Asher v. Unarco Material Handling, Inc.

• Decision Date: 10 May 2012
• Docket Number: Civil No. 06–548–ART.
• Citation: 862 F.Supp.2d 551
• Parties: William H. ASHER, et al., Plaintiffs, v. UNARCO MATERIAL HANDLING, INC., et al., Defendants. v. Lexington Insurance Co., Intervening Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

862 F.Supp.2d 551

William H. ASHER, et al., Plaintiffs,

v.UNARCO MATERIAL HANDLING, INC., et al., Defendants.

v.Lexington Insurance Co., Intervening Defendant.

Civil No. 06–548–ART.

United States District Court,

E.D. Kentucky,

Southern Division,

London.

May 10, 2012.

Elizabeth Russo, Russo Appellate Firm, Don Russo, Lynn L. Audie, Don Russo, PA, Miami, FL, Charles C. Adams, Jr., Thomas K. Herren, Herren & Adams, Lexington, KY, for Plaintiffs.

Carl Norman Frazier, David C. Schwetschenau, Eileen M. O'Brien, Perry M. Bentley, Todd S. Page, Stoll Keenon Ogden, PLLC, Lexington, KY, for Defendants.

Bridget L. Dunaway, Tooms & Dunaway, London, KY, Donald L. Uttrich, Kristen C. Vine, Jackson & Campbell PC, Washington, DC, for Intervenor Defendant.

MEMORANDUM OPINION & ORDER

AMUL R. THAPAR, District Judge.

Numerous plaintiffs sued Unarco Material Handling claiming that Unarco's negligence led to the plaintiffs' carbon monoxide exposure. After several years of litigation, Unarco settled. Unarco's insurer footed the bill for all of Unarco's settlement and defense costs.

Unarco subsequently sued its subcontractor Atlas and Atlas's insurer, Lexington Insurance Company, for breach of contract, among other things. Unarco now wants Atlas and Lexington to pay Unarco for its litigation and settlement costs—costs for which Unarco has already been reimbursed by its own insurer. The law, however, does not support Unarco's attempt to obtain a second recovery.

BACKGROUND

The facts of this case are well-established. See Asher v. Unarco Material Handling, Inc., 737 F.Supp.2d 662 (E.D.Ky.2010). Briefly, in October 2005, Wal–Mart hired Unarco to repair, replace, and install storage racks at its Distribution Center in London, Kentucky. R. 820–1 at 2. Unarco, in turn, subcontracted the work to Atlas for rack repair services. Id. Atlas further subcontracted the installation work to Rack Conveyor Installations, Inc. (“RCI”). Id.

Between November and December of 2005, a number of Wal–Mart employees working at the Distribution Center suffered carbon monoxide-related injuries as a result of the ongoing rack installation and repair work. R. 1–2 at 9, 10. These employees—the Asher plaintiffs—sued Unarco and Atlas in November 2006 and settled with them in late 2008. R. 1–1. During the Asher litigation, Unarco filed cross-claims against Atlas and RCI for contractual and common-law indemnity, and RCI later settled the claims against it. See R. 67. Unarco also demanded that Atlas's insurance company, Lexington, defend and indemnify Unarco for the claims asserted against it. When Lexington did not do so, Unarco filed an intervening complaint against Lexington for breach of contract, bad-faith refusal to pay a claim, and violation of the Kentucky Unfair Claims Settlement Practices Act. See R. 737 at 4. The parties agreed to postpone consideration of the bad faith and unfair settlement claims against Lexington. See R. 835 at 2.

DISCUSSION

Unarco's pending claims against Atlas and Lexington are for breach of contract. To prove breach of contract under Kentucky law, Unarco must prove that (1) a valid contract exists; (2) Atlas and Lexington breached their respective contracts; and (3) Unarco has sustained damages due to the breach. See Metro Louisville/Jefferson Cnty. Gov't v. Abma, 326 S.W.3d 1, 14 (Ky.Ct.App.2009). The Court has already determined that Unarco qualified as an additional insured under Atlas's policy with Lexington, see generally R. 835, and that Unarco was entitled to be defended and indemnified in the Asher litigation in accordance with this policy, see generally id., R. 863. There is no dispute that Lexington breached its duties to defend and indemnify Unarco in the Asher litigation. Likewise, the Court previously held that Atlas had a contractual duty to indemnify Unarco. R. 863 at 1. But because Unarco has not incurred any damages, it is not entitled to recover on these breach of contract claims.

I. Whether Unarco Has Proven Damages Against Lexington

In its breach of contract claim against Lexington, Unarco seeks to recover (1) the costs of defending the Asher litigation and of settling with the Asher plaintiffs, (2) the costs of bringing this coverage action against Lexington, and (3) pre-judgment interest. While Travelers has incurred these costs as Unarco's insurer, Unarco has neither incurred nor expended a single cent. Therefore, the Court must grant summary judgment in favor of Lexington.

A. Defense and Settlement Costs of the Asher Litigation

There is no dispute that Travelers provided Unarco with legal representation for the underlying Asher litigation and likewise paid for the entire amount of Unarco's settlement with the Asher plaintiffs. See Unarco's Resps. to Requests for Admission, R. 871–6 (Nos. 2 & 3); Penrod Dep., R. 871–8 at 6–7; Mots. Hr'g Tr. at 4 (Mr. Page: “I don't believe that there are any hard dollar damages that have not been paid by Travelers.”). Instead, Unarco argues that Travelers' payment is irrelevant because of the collateral source rule.

Under the collateral source rule, a tortfeasor cannot claim credit for payments that the plaintiff receives from others, such as insurance companies. Schwartz v. Hasty, 175 S.W.3d 621, 626 (Ky.Ct.App.2005). Why? In a choice between allowing the plaintiff a double recovery from the tortfeasor and his insurer and allowing the defendant to escape liability, the windfall should “accrue to the less culpable injured party.” Id. Otherwise, permitting the tortfeasor to reduce his liability by the plaintiff's collateral benefits would result in under-deterrence. Id. For example, suppose that Jennifer negligently burns Chad with “Beyond Insanity” hot sauce during lunch. As a result, Chad has $10,000 in medical expenses, which his trusty insurer repays. Eager to hold Jennifer liable, however, Chad sues her for negligence, seeking to recover the $10,000 in medical expenses. If Jennifer may credit Chad's $10,000 worth of insurance coverage against her own $10,000 liability, then that lowers the cost of Chad's injuries to Jennifer and thus results in sub-optimal deterrence. This result would also shift the burden of the cost to first-party insurers, likely resulting in either reduced coverage or increased premiums for victims. See Richard A. Posner, Economic Analysis of Law 199 (7th ed.2007). In a choice between Chad's double recovery of $20,000 and Jennifer's liability of $0, the collateral source rule opts for the former because of tort law's emphasis on deterring others and punishing the tortfeasor.

Unarco says that the collateral source rule prevents the Court from crediting Travelers' payments against Unarco's costs. The linchpin holding Unarco's argument together is the assertion that the collateral source rule applies to breach of contract claims. But it does not.

Unarco has not identified a single case where Kentucky courts have held that this rule applies in a breach of contract action even though the collateral source rule has existed in Kentucky for over a century, see Louisville & N.R. Co. v. Carothers, 65 S.W. 833, 834 (Ky.1901). In fact, Unarco cites only one Kentucky case involving the collateral source rule in a breach of contract case. See R. 881 at 3. That case, USACO Coal Co. v. Liberty Nat'l Bank & Trust Co., 700 S.W.2d 69, 72 (Ky.Ct.App.1985), does not support applying the rule to breach of contract claims. In USACO, the defendant compensated the plaintiff and wanted to credit that payment against his tort liability to the plaintiff. Id. The court allowed him to do so. Id. It reasoned that the collateral source rule was inapplicable because, unlike payments made by a third-party insurer, payments by a defendant are not “collateral” to the dispute between the plaintiff and the defendant. Importantly, the court did not decide whether the collateral source rule would apply to a breach of contract claim. Id. (holding that “the collateral source rule has no application” because the source of the plaintiff's compensation was “not truly a collateral source”). Of the other jurisdictions to consider this question, the overwhelming majority have explicitly refused to import the collateral source rule into the law of contracts.¹

This national consensus exists for good reason: the policies underlying the rule “are less compelling” in breach of contract cases than in tort actions. Restatement (Second) of Contracts § 347 cmt. e (1979). Tort law's focus on punishment and deterrence favors the risk of a plaintiff's double recovery over the risk of under-deterring the defendant. Unlike in tort law, the purpose of damages in contract law is not deterrence and punishment. See Ronald W. Eades, Kentucky Law of Damages § 18:1 (2012) (“To compensate a party injured by a breach of contract, the court will seek to award sufficient funds to put the party in the position he or she would have enjoyed of the contract had not been breached.”); Ky.Rev.Stat. § 411.184(4) (“In no case shall punitive damages be awarded for breach of contract.”); cf. Med. Protective Co. v. Wiles, No. 2010–CA–000262–MR, 2011 WL 2420011, at *7 (Ky.Ct.App. June 17, 2011) (permitting punitive damages to be awarded for breach of an insurance contract only when there is “proof of bad faith,” which constitutes a separate tort claim (quoting Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky.1993))). Instead, contractual damages are almost purely compensatory, measured by the amount that the non-breaching party would have received if the contract had been performed as promised. Barnett v. Mercy Health Partners–Lourdes, Inc., 233 S.W.3d 723, 727 (Ky.Ct.App.2007); see also22 Am. Jur.2d Damages § 45 (limiting a party's recovery in a breach of contract action to “the loss that he has actually suffered by reason of the breach”). Applying the collateral source rule to contract law would “contravene this principle by awarding the non-breaching party more damages than necessary to compensate it for the breach.” Midland...