Cincinnati Ins. Co. v. Vance
| Decision Date | 21 May 1987 |
| Docket Number | No. 86-SC-852-DG,86-SC-852-DG |
| Parties | CINCINNATI INSURANCE COMPANY and Red Arrow Delivery, Inc., Appellants, v. Sadie H. VANCE; Bessie L. Hacker; and Kenneth Murphy, Appellees. |
| Court | United States State Supreme Court — District of Kentucky |
Thomas M. Cooper, Larry C. Deener, Lexington, for appellants.
Buddy Salyer, Morehead, for appellees.
On April 23, 1982, Appellee Murphy, while operating a commercial vehicle owned by Red Arrow Delivery, collided with a vehicle occupied by Appellees Vance and Hacker, causing them injuries. Hacker and Vance sued Murphy for damages, alleging negligence, and also sued Red Arrow claiming that Murphy "was driving said van as agent and employee of the Defendant, Red Arrow Delivery, Inc., with [its] knowledge, consent and approval...."
Shortly after the accident Red Arrow's insurance carrier, Cincinnati Insurance Co., decided after an investigation that Murphy had no permission to use the vehicle on the occasion of the accident and did not qualify as an additional insured under the "persons insured" clause in its policy. That clause provides that in addition to the named insured, "an insured" includes:
"(c) Any other person while using an owned automobile ... with the permission of the named insured, provided his actual operation ... is within the scope of such permission...."
Cincinnati Insurance Co. employed counsel on behalf of its named insured, Red Arrow, who filed an Answer denying the allegations of the complaint that Murphy was driving the van as agent and employee of Red Arrow, and denying as well the claim that Murphy had Red Arrow's "knowledge, consent and approval" to drive the vehicle. Cincinnati Insurance Co. denied that Murphy was insured by its policy and refused to defend him.
Murphy did not defend the tort action, and a default judgment was entered against him on liability only, reserving all other issues. Subsequently, Hacker and Vance elected to dismiss the suit against Red Arrow, and thereafter entered into an Agreed Judgment with Murphy specifying damages of $50,000 for Hacker and $40,000 for Vance.
Anticipating that Hacker and Vance (and Safeco Insurance Co. which had paid basic reparations benefits to them) would sooner or later seek to enforce collection of their judgments against Cincinnati Insurance Co. on grounds that their policy covered Murphy, Cincinnati Insurance Co. then filed this declaratory judgment action on behalf of itself and Red Arrow, seeking a declaration of rights that it had no liability under its policy.
The declaration of rights suit proceeded to jury verdict, with the jury answering "No" to an interrogatory asking whether it believed from the evidence that at the time the accident occurred Murphy was operating the vehicle belonging to Red Arrow Delivery, Inc. with the express or implied permission of Red Arrow Delivery and within the scope of such permission. 1 The trial court then entered judgment (1) stating that Murphy "was not insured at the time of the accident under the terms and conditions of the insurance policy issued by the plaintiff, Cincinnati Insurance Co., and covering the vehicle owned by the plaintiff Red Arrow Delivery, Inc.," and (2) dismissing the counterclaim that was made on behalf of Vance, Hacker and Murphy, which demanded indemnity for Murphy and judgment for Vance and Hacker against Cincinnati Insurance Co. in the amount of their judgments against Murphy.
On appeal the Kentucky Court of Appeals reversed the trial court and remanded the case "for proceedings consistent with [the Court of Appeals'] opinion." Presumably this directs the trial court to enter judgment holding that there was coverage and finding for Vance, Hacker and Murphy on their counterclaims. The theory behind the Court of Appeals' opinion was that Cincinnati Insurance Co. was compelled by the allegations of the original complaint by Vance and Hacker against Murphy, which alleged that the accident occurred in the course of Murphy's employment and that he had permission to use the vehicle, to defend Murphy in the initial suit; that "Cincinnati breached its duty to defend and is, therefore, estopped from asserting lack of permissive use;" and that "Cincinnati must therefore honor the Vance/Hacker judgments." The Court of Appeals was of the opinion that Cincinnati "could have defended under reservation of rights and subsequently litigated the issue of coverage or filed for declaration of rights at the first instance," but it did not have the option to refuse to provide any defense for Murphy and it is therefore estopped from now litigating the issue of coverage.
We have accepted discretionary review, and reverse. The issue is whether a liability insurance carrier, having decided that a claim alleged against a putative insured does not fall within the coverage of its policy, may elect not to defend and later litigate the coverage question, or whether the insurance company must defend regardless of coverage unless and until it has (1) entered into a reservation of rights agreement with the putative insured or (2) obtained a declaratory judgment that there is no coverage. We hold that the insurance company, at its own peril, may elect not to defend the original action against a putative insured, although thereafter it may be liable for the judgment if it is judicially determined that the policy did in fact provide coverage in the circumstances.
We agree with the appellees that the insurance company owes to its insured, including a person who falls within the definition of a permissive user, a duty to defend which is separate and apart, and in addition to, its duty to indemnify the insured to the extent of its policy limits. Ursprung v. Safeco Insurance Co. of America, Ky., 497 S.W.2d 726 (1973). We further agree that if the insurer has elected not to provide a defense wrongfully or erroneously because it is later determined that the policy provided coverage, the insurer then would have breached the terms of its policy and the aggrieved party then would be entitled...
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