Ky. Employers' Mut. Ins. v. Ellington

• Decision Date: 14 May 2015
• Docket Number: 2013–SC–000802–WC
• Parties: Kentucky Employers' Mutual Insurance, Appellant v. Randy Ellington; R & J Cabinets; Hon. Jonathan Weatherby, Administrative Law Judge; and Workers' Compensation Board, Appellees
• Court: United States State Supreme Court — District of Kentucky

459 S.W.3d 876

Kentucky Employers' Mutual Insurance, Appellant

v.Randy Ellington; R & J Cabinets; Hon. Jonathan Weatherby, Administrative Law Judge; and Workers' Compensation Board, Appellees

2013–SC–000802–WC

Supreme Court of Kentucky.

RENDERED: MAY 14, 2015

Counsel for Appellant: Barry Lewis, Lewis and Lewis Law Offices, 151 East Main Street, Suite 100, PO Box 800, Hazard, Kentucky 41702–0800

Counsel for Appellee, Randy Ellington: Timothy Jay Wilson, Wilson & McQueen, 309 North Broadway, Lexington, Kentucky 40508

Counsel for Appellee, R & J Cabinets: Scott Mitchell Burns Brown, Ferreri & Fogle, PLLC, 300 East Main Street, Suite 400, Lexington, Kentucky 40507

Opinion

OPINION OF THE COURT BY JUSTICE NOBLE

The Appellant, Kentucky Employers' Mutual Insurance (KEMI), appeals from a decision of the Court of Appeals holding that the Appellee, Randy Ellington, was covered by a workers' compensation policy it issued. The policy named Ellington and his business, a sole proprietorship with the assumed name of R & J Cabinets, as “insureds.” At the same time, the policy included a specific exclusion from coverage of Ellington as the sole proprietor. The Court of Appeals found the policy to be ambiguous because of these competing terms and construed it in Ellington's favor to provide coverage for his injuries. This Court concludes that the policy as issued, on its face, is clearly not a personal policy, but is rather a business policy purchased by a sole proprietor, and no ambiguity requires a different conclusion. Ellington, as the sole proprietor, was not entitled to benefits under the policy. For that reason, the Court of Appeals is reversed.

I. Background

In December 2010, Ellington slipped on a patch of ice at a job site and broke his femur. Some time later, he filed for workers' compensation benefits under a workers' compensation insurance policy issued to him by KEMI.

Ellington owned and operated R & J Cabinets as a sole proprietorship. At times, R & J Cabinets employed part-time workers, usually one at a time, but at the time of Ellington's work-related injury, only Ellington remained with the business. He does not appear to have had any employees for at least a year leading up to his injury.

The KEMI policy was originally purchased in 2006. At that time, Ellington had at least one employee, which he reported to KEMI. The original application for the policy stated that Ellington was a “sole proprietor” and that he was not covered by the policy.

The policy itself was issued to “Randy Ellington DBA R & J Cabinets,” and was reissued annually. A section of the policy titled “Classifications” laid out how the premium was calculated in part.¹ It included a table showing how the “manual premium” was set. This table included a column titled “CLASS RATING AND MANUAL PREMIUM DETAIL,” under which Ellington's name was listed with a code showing the type of work done by the business. Below this was another table showing how the final premium was calculated (i.e., by adding an “expense constant” and a special fund assessment to the manual premium).

At the time of the accident, the policy also included a number of attached endorsements. Most of these endorsements have no bearing on this case, as they lay out things like how tax is assessed on the policy. But two of the endorsements are relevant.

One of these was headed “SOLE PROPRIETORS, PARTNERS, OFFICERS AND OTHERS EXCLUSION ENDORSEMENT” (hereinafter “exclusion endorsement”). It specifically stated that there was no bodily injury coverage to any person in the attendant schedule.² The endorsement further stated that “remuneration” (i.e., salary or other earnings) of any person listed in the schedule was not used to set the policy premium, and that if KEMI was ever required to make any payment for bodily injury to a listed person, then that person agreed to reimburse the company. The only person listed on the attendant schedule was Ellington, whose name was included in a column headed “Excluded Individual Name.” The next column of that schedule is headed “Excluded Individual Position,” under which is written “Sole Proprietor.”

A second endorsement was entitled “SCHEDULE OF NAMED INSUREDS AND WORK PLACES” (hereinafter “named-insured endorsement”). Under that title, this endorsement listed Randy Ellington and R & J Cabinets separately. The address for both Ellington and R & J Cabinets were the same.

The first policy expired on its anniversary in 2007, but it was renewed annually thereafter. In 2007 and 2008, Ellington completed a “Policyholder's Mail Audit,” which is sent out by the insurer at the end of each of the first few policy years to gather additional information upon which the premium was to be calculated. Those audit forms stated that Ellington was not covered. These forms, according to the ALJ's findings, require the business owner to list the number of employees he had during the policy year and the amount of payroll for the employees. This information is then used, in an after-the-fact manner, to calculate the final amount of premium the business owner owes for the coverage extended to these employees over the past year. Ellington listed employees and payroll on those forms.

It was this policy under which Ellington made his claim for benefits. KEMI denied his claim, arguing that it was not covered because of the sole-proprietor exclusion endorsement and other extrinsic evidence.

After discovery, the Administrative Law Judge (“ALJ”) conducted a formal hearing. The evidence at the hearing established that Ellington's premium changed when he no longer had employees but that he still had a premium. Ellington claimed that that was part of why he believed he was covered by the policy.

Other testimony, however, established that business owners such as Ellington often maintained coverage even when business was slow, and presumably the number of employees down (even to zero), so that extra labor could be added to compete for a particular job. The testimony also established that some jobs require a contractor to have workers' compensation insurance before a bid could be submitted. In fact, the record shows that Ellington actually requested a certificate of insurance in 2010 so that he could be considered for a job with a roofing company. Given the possibility of up-the-ladder liability, such coverage is often required by larger companies that hire smaller companies for particular work.

Other testimony established that if Ellington had been included under the policy, his annual premium would have increased more than sixfold, from approximately $1144 to $7200.

After the hearing, the ALJ issued findings of fact and conclusions of law. He addressed only the question whether Ellington was covered by the policy, concluding that Ellington was not covered.

The ALJ began by noting that under KRS 342.012, a sole proprietor like Ellington must specifically elect to be covered by a workers' compensation coverage and that to do so, he must obtain a specific endorsement on his insurance policy and pay a significant additional premium. No such endorsement had been sought or issued.

The ALJ also noted Ellington's arguments that his listing by name as a named insured separate from R & J Cabinets on the named-insured endorsement suggested he had personal coverage; that this at least created an ambiguity that should be resolved in his favor under Kentucky Employers' Mutual Insurance v. Decker, 2010–SC–000459–WC, 2011 WL 1642183 (Ky. April 21, 2011), an unpublished decision; and that it would be unreasonable for him to pay a premium if he had no employees if he was not personally covered.

The ALJ distinguished Decker, noting that the sole proprietor in that case had never had employees and was less sophisticated than Ellington, and that he had never signed audit forms specifically indicating a lack of coverage. The ALJ went on to conclude “that while there may have been some ambiguity due to listing of [Ellington] as a named insured, that ambiguity should have been clarified ... by the specific language of the policy which clearly states that he is not covered and by the individual audit forms that he specifically and individually signed which also clearly indicate that he personally was not covered.” The ALJ again noted that the audit forms required Ellington to fill in the amount of his employee payroll and number of employees for a given year and “include[d] clear and unambiguous language indicating that Mr. Ellington was excluded from coverage.” The ALJ also cited Ellington's education (high school and some vocational school as a marine mechanic) and “presentation” at the hearing as showing sufficient sophistication to allow him to understand policy documents. He also noted that Ellington understood that his premiums were based on the amount of payroll he reported, and that he called KEMI multiple times to report a reduction in payroll in an effort to reduce his premiums. The ALJ also concluded that it was “reasonable for [Ellington] to want to maintain coverage even when the business was slow in case he needed to add extra labor to complete or apply for a particular job,” and cited the fact that Ellington sought a certificate of insurance in 2010 to be considered for a contracting job. The ALJ also noted that after his fall, Ellington did not tell the hospital he had workers' compensation insurance and instead referred payment inquiries to his lawyer, whom he contacted while still in the hospital.

Based on these findings, the ALJ concluded that “it is not credible that [Ellington] believed he had workers' compensation coverage at the time of his injury in light of the weight of the evidence to the contrary.” Because there was no coverage, the ALJ dismissed the claim.

The Workers' Compensation Board affirmed, concluding that the evidence did not compel a different result than that reached by the ALJ. In reaching this conclusion, the board reviewed and recited much of the same evidence relied on by the ALJ and agreed...