Ray v. Encompass Insurance Company
Filing
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MEMORANDUM OPINION AND ORDER by Judge Greg N. Stivers on 10/23/2017. Defendant's Motion for Declaratory Judgment (DN 20 ) is GRANTED. Plaintiff's Motion for Declaratory Judgment (DN 19 ) is DENIED. cc: Counsel(CDR)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:16-CV-00504-GNS-DW
STEPHANIE RAY
PLAINTIFF
v.
ENCOMPASS INDEMNITY CO.
DEFENDANT
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Plaintiff’s Motion for Declaratory Judgment (DN 19)
and Defendant’s Motion for Declaratory Judgement (DN 20). For the reasons outlined below,
Plaintiff’s motion is DENIED, and Defendant’s motion is GRANTED.
I.
STATEMENT OF FACTS AND CLAIMS
On September 8, 2014, Plaintiff Stephanie Ray (“Plaintiff”) was injured in an automobile
collision caused by Pete Mayfield (“Mayfield”) in Elizabethtown, Kentucky. (Compl. ¶¶ 3, 6-7,
DN 1-1). Mayfield’s insurance provider, State Farm Mutual Automobile Insurance Company
(“State Farm”), offered to pay Plaintiff $50,000 to settle her claim and $50,000 to Plaintiff’s
husband to settle his derivative loss of consortium claim, which together represented the total
liability policy limit of $100,000. (Compl. ¶ 7; Def.’s Mem. Supp. Mot. Summ. J. 2, DN 20-1
[hereinafter Def.’s Mem.]). Plaintiff contends that Mayfield was an “underinsured driver,” as his
policy with State Farm was insufficient to adequately compensate Plaintiff for her damages.
(Compl. ¶ 8).
At the time of the accident, Plaintiff held an insurance policy (“Policy”) issued by
Defendant Encompass Indemnity Company (“Defendant”) which provided underinsured motorist
(“UIM”) benefits. (Compl. ¶ 11; (Def.’s Mem. 2; Def.’s Mem Supp. Mot. Summ. J. Ex. 1, DN
20-2 [hereinafter Policy]).1 In relevant part, the Policy provided that Defendant “will reduce
total damages to any covered person by any amount available to that covered person, under any
bodily injury liability bonds or policies applicable to the underinsured motor vehicle, that the
covered person did not recover as a result of a settlement between that covered person and the
insurer of any underinsured motor vehicle.” (Policy 4 (emphasis deleted)). The Policy further
stated that Defendant “will not make duplicate payment under this coverage for any element of
loss for which payment has been made by or on behalf of persons or organizations who may be
legally responsible.” (Policy 4).
Pursuant to KRS 304.39-320 and Coots v. Allstate Insurance Co., 853 S.W.2d 895 (Ky.
1993), Plaintiff’s counsel sent a letter informing Defendant of the settlement offer and its terms.
(Compl. ¶ 9; Def.’s Mem. 2). Defendant failed to respond within 30 days to advance Mayfield’s
policy limits and reserve its subrogation claims against State Farm and Mayfield. (Compl. ¶ 9;
Def.’s Mem. 3). Thereafter, Defendant informed Plaintiff’s counsel that it did not intend to
advance the policy limits and consented to the settlement, but later sent a letter offering
settlement on terms inconsistent with those previously disclosed. (Compl. ¶ 9).
Plaintiff then filed suit in Hardin Circuit Court, stating claims against Defendant for UIM
benefits and breach of contract. (Compl. ¶¶ 10-17). Defendant removed the action to this Court.
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Regarding UIM benefits, the Policy stated that Defendant “will pay damages which any
covered person is legally entitled to recover from the owner or operator of any underinsured
motor vehicle because of bodily injury . . . 1. [s]ustained by a covered person, and 2. [c]aused
by an accident arising out of the ownership, maintenance or use of an underinsured motor
vehicle.” (Policy 3 (emphasis deleted)). The Policy defined the term “underinsured motor
vehicle” as:
[A] land motor vehicle . . . to which a bodily injury liability bond or policy
applies at the time of the accident but the amount paid for bodily injury under that
bond or policy to a covered person is not enough to pay the full amount the
covered person is legally entitled to recover as damages.
(Policy 2-3 (emphasis deleted)).
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(Notice Removal, DN 1). The parties have agreed to resolve the legal dispute over the amount of
credit for liability coverage that Defendant could “set off” against Plaintiff’s UIM benefits claim.
(Agreed Order, DN 18; Pl.’s Br. 1, DN 19 [hereinafter Pl.’s Mem.]; Def.’s Mem. 3). Plaintiff
contends this amount is $50,000, as received by her in her settlement with State Farm; Defendant
argues it is entitled, both under the plain language of the Policy and Kentucky law, to set off the
full amount of Mayfield’s $100,000 liability policy limit. (Pl.’s Mem. 1; Def.’s Mem. 1-2).
II.
JURISDICTION
The Court has subject matter jurisdiction under 28 U.S.C. § 1441(a), as a civil action
originally brought in a state court of which the district courts of the United States have original
jurisdiction, under 28 U.S.C. § 1332(a) because there is diversity of citizenship between the
parties and the amount in controversy exceeds $75,000, exclusive of interest and costs, and as the
Defendant removed the action to this Court, as the district court of the United States for the
district and division embracing the place where the state court action was pending.
III.
DISCUSSION
Under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), “any court of the United
States, upon the filing of an appropriate pleading, may declare the rights and other legal relations
of any interested party seeking such declaration, whether or not further relief is or could be
sought.” Exercise of jurisdiction under the Declaratory Judgment Act is discretionary, not
mandatory. Bituminous Cas. Corp. v. J & L Lumber Co., Inc., 373 F.3d 807, 812 (6th Cir. 2004)
(citing Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942)).
The Court considers five factors to determine whether it should exercise jurisdiction over
a request for a declaratory judgment. Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d
323, 326 (6th Cir. 1984); Bituminous, 373 F.3d at 812-13 (citing Scottsdale Ins. Co. v. Roumph,
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211 F.3d 964, 967 (6th Cir. 2000)). Neither party challenges this Court’s exercise of jurisdiction
to issue a declaratory judgment and, on balance, the factors weigh in favor of the Court’s
exercising jurisdiction.2 See Bays v. Summitt Trucking, LLC, 691 F. Supp. 2d 725, 735 n.3
(W.D. Ky. 2010). Therefore, the Court will determine Defendant’s obligations.
Defendant argues that it is entitled, both under the plain language of the Policy and
Kentucky law, to set off the full amount of Mayfield’s $100,000 liability policy limit against
Plaintiff’s UIM benefits claim, regardless of Plaintiff’s unilateral attempt to set the value of her
settlement at $50,000. (Def.’s Mem. 1-2). Plaintiff contends that where the tortfeasor’s liability
limits are, in fact, exhausted because of multiple claimants, the UIM carrier is credited for the
amount paid by the liability carrier to the individual claimant, not the entire liability limit split
between multiple claimants. (Pl.’s Mem. 2).
To review the parties’ cross motions for declaratory judgment, the interpretation of the
insurance policy is a question of law to be enforced under Kentucky law as written, with clear
and unambiguous terms given their ordinary meaning. Erie R.R. Co. v. Tompkins, 304 U.S. 64,
78-79 (1938); K.M.R. Foremost Ins. Grp., 171 S.W.3d 751, 752 (Ky. App. 2005); Goodman v.
Horace Mann Ins. Co., 100 S.W.3d 769, 772 (Ky. App. 2003). KRS 304.39-320 requires that
insurers make UIM coverage available to their insureds, providing coverage in instances when
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For the sake completeness, the Court has considered all of the factors. First, declaratory
judgment settles the controversy about the extent of Defendant’s set-off for Plaintiff’s claim.
Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 555-56 (6th Cir. 2008). Second, a declaratory
judgment would clarify the legal relations at issue, in that it would “resolve, once and finally, the
question of the insurance indemnity obligation of the insurer.” Id. at 556-58. Third, the case
does not present the appearance of a “race for res judicata,” as both parties have moved for
declaratory judgment, and in either case the Court gives the relevant party the benefit of the
doubt that no improper motive fueled its filing. Bituminous, 373 F.3d at 814. Fourth, a
declaratory action would not increase the friction between federal and state courts or improperly
encroach on state jurisdiction since there is no concurrent state proceeding, as this action was
removed from state court. Id. at 813-15. Fifth, and finally, declaratory judgment is no less
effective than any potential alternative remedy. See id. at 813.
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the insured sustains damages beyond the tortfeasor’s liability limits.3 In construing and applying
a statute, the Court’s “duty is to ascertain and give effect to the intent of the Legislature.”
Steward v. ELCO Admin. Servs., Inc., 313 S.W.3d 117, 121 (Ky. App. 2010) (internal quotation
marks omitted) (quoting Beckham v. Bd. of Educ. of Jefferson Cty., 873 S.W.2d 575, 577 (Ky.
1994)). “To discern legislative intent and purpose, we look to the statute’s plain language.”
Progressive Max Ins. Co. v. Jamison, 431 S.W.3d 452, 455 (Ky. App. 2014) (citing Cabinet for
Families & Children v. Cummings, 163 S.W.3d 425, 430 (Ky. 2005)).
The plain language of the UIM statute provides with respect to UIM insurance set-offs:
The underinsured motorist insurer is entitled to a credit against total damages in
the amount of the underinsured motorist’s liability policies in all cases to which
this section applies, even if the settlement with the underinsured motorist . . . is
for less than the underinsured motorist’s full liability policy limits.
KRS 304.39-320(5). See also Jamison, 431 S.W.3d at 458 (“KRS 304.39-320(5)’s unambiguous
language . . . makes clear that the injured party, not that injured party’s UIM carrier, bears the
burden of any settlement below the tortfeasor’s liability policy limits.”). The UIM endorsement
in the Policy tracks the Kentucky UIM statute, providing that the insured’s total damages will be
reduced “by any amount available to that covered person, under any bodily injury liability bonds
or policies applicable to the underinsured motor vehicle, that the covered person did not recover
as a result of a settlement between that covered person and the insurer of any underinsured motor
vehicle.” (Policy 4 (emphasis deleted)). This type of UIM coverage is known as “damages less
limits,” “where UIM benefits kick in where the tortfeasor’s liability limits leave off.” Dawson v.
Travelers Indem. Co., 2014 U.S. Dist. LEXIS 135789, at *6 (W.D. Ky. Sept. 25, 2014). This
type is contrasted with the “damages less paid” type, which was employed in Kentucky until the
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This statute is “part of the Motor Vehicle Reparations Act . . . , and, as such, is remedial
legislation which should be generally construed to accomplish its stated purposes.” LaFrange v.
United Servs. Auto. Ass’n, 700 S.W.2d 411, 413 (Ky. 1985) (citation omitted).
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Kentucky legislature amended the statute in 1988 to adopt the “damages less limits” provision.
Id. at *10.
This Court assessed a virtually identical UIM policy in Dawson. In that case, the plaintiff
claimed the per-occurrence limit of $100,000 “capped” the amount she could recover, as it was
to be shared among 50 potential claimants involved in the underlying accident, which “forced”
her to take the $5,000 settlement to which she had agreed. Id. at *7. The plaintiff argued the
inequity of the UIM insurer receiving a credit to the full extent of the $50,000 per-person
liability limit and that the $100,000 per-occurrence limit was insufficient to pay all claims, but
did not introduce evidence of how many individuals actually made claims or whether the policy
limits were in fact exhausted. Id. at *6-9. The Court found for the defendant, noting that it
would not find against the purpose and policy underlying Kentucky’s adoption of the “damages
less limits” provision where the plaintiff had failed to justify a different interpretation or
application. Id. at *10-11.
Plaintiff argues that this case is distinct from Dawson because it is undisputed here that
the damages exceeded the policy limit and the limit was in fact exhausted by multiple claimants.
(Pl.’s Mem. 6). The Kentucky Supreme Court has held, however, that:
[W]hile the statute serves the remedial purpose of protecting auto-accident
victims from underinsured motorists who cannot adequately compensate them for
their injuries, that purpose has not been raised to the level of a public policy
overriding other purposes of the MVRA, such as guaranteeing the continued
availability of affordable motor vehicle insurance, or overriding all other
considerations of contract construction.
State Farm Mut. Auto. Ins. Co. v Hodgkiss-Warrick, 413 S.W.3d 875, 881 (Ky. 2013) (emphasis
added) (citation omitted). As Defendant properly notes, Kentucky is a “strict ‘four corners’
jurisdiction” in which matters of contract interpretation, including an insurance policy, begin
“with the plain language of the contract itself.” (Def.’s Mem. 5 (citing 3D Enters. Contracting
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Corp. v. Louisville & Jefferson Cty. Metro. Sewer Dist., 174 S.W.3d 440, 448 (Ky. 2005);
Nationwide Mut. Ins. Co. v. Nolan, 10 S.W.3d 129, 131-32 (Ky. 1999)). Nothing in the plain
language of the Policy provides support for Plaintiff’s argument, as it explicitly tracks the
“damages less limits” formula that is also Kentucky’s statutory standard.
Kentucky courts have held that the purpose and intent of the UIM statute is to treat the
injured party as if the tortfeasor is adequately insured, meaning “the injured party must exhaust
the tortfeasor’s liability insurance before turning to its own carrier for compensation.” Jamison,
431 S.W.3d at 458. Whether Mayfield’s policy limit was in fact exhausted because of multiple
claimants, and was therefore incapable of adequately compensating Plaintiff for her damages,
does not alter the undisputed fact that Plaintiff voluntarily settled her own claim with State Farm
for $50,000, less than the total policy limit. The Court is therefore satisfied that Defendant is
entitled to set off the full $100,000 liability insurer’s policy limit against Plaintiff’s UIM
coverage claim, in accordance with the plain language of the Kentucky UIM statute and the
Policy itself.
IV.
CONCLUSION
For the reasons outlined above, IT IS HEREBY ORDERED as follows:
1.
Defendant’s Motion for Declaratory Judgment (DN 20) is GRANTED.
2.
Plaintiff’s Motion for Declaratory Judgment (DN 19) is DENIED.
Greg N. Stivers, Judge
United States District Court
October 23, 2017
cc:
counsel of record
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