Davidson v. American Freightways, Inc.

• Decision Date: 24 August 2000
• Docket Number: No. 1998-SC-0554-DG.,1998-SC-0554-DG.
• Citation: 25 S.W.3d 94
• Parties: Joseph DAVIDSON; and Thomas Davidson, Appellants, v. AMERICAN FREIGHTWAYS, INC., Appellee.
• Court: United States State Supreme Court — District of Kentucky

25 S.W.3d 94

Joseph DAVIDSON; and Thomas Davidson, Appellants, v. AMERICAN FREIGHTWAYS, INC., Appellee.

No. 1998-SC-0554-DG.

Supreme Court of Kentucky.

August 24, 2000.

Mike Breen, Mike Breen, Attorney at Law, P.S.C., Bowling Green, Richard M. Breen, Richard Breen Law Offices, P.S.C., Louisville, for Appellants.

Armer H. Mahan, Jr., Petersen Thomas, Lynch, Cox, Gilman & Mahan, P.S.C., Louisville, for Appellee.

M. Austin Mehr, Austin Mehr Law Offices, P.S.C., Lexington, for Amicus Curiae Kentucky Academy of Trial Attorneys.

COOPER, Justice.

On May 18, 1994, two tractor-trailer rigs, one owned by Appellee American Freightways, Inc. (AFI) and operated by its employee, William C. Jackson, and the other owned by Appellant Joseph Davidson and operated by Appellant Thomas Davidson, collided on Interstate Highway 65 just south of Louisville, Kentucky. At the time of the accident, AFI was insured by a liability insurance policy issued by Protective Insurance Company. However, the policy contained a $250,000.00 deductible; and AFI investigated, negotiated, litigated, and ultimately paid those claims with its own money. At trial on the tort claims, the Davidsons were granted a directed verdict on the issue of liability and the jury awarded them damages in the total sum of $71,143.27. The Davidsons then filed this action against AFI for compensatory and punitive damages arising out of AFI's alleged failure to attempt in good faith to effectuate a prompt, fair and equitable settlement of their tort claims prior to trial. The Jefferson Circuit Court entered a summary judgment in favor of AFI and the Court of Appeals affirmed. We granted discretionary review primarily to consider whether the Unfair Claims Settlement Practices Act (the UCSPA), KRS 304.12-230, and/or the so-called tort of "bad faith" apply to persons or entities who are either self-insured or uninsured. We conclude that both the statute and the common law tort apply only to persons or entities engaged in the business of insurance; hence, we affirm.

AFI is an interstate motor carrier and had complied with the requirements of 49 U.S.C. § 31139(b) and (e), thus had qualified as a "self-insured" under federal law to the extent of its $250,000.00 deductible. However, it had not complied with KRS 304.39-080(7), thus had not qualified as a "self-insured" under Kentucky law. KRS 304.39-080(6). Nor was it a "liability self-insurance group" as defined in KRS 304.48-030 so as to fall within the parameters of the only unfair claims settlement practices statute specifically applicable to self-insureds. KRS 304.48-240(2). Nevertheless, Appellants characterize AFI as a "self-insured" or, alternatively, as "an uninsured," rather than "an insured with a $250,000.00 deductible," presumably because KRS 304.12-220 specifically provides that the UCSPA does not apply to "an insured."¹ Appellants conclude that since "an insured" is the only "person" specifically excluded from the provisions of the UCSPA, a self-insured or uninsured person must ipso facto be subject to the statute. Under this theory, any person or entity who is either uninsured or self-insured would be held to the same standards of conduct with respect to the negotiation and settlement of tort liability claims as is an insurance company which is in the business of entering into contracts under which it is paid to assume the risk of liability for claims brought against the other contracting party. Thus, even an uninsured owner of a "mom-and-pop" grocery store who balks at (or is "bull-headed" about) paying his/her own money to settle a premises liability claim would be subject to punitive damages for committing an unfair claims settlement practice in violation of the UCSPA. We reject this view as contrary to the expressed intent of the legislature in enacting the Insurance Code, contrary to the interpretation placed upon the UCSPA by the administrative agency charged with its enforcement, contrary to our own well-established precedents, and contrary to the interpretation given to similar statutes by all other state courts which have considered the issue to date. Such an interpretation also would require us to declare the UCSPA unconstitutional as violative of Section 51 of our Constitution.

I. KENTUCKY CONSTITUTION.

Section 51 of the Constitution of Kentucky provides: "No law enacted by the General Assembly shall relate to more than one subject, and that shall be expressed in the title . . . ." The UCSPA is entitled, "AN ACT relating to insurance,"² (not, e.g., "AN ACT relating to persons"). If the statute related to both insurance and to persons who are not insured, it would violate Section 51 and would be unconstitutional. E.g., McGuffey v. Hall, Ky., 557 S.W.2d 401, 406-07 (1977) (statute entitled "AN ACT relating to health care malpractice insurance and claims" could not constitutionally contain a provision pertaining to medical peer review boards); Thompson v. Commonwealth, 159 Ky. 8, 166 S.W. 623 (1914) (statute entitled "An Act to appropriate money for the benefit of the Houses of Reform, to provide funds to pay the existing deficit and to make improvements at the Houses of Reform" could not constitutionally contain provisions pertaining to inmates housed in the Houses of Reform). It is a well established principle of constitutional law and statutory construction that if a statute is reasonably susceptible to two constructions, one of which renders it unconstitutional, "the court must adopt the construction which sustains the constitutionality of the statute." American Trucking Ass'n v. Commonwealth, Transp. Cabinet, Ky., 676 S.W.2d 785, 789-90 (1984); see also Commonwealth v. Halsell, Ky., 934 S.W.2d 552, 554-55 (1996). Following this principle, we conclude that "AN ACT relating to insurance" pertains to insurance and not to persons or entities who are not insured.

II. KENTUCKY STATUTORY SCHEME.

Regardless of the impact of Section 51, the UCSPA was clearly intended to regulate the conduct of insurance companies. KRS 304.12-230 is not a unique creature of Kentucky statutory law. It is an almost verbatim adoption of the 1971 version of the model act formulated by the National Association of Insurance Commissioners (NAIC) entitled "An Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance." (Emphasis added.) See State Farm Mut. Auto. Ins. Co. v. Reeder, Ky., 763 S.W.2d 116, 118 (1988); M. Breen, Bad Faith in Kentucky: A Primer, at 37 (The Kentucky Academy of Trial Attorneys undated). The NAIC model act has been adopted in one form or another in all fifty states and all territories of the United States. M. McFadden, Insurance Benefits Under the ADA: Discrimination or Business as Usual?, 28 Tort & Ins. L.J. 480, ___, n. 67 (1993).

KRS 304.12-230 provides as follows:

It is an unfair claims settlement practice for any person to commit or perform any of the following acts or omissions:

(1) Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

(4) Refusing to pay claims without conducting a reasonable investigation based upon all available information;

(5) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

(6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;

(7) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;

(8) Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;

(9) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of the insured;

(10) Making claims payments to insureds or beneficiaries not accompanied by statement setting forth the coverage under which the payments are being made;

(11) Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;

(12) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;

(13) Failing to promptly settle claims, where liability has become reasonably clear, under one (1) portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage; or

(14) Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement. (Emphasis added.)

Thus, of the fourteen sections of the UCSPA, only two, sections (4) and (6), do not contain specific language referring to insurance policies, applications therefor, insureds, coverages, and/or proof of loss forms. It would be absurd to suggest that the legislature intended that twelve of the fourteen sections of this statute would apply only to claims against insurance companies, but that the other two would apply to "everyman." Appellants, however, assert that the phrase "any person" contained in the first sentence of the statute relates back to...