Merritt v. Catholic Health Initiatives, Inc., 2018-SC-0155-DG

• Decision Date: 17 December 2020
• Docket Number: 2018-SC-0155-DG
• Citation: 612 S.W.3d 822
• Parties: Harold MERRITT, Individually, and as Court-Appointed Administrator of the Estate of Kimberly Merritt, and as Court-Appointed Administrator and Next Friend of the Estate of Harold Merritt, III, Appellants v. CATHOLIC HEALTH INITIATIVES, INC., and First Initiatives Insurance, Ltd., Appellees
• Court: United States State Supreme Court — District of Kentucky

612 S.W.3d 822

Harold MERRITT, Individually, and as Court-Appointed Administrator of the Estate of Kimberly Merritt, and as Court-Appointed Administrator and Next Friend of the Estate of Harold Merritt, III, Appellants

v.CATHOLIC HEALTH INITIATIVES, INC., and First Initiatives Insurance, Ltd., Appellees

2018-SC-0155-DG

Supreme Court of Kentucky.

DECEMBER 17, 2020

COUNSEL FOR APPELLANTS: J. Dale Golden, Kellie Marie Collins, Mary Lauren Melton, Lexington, GOLDEN LAW OFFICE, PLLC.

COUNSEL FOR APPELLEES: Bryan Todd Thompson, Chad Owens Propst, THOMPSON MILLER & SIMPSON PLC, Louisville.

COUNSEL FOR AMICUS CURIAE, KENTUCKY DEFENSE COUNSEL, INC.: William Baxter Orberson, Jr., Louisville, John Clifford Phillips, PHILLIPS PARKER ORBERSON & ARNETT PLC.

OPINION OF THE COURT BY JUSTICE HUGHES

Appellant Harold Merritt, individually and as administrator of the Estates of Kimberly Merritt and Harold Merritt, III (Merritt) brought a medical negligence action against various healthcare defendants following the deaths of his wife and newborn son. The medical negligence claims were settled, and the Fayette Circuit Court subsequently denied Merritt's motion for declaratory relief as to his bad faith insurance claim against First Initiatives Insurance, Ltd. (First Initiatives), a foreign captive insurance entity that provides self-insurance for Catholic Health Initiatives, Inc. (Catholic Health). The Court of Appeals affirmed both that ruling and the trial court's grant of summary judgment to First Initiatives and Catholic Health. On discretionary review, the sole issue before this Court is whether First Initiatives, as a captive insurer, is subject to the Kentucky Unfair Claims Settlement Practices Act (UCSPA). Kentucky Revised Statutes (KRS) 304.12-230. Finding that the Legislature has clearly and unequivocally excluded captive insurers from the requirements of the UCSPA, we affirm the Court of Appeals.

FACTS AND PROCEDURAL BACKGROUND

On October 7, 2015, Harold Merritt, Jr., filed a complaint alleging that Dr. Anthony Smith, an employee of KentuckyOne Health, breached the medical standard of care and was ultimately responsible for the deaths of his wife, Kimberly, and infant son, Harold Merritt, III. In 2014 Kimberly, an expectant mother, developed placenta previa

, a condition which can cause severe bleeding during pregnancy.¹ She was referred to a high-risk obstetrician who recommended that the baby be delivered by caesarian section

no later than thirty-seven weeks gestation. Merritt alleges that despite having this information from the high-risk obstetrician, Dr. Smith examined Kimberly Merritt when she was at thirty-seven weeks and six days gestation and did not perform nor schedule a caesarian section. Instead, he scheduled an appointment to see Kimberly in one week.

In the early morning of April 10, 2015, Kimberly called Merritt and said she was bleeding and that something was wrong. After the line suddenly went dead, Merritt called 911. Upon arrival, Emergency Medical Services (EMS) found Kimberly unresponsive. She died shortly after being transported to the hospital by EMS. Harold Merritt, III, was delivered by post-mortem caesarian section

but only survived a few hours after suffering from seizures due to complications from lack of oxygen.

In his complaint, Merritt alleged that Dr. Smith breached the standard of care by not acting in accordance with the high-risk obstetrician's recommendation. Merritt named as additional defendants St. Joseph Hospital, KentuckyOne Health, KentuckyOne Health Obstetrics and Gynecology Associates and St. Joseph Obstetrics and Gynecology (hereinafter collectively referred to as "the medical defendants"). Merritt also named as defendants Catholic Health, an entity that sponsors KentuckyOne Health and its affiliates, and First Initiatives, which provides self-insurance coverage to Catholic Health, its affiliates and employees, including KentuckyOne Health and Dr. Smith. First Initiatives is a wholly owned subsidiary of Catholic Health. Pursuant to one self-insurance agreement, First Initiatives covers all of Catholic Health's subsidiaries and their employees for employment-related conduct. Only Catholic Health pays assessments to First Initiatives for the provision of its self-insurance program—Catholic Health's affiliates do not pay for the coverage.

Merritt brought negligence, fraud, and Kentucky Consumer Protection Act claims against First Initiatives. Merritt also maintained that First Initiatives violated the UCSPA, KRS 304.12-230, by engaging in bad faith settlement negotiations.

On November 16, 2015, Merritt filed a motion for declaratory judgment seeking a declaration that First Initiatives is subject to the UCSPA and civil liability for any violations of the statute. Merritt claimed that First Initiatives refused to negotiate the claims for the deaths of Kimberly and Harold Merritt, III, separately, instead offering a consolidated settlement for both. Additionally, Merritt alleged that First Initiatives attempted to leverage the undisputed claims of Harold Merritt, III, in order to settle the disputed claims of Kimberly. He also stated that First Initiatives failed to timely respond to settlement demands and provided no basis for denying various settlement demands.

Despite First Initiatives’ claims that it is not subject to the UCSPA, Merritt maintained that First Initiatives does not self-insure Catholic Health and is actually in the business of insurance because it issued a policy to KentuckyOne Health and Catholic Health. Merritt also argued that First Initiatives has an independent corporate identity distinct from that of Catholic Health that renders self-insurance between the two entities impossible. With this approach, Merritt insisted First Initiatives is not a captive insurer under Kentucky law. Merritt filed an amended complaint on November 23, 2015 to include this particular declaratory judgment argument.

First Initiatives responded to the declaratory judgment motion, arguing that as a captive insurance company, it is exempt from the UCSPA. Specifically, First Initiatives contended the captive insurance agreement between Catholic Health and First Initiatives does not involve risk shifting or risk distribution like ordinary insurance, and First Initiatives is not in the business of insurance. First Initiatives also claimed that the motion was not ripe for review because the underlying claim of medical negligence had not been adjudicated or resolved.

On December 1, 2015 the trial court granted Catholic Health and First Initiatives’ motion to bifurcate the bad faith claims from the underlying negligence claims. The trial court also stayed all discovery concerning Merritt's bad faith claims pending a January 22, 2016 hearing on Merritt's motion for declaratory judgment and other issues.

At that time, Merritt insisted that the declaratory judgment issue was ripe for a prompt ruling and posited that if the trial court ruled that First Initiatives was subject to the UCSPA, then all pending claims would be resolved. The trial court conducted hearings on January 22, March 10, and May 6, 2016 on various issues, including declaratory judgment. On May 2, 2016, Merritt filed a supplement to his motion for declaratory judgment to provide an affidavit from the Kentucky Department of Insurance and to emphasize the importance of a ruling on the applicability of the UCSPA.

Ultimately, the trial court denied Merritt's motion for declaratory judgment on June 14, 2016. The trial court determined that the UCSPA does not apply to a self-insured person or entity. The trial court further determined that First Initiatives is a captive insurance company pursuant to KRS 304.49-010(12) because it only exists to insure Catholic Health and its affiliates, and also a foreign captive insurer under KRS 304.49-010(14) because it is located in the Cayman Islands and subject to the captive insurance laws of the Cayman Islands government. Additionally, the trial court concluded First Initiatives is not in the business of insurance under Kentucky law because its activities lack the defining aspects of insurance, namely risk shifting and risk distribution. The trial court referenced an affidavit of Phillip L. Foster, the Vice President and Chief Risk Officer of Catholic Health, which states that First Initiatives’ financial statements are consolidated with Catholic Health's financial statements, as are the financial statements of all wholly-owned affiliates of Catholic Health. Unlike an entity that is in the business of insurance and able to spread loss throughout the market by way of premiums, First Initiatives is unable to shift risk due to the economic link between it and its parent corporation, Catholic Health.

Because the trial court held that the entities were exempt from the UCSPA, Catholic Health and First Initiatives moved for summary judgment. In their motion, Catholic Health and First Initiatives argued that Merritt's claims against Catholic Health and First Initiatives were dependent on finding bad faith under the UCSPA and with that statute inapplicable the claims were legally insufficient. They further contended that no issues of material fact remained as to Catholic Health and First Initiatives.

Merritt filed a motion to reconsider the denial of the declaratory judgment motion but conceded that the trial court correctly ruled that First Initiatives is a foreign captive insurer. Merritt requested, however, that the trial court consider the exception in KRS 304.49-230, which states that the subtitle is not applicable to any foreign captive insurer transacting the business of insurance in Kentucky prior to July 14, 2000 unless the insurer petitions the insurance commissioner for the subtitle to apply. Merritt asked the court to address whether First Initiatives is in the business of insurance. Finally, Merritt stated that, rather than dismiss his claims, the trial court should allow additional discovery so that h...