutual seek a declaration that Canal has a
duty to defend HCC for the claims asserted in the Henney Action, a declaration that the LM Policy
and the Liberty Mutual Policy are excess to the Canal Policy, an order requiring Canal to reimburse
Liberty Mutual for all of the defense costs and expenses paid by Liberty Mutual in defending the
Henney Action, along with interest on those amounts, as well as its costs and attorney’s fees.
On January 12, 2012, LM and Liberty Mutual filed their motion for summary judgment.
They argue that Liberty Mutual has paid $421,925.51 in attorneys’ fees and costs in defending the
claims against HCC, not including interest. They move for judgment against Canal for that amount,
3

plus prejudgment interest [DE #19]. Canal also filed a motion for partial summary judgment on
January 12, 2012 [DE #21]. While Canal concedes that it is liable for twenty-five percent of the
valid defense costs and expenses incurred in the defense of HCC between June 7, 2010, the date of
HCC’s tender, and January 19, 2011, it seeks partial summary judgment on the remainder of Liberty
Mutual’s claims.
II.

SUMMARY JUDGMENT STANDARD
Rule 56(a) entitles a moving party to summary judgment if that party “shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Rule 56(c)(1) further instructs that “[a] party asserting that a fact cannot be or is genuinely disputed
must support the assertion” by citing to the record or “showing that the materials cited do not
establish the absence or presence of a genuine dispute, or that an adverse party cannot produce
admissible evidence to support the fact.” 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). The moving party may
meet this burden by demonstrating the absence of evidence concerning an essential element of the
nonmovant’s claim on which it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477
U.S. 317, 323 (1986). Once the movant has satisfied its burden, the nonmoving party msut “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, 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
4

entirety, a rational fact finder could not find for the nonmoving party, summary judgment should be
granted. Ercegovich v. Goodyear Tire & Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998).
Moreover, the trial court is not required to “search the entire record to establish that it is
bereft of a genuine issue of material fact.” Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80
(6th Cir. 1989). Rather, “the nonmoving party has an affirmative duty to direct the court’s attention
to those specific portions of the record upon which it seeks to rely to create a genuine issue of
material fact.” In re Morris, 260 F.3d 654, 665 (6th Cir. 2001).
The interpretation of an insurance policy is a question of law, rendering it appropriate for
summary judgment. See Stone v. Kentucky Farm Bureau Mut. Ins. Co., 34 S.W.3d 809, 810-11 (Ky.
App. 2000). The terms of an insurance policy will be given their plain and ordinary meaning and
when the terms of the policy are clear and unambiguous, they must be enforced as drafted. City of
Louisville v. McDonald, 819 S.W.2d 319, 320-21 (Ky.App. 1991); Osborne v. Uniguard Indem. Co.,
719 S.W.2d 737, 740 (Ky. App. 1986). Based on the “reasonable expectation doctrine, ambiguous
terms in an insurance contract must be interpreted in favor of the insured’s reasonable expectations
and construed as an average person would construe them . . . Insurance policies should be construed
according to the parties’ mutual understanding at the time they entered into the contract, with this
mutual understanding to be deduced, if at all possible, from the language of the contract itself.”
Hugenberg v. West American Ins. Co., 249 S.W.3d 174, 185-86 (Ky. App. 2006).
III.

ANALYSIS
Insurers have an obligation to defend if the complaint contains any allegation “which

potentially, possibly or might come within the coverage of the policy.” Lenning v. Commercial
Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001)(quoting Brown Found.., 814 S.W.2d at 279). An
5

insurance company must decide at the outset of the litigation whether or not a defense is required.
Brown Found., 814 S.W.2d at 279. An insurer who believes coverage is unwarranted may choose
to defend the party anyway and preserve its rights to challenge the coverage at a later date through
a reservation-of-rights letter. Aetna Cas. & Surety v. Kentucky, 179 S.W.3d 830, 841 (Ky. 2005).
However, if the insurer elects not to defend the party and it turns out that the insurer should have
done so, the insurer will be liable for “all damages naturally flowing from” the failure to provide a
defense. Id. (Eskridge v. Educator and Executive Insurers, Inc., 677 S.W.2d 887 (Ky. 1984).
Canal chose not to defend HCC. The complaint in the Henney Action contained several
counts against HCC. Many of the claims against HCC alleged that it was vicariously liable for the
acts of Henderson and/or that HCC and Henderson were engaged in a joint enterprise and should be
held jointly and severally liable for the plaintiff’s damages. A single claims alleged that HCC
independently, negligently, recklessly, or knowingly overloaded Henderson’s dump truck. In order
to determine which insurance policy provided primary coverage for these claims, it is necessary to
review the policies at issue.
A.

THE POLICIES

In a contest between two insurers, “the liability for a loss should be determined by the terms
of the respective policies. Standard Fire Ins. Co. v. Empire Fire & Marine Ins. Co., 234 S.W.3d
377, 379 (Ky. App. 2007)(internal citations and quotations omitted). The relevant provisions of each
policy are set forth below.
1.

The Liberty Mutual Auto Policy

The Liberty Mutual Auto Policy was issued to HCC for the period April 1, 2008 to April 1,
2009. It provides a combined single limit of liability coverage of $1 million dollars. This policy
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provides that it shall pay all sums that HCC must pay as damages “caused by an ‘accident’ and
resulting from the ownership, maintenance or use of a covered ‘auto’.” A “covered auto,” under this
policy, means “any auto” (including non-owned autos). The policy also contains an exclusion for
damages caused by the handling of property.
In the Other Insurance portion of the policy, it provides as follows:
Other Insurance
a.

For any covered “auto” you own, the Coverage Form provides
primary insurance. For any covered “auto” you don’t own, the
insurance provided by this Coverage Form is excess over any other
collectible insurance . . . .

****
b.

When this Coverage Form and any other Coverage Form or policy
covers on the same basis, either excess or primary, we will pay only
our share. Our share is the proportion that the Limit of Insurance of
our Coverage Form bears to the total of the limits of all Coverage
Forms and policies covering on the same basis.

[DE#21-4].
2.

The LM CGL Policy

The LM Commercial Liability Insurance policy was issued to HCC for the period April 1,
2008 to April 1, 2009. This policy agrees to cover certain damages to which the insurance applies
and contains a $1 million limit per occurrence. It is a standard CGL policy which provides that it
shall pay all sums that HCC must pay as damages because of “bodily injury” caused by an
“occurrence” within the policy period. There is an exclusion for bodily injury “arising out of the
ownership, maintenance, use or entrustment to others of any . . .’auto’ owned or operated by or
rented or loaned to any insured.” The Other Insurance provision in this policy provides that the

7

policy shall be excess over any other insurance “[i]f the loss arises out of the maintenance or use of
‘autos’ to the extent not subject to Exclusion g. of Section I- Coverage A -Bodily Injury and Property
Damage Liability” [DE #19-8].
3.

The Canal Auto Policy

Canal issued a business auto policy to Henderson for a policy period of June 7, 2008 to June
7, 2009 [DE #21-3]. Due to the requirement in the Hauling Contract, Henderson also purchased an
endorsement whereby HCC was named as an additional Designated Insured. The Canal Policy
provides coverage for damages for bodily injury “resulting from the ownership, maintenance or use
of a covered ‘auto.’” There is no dispute that Henderson’s dump truck, which was involved in the
accident that was the subject of the Henney Action, was a covered auto under this policy.
The Other Insurance provision of the Canal Policy provides that the coverage is primary for
any covered auto “you own” and is excess for any covered auto “you don’t own.” “You” is defined
as the named insured, Henderson. However, by way of a Trucker’s Endorsement, the policy provides
that if the covered auto (i.e., Henderson’s dump truck), is “being used or maintained pursuant to any
lease, contract of hire, bailment, rental agreement, or any similar contract or agreement,” the
insurance to “you” (i.e. Henderson) shall be excess over any other insurance [DE #21-3]
B.

CORRESPONDENCE BETWEEN THE PARTIES

On October 31, 2008, Canal received notice of the accident and began its investigation. On
April 6, 2009, Rose Penberthy of Liberty Mutual advised Canal’s adjuster that Liberty Mutual
insured HCC and that Henderson was hauling a load of asphalt for Hinkle at the time of the accident
[DE #21-6]. On April 20, 2009, an attorney for Henney’s estate sent a demand letter to both
Henderson and Hinkle and offered to settle the claim in full for $3 million.
8

On June 5, 2009, Canal’s counsel advised Liberty Mutual that Canal had determined that no
coverage was afforded to HCC under the Canal policy because there was no evidence that HCC was
vicariously liable for Henderson’s conduct. However, even if there were such a claim, it appeared
that the LM Auto Policy and the Canal policy were co-primary and therefore, pro-rata allocation was
required under the policies’ Other Insurance Clauses. Canal also advised Liberty Mutual that it had
responded to the Estate’s $3 million demand by advising that Canal’s Policy limit was only $1
million [DE #21-7].
On June 29, 2009, the Estate’s attorney emailed Liberty Mutual’s new adjuster to advise her
that the Estate would pursue non-auto theories of liability against HCC, including loading,
unloading, joint venture and conspiracy to violate state and federal transportation safety laws [DE
#21-8]. Again, on August 19, 2009, the Estate’s attorney advised Liberty Mutual that the complaint
would contain allegations not related to transportation [DE #21-9].
The Estate’s suit was filed on October 28, 2009 [DE #1-1]. On November 6, 2009, Liberty
Mutual’s adjuster wrote to Canal’s attorney in an attempt to tender HCC’s defense and
indemnification to Canal [DE #21-10]. By letter dated January 6, 2010, Canal’s counsel advised that
Canal would evaluate what duties may be owed by Canal to HCC based on the allegations in the
Estate’s complaint [DE #21-11]. On March 29, 2010, Canal advised Liberty Mutual that it had not
received a request by HCC to tender the defense and indemnification to Canal and that such a duty
is non-delegable. Canal further advised that should HCC make such a demand under the Canal
policy, it would be happy to work with Liberty Mutual on their shared obligation [DE #21-12].
Then, on June 7, 2010, Canal received a letter from HCC’s personal attorney, Clark Keller,
who formally tendered the defense and indemnification of HCC’s claims to Canal at that time [DE
9

#21-13]. On June 10, 2010, Canal wrote HCC’s attorney and agree that HCC was an additional
insured on the Canal Policy by virtue of the Designated Insured Endorsement. However, Canal
advised HCC that coverage under the Canal policy was limited to vicarious liability claims against
HCC arising out of Henderson’s operation of the truck [DE #22-1].
By letter of July 9, 2010, Canal reiterated its acceptance of HCC’s tender of defense on a coprimary basis with Liberty Mutual: “Further, assuming that Liberty Mutual is providing Hinkle with
a defense in this litigation, we will be glad to discuss a cost-sharing agreement for Hinkle’s defense
as of June 7, 2010, with it. If you are authorized by Liberty Mutual to negotiate on its behalf as to
the terms of the cost sharing agreement, please also advise us immediately” [DE #22-2]. Canal
received no further communications from HCC or Liberty Mutual regarding a cost-sharing
agreement. Canal was not consulted regarding choice of defense counsel, nor was Canal provided
a single invoice for HCC’s defense costs and expenses until after this litigation commences.
Furthermore, LM, the issuer of the LM CGL Policy, never contacted Canal during the pendency of
the Estate action and Canal was never advised that LM was paying some part of HCC’s defense costs
until after the Complaint in this case was filed.
C.

CANAL HAD THE PRIMARY DUTY TO DEFEND HCC

It is well established in Kentucky that whether an insurer has a duty to defend is determined
by the allegations contained in the complaint. Brown Found., 814 S.W.2d at 279. Thus, an insurer
must “defend any suit in which the language of the complaint would bring it within the policy
coverage.” Id. at 279.
Canal concedes that the claims made against HCC in the Henney action triggered a duty to
defend on the part of Canal based on the policy issued to Henderson. However, Canal argues that
10

both Liberty Mutual’s Auto Policy and LM’s CGL Policy were also triggered by the claims made
against HCC in the Henney action. Thus, the question for the Court is the proper application of
various provisions of each policy in order to determine which insurers were primary, if any, and
which were excess, if any.
Pursuant to the requirement in the Hauling Contract, Henderson purchased the “Designated
Insured” endorsement in conjunction with the Canal Policy to have HCC added as an additional
insured. This endorsement states: “This endorsement identifies person(s) or organization(s) who are
‘insureds’ under the Who Is An Insured Provision of the Coverage Form” and lists “Hinkle
Contracting” as an “insured” [DE #21-3, p. 114] As a result, HCC is an insured of the Canal Policy
pursuant to this endorsement and is entitled to coverage for all claims “resulting” from the “use” of
a covered auto.
While Canal argues that the certain claims in the Henney Action including negligent
overloading, joint enterprise and civil conspiracy claims (the “overloading claims”) do not result
from the “use” of Henderson’s auto, the Court disagrees. Kentucky courts have construed terms
“resulting from” or “arising from” the use of an auto very broadly. Specifically, courts look to
whether the claim for which a party is seeking coverage was “causally connected” to the use of the
auto. See Hugenberg, 249 S.W.3d at 187; Dodson v. Key, 508 S.W.2d 586, 589-90 (Ky.App. 1974);
Hartford Ins. Cos. of America v. Kentucky School Boards Ins. Trust, 17 S.W.3d 525, 527 (Ky.App.
1999); Asher v. Unarco Material Handling, Inc., 2011 WL 42999 (E.D.Ky 2011); Johnson v. Service
Merchandise Co., 327 F.Supp.2d 735, 737 (E.D.Ky. 2004). Here, there would be no cause of action
for the overloading claims but for the fact that Henderson ran a stoplight and struck Mr. Henney’s
vehicle. Under the terms of the policy, Canal had a duty to defend any claim in the Henney Action
11

which even potentially alleges a bodily injury “resulting from” the “use” of a covered auto. Thus,
all of the claims asserted against HCC in the Henney Action “resulted from” the “use” of
Henderson’s auto.
The Other Insurance provision in Liberty Mutual’s CGL Policy now comes into play. It
specifically excludes coverage for bodily injury “arising out” of the “ownership, maintenance, use
or entrustment to others” of any “auto” owned or operated by or rented or loaned to any insured. [DE
#21-3 p.67] This exclusion, however, does not apply because the dump truck was not owned or
operated by HCC or any insured of the CGL Policy. As a result, the Other Insurance provision of
the CGL Policy applies. It provides that, to the extent it affords coverage to HCC for a claim
“arising out of the use of a “auto[]”, it provides excess coverage to all other available insurance
“whether primary, excess, contingent or on any other basis.” [DE #21-5 p. 74] Because the Court
finds that the overloading claims were “auto claims,” then Canal and Liberty Mutual were insuring
the same risk. As a result of the Other Insurance provision in the CGL Policy, the CGL Policy is
excess to the Canal Policy.
Turning next to the LM Auto Policy, the Court notes that its Other Insurance provision is
identical to the Canal Policy. Both policies provide:
For any covered “auto” you own, this Coverage Form provides primary insurance.
For any covered auto you don’t own, the insurance provided by this Coverage Form
is excess over any other collectible insurance.
[DE ##, 19-7, p. 13, 21-3p. 49]. Under both policies, “you” is defined as the “Named Insured.” The
“Named Insured” of the LM Auto Policy is HCC. Clearly, the LM Auto Policy provides primary
coverage for autos owned by HCC and excess coverage for autos not owned by HCC. Because there
is no dispute that the truck involved in the accident was owned by Henderson, the LM Auto Policy
12

is excess to the Canal Policy. This is consistent with Kentucky law, which has recently held on two
occasions that the owner of a vehicle shall provide primary insurance irrespective of the “other
insurance” provisions in the competing policies. See Kentucky Farm Bureau Mut. Ins. Co. v. Shelter
Mut. Ins. Co., 326 S.W.3d 803 (Ky. 2010); Progressive Max Ins. Co. v. National Car Rental
Systems, Inc., 329 S.W.3d 320 (Ky. 2011).
Canal’s argument that the Trucker’s Endorsement to its auto policy renders its coverage coexcess fails. The relevant provision of the Trucker’s Endorsement provides:
Regardless of the provisions of paragraph a. above, in the event the “auto described
in this policy is being used or maintained pursuant to any lease, contract of hire,
bailment, rental agreement, or any similar contract or agreement, either written or
oral, expressed or implied, the insurance afforded you shall be excess insurance over
any other insurance.
[DE #19-3, p.78]. Importantly, this provision only applies to “you,” defined as the “Named Insured,”
which is Henderson. By its own terms, it does not apply to HCC as an additional designated insured.
Instead, it only applies when Henderson, the “Named Insured,” seeks coverage from Canal when his
own auto is being used or maintained “pursuant to any lease, contract . . .” and Henderson has no
other available coverage to him. The Trucker’s Endorsement is simply not applicable to HCC in this
case.
Even if the “Other Insurance” provision in the Trucker’s Endorsement applied to coverage
afforded an additional insured such as HCC, the Hauling Contract between Henderson and HCC
does not constitute “a lease, contract for hire” or other similar agreement. The Hauling Contract
between Henderson and HCC provides that Henderson is an independent contractor of HCC and that
HCC will tender construction materials to Henderson for delivery to assigned locations. Henderson
is paid based on the weight of the material to be hauled, and is responsible for furnishing all the
13

necessary equipment and personnel to comply with the Hauling Agreement, not just a designated
truck. Furthermore, Henderson was responsible for all maintenance and insurance regarding his
equipment and his employees. HCC did not designate or require any particular truck or employee
to perform the services required by the Hauling Contract. HCC had not right to exercise any control
over Henderson’s means of complying with the Hauling Contract, other than to require Henderson
to take the “shortest practicable route” for each delivery. For these reasons, the Hauling Contract
was not a “contract to hire” the truck or any other type of agreement contemplated by the Trucker’s
Endorsement. It was simply an independent contract arrangement to hire Henderson to perform
hauling services for HCC. This holding is supported by holdings in Liberty Mutual Fire Ins. Co. V.
Canal Ins. Co., 177 F.3d 326 (5th Cir. 1999); Liberty Mutual Fire Ins. Co. v. Canal Ins. Co., 50
F.Supp. 2d 591 (S.D. Miss. 1998); Liberty Mutual Fire Ins. Co. v. Canal Ins. Co., 1997 WL 786760
(N.D. Miss. 1997), where the courts found that such hauling and contract services were not contracts
to “hire” the truck, but instead service contracts. For these reasons, the LM Auto Policy is also
excess to the Canal Policy.
Based on these findings, Canal owed a primary duty to defend HCC against the claims
asserted in the Henney Action. Under Kentucky law, Canal is responsible for “all damages naturally
flowing from the failure to provide a defense. This includes ‘damages for reimbursement of defense
costs and expenses.” Aetna Cas. & Surety Co., 179 S.W.3d at 841 (internal citations and quotations
omitted). Thus, Liberty Mutual is entitled to be fully reimbursed for the costs it paid defending HCC
against the claims asserted in the Henney Action.
D.

CANAL’S DUTY TO DEFEND BEGAN AT INCEPTION OF THE CLAIMS
AGAINST HCC

14

The parties dispute when Canal’s obligation to defend HCC began. Although Canal was
aware of the Henney’s claims against Henderson and HCC prior to the filing of the Henney Action,
it was advised of Liberty Mutual’s intent to tender defense to Canal in the spring of 2009 [DE #20-1,
p.1]. After the suit was filed, Liberty formally tendered defense of HCC to Canal [DE #20-1, p.8].
Canal never responded. It was months later that Canal advised Liberty Mutual that it would not
accept the tender and that it would only accept a tender from HCC directly [DE #20-1, p. 12].
Shortly thereafter, counsel for HCC wrote a “formal tender of the defense Canal owes to HCC.” [DE
#20-1, p.13] Canal responded that it would accept HCC’s tender of defense, but since Liberty
Mutual was paying the defense costs, it would negotiate a cost-sharing arrangement [DE #20-1, p.2931]. Apparently, no such arrangement was ever reached. Based on this correspondence, Canal
argues that it is not liable for any defense costs incurred prior to June 7, 2010, the date that HCC’s
counsel tendered the defense to Canal.
Essentially, Canal is arguing that the previous tenders were made by Liberty Mutual on behalf
of HCC were ineffective. There is simply no Kentucky caselaw directly in support of Canal’s
argument. In fact, Kentucky generally recognizes that the insurer is an agent of the insured during
the course of litigation or anticipated litigation. See e.g. Asbury v. Beerbower, 589 S.W.2d 216 (Ky.
1979)(holding that the attorney-client privilege extends to communications made by an insured to
their insurer upon the recognition that the “insurer as the agent” of the insured will transmit the
communication to an attorney). Canal had notice of the claims against HCC, but wishes to avoid
its defense obligations based on the fact that Liberty Mutual wrote the tender letter on HCC’s behalf.
There is no support for Canal’s position, particularly in light of the fact that Canal waited months
to inform Liberty Mutual that it would not accept Liberty’s tender and that it would only accept a
15

tender from HCC directly. Canal then agreed to accept HCC’s tender of defense, but then told HCC
that since Liberty Mutual was paying the defense costs for HCC, it would negotiate a cost-sharing
agreement with Liberty Mutual, which was never accomplished.
However, even if this tender by Liberty Mutual was somehow ineffective, Kentucky law
provides that an insurance company cannot avoid its obligations to an insured on the basis of a
failure to notify the insurer of the claim unless the insurer can prove that it was prejudiced by the
delay. See Jones v. Bituminous Cas. Corp., 821 S.W.2d 798, 801-03 (Ky. 1991). “Kentucky’s
general pronouncement on late notice is very persuasive authority that Kentucky would continue to
place the burden on the insurer to show prejudice due to late notice rather than assuming prejudice
as many other jurisdictions have for pre-tender defense costs.” Travelers Property Cas. Co. of
America v. Hillerich &Bradsby Co., Inc., 598 F.3d 257 (6th Cir. 2010). Because Canal was on
notice of the claims against HCC since April 2009, it cannot show any prejudice. Canal had every
opportunity to assume the defense of HCC from the filing of the complaint to the conclusion of the
lawsuit. Accordingly, Liberty Mutual is entitled to full contribution from Canal for all reasonable
defense costs it paid in defense of HCC.
E.

DEFENSE COSTS

Liberty Mutual seeks defense costs in the amount of $421,925.51, plus prejudgment interest.
Liberty Mutual has tendered invoices, legal bills, cancelled checks, and affidavits to support these
costs [DE #20] . The parties agree that the burden is on Liberty Mutual to prove these costs, although
Liberty Mutual also contends that it is entitled to presumption of reasonableness due to Canal’s
decision not to participate in the defense. Liberty Mutual argues that Canal should not be allowed
to refuse to participate, and then to challenge the reasonableness of the defense costs actually
16

incurred by the insurer actually participating. The Court agrees.
Furthermore, in review of the defense costs, the Court finds that defense costs incurred were
indeed reasonable. The rates charged by Baker Kriz, $100 per hour for attorney work and $60 per
hour for paralegal work, are certainly reasonable rates in this jurisdiction. To the extent that Liberty
Mutual consulted with other attorneys charging a higher rate or experts, the Court has reviewed these
expenses and finds that they are also reasonable in light of the facts of the case. Thus, Liberty
Mutual is entitled to recover the entire amount of its defense costs, $421,925.51.
F.

PREJUDGMENT INTEREST

Finally, Liberty Mutual seeks to recover prejudgment interest on each defense payment. In
Kentucky, prejudgment interest can be awarded in three circumstances: (1) where there is statutory
authority; (2) where there is a contract allowing prejudgment interest; and (3) when the damages are
liquidated. See Nucor Corp. v. General Electric Co., 812 S.W.2d 136 (Ky. 1991). When the award
of damages is liquidated, then prejudgment interest is required as a matter of right. Id. at 141. A
“liquidated amount” is one that can be determined by simple calculation, can be determined with
reasonable certainty, can be determined pursuant to fixed rules of evidence or can be determined by
well-established market values. 3D Enterprises Contracting Corp. v. Louisville and Jefferson
County Metrop. Sewer Dist., 174 S.W.3d 440, 450 (Ky. 2005)(internal citations omitted).
Here, the defense costs incurred by Liberty Mutual are liquidated under Kentucky law. The
amounts were invoiced, tendered to, and paid by Liberty Mutual pursuant to its insurance contract
with HCC. As a result, prejudgment interest at 8% per annum, runs on each payment made by
Liberty Mutual from the date of the payment until the date of the judgment. KRS 360.010; Pursley
v. Pursley, 144 S.W.3d 820, 828, 29 (Ky. 2004)
17

IV.

CONCLUSION.
For the reasons set forth above, Canal was HCC’s primary insurer and Liberty Mutual and

LM were excess insurers. Liberty Mutual is entitled to full reimbursement from Canal for all defense
costs it paid in defense of HCC, including prejudgment interest at 8% per annum. Accordingly, the
Court, being fully and sufficiently advised, hereby ORDERS as follows:
(1)

Liberty Mutual’s motion for summary judgment [DE #19] is GRANTED, and
summary judgment will be entered in favor of Liberty Mutual for the amount
$421,925.51 plus prejudgment interest;

(2)

Canal’s motion for partial summary judgment [DE #20] is DENIED;

(3)

the parties’ joint motion to amend the scheduling order [DE #31] is DENIED AS
MOOT;

(4)

the pretrial conference currently set for April 19, 2012 and the bench trial currently
set for May 15, 2012 are SET ASIDE; and

(5)

WITHIN TEN DAYS OF ENTRY OF THIS ORDER, Liberty Mutual shall
submit a proposed Judgment, including amounts for prejudgment interest.

This March 22, 2012.