Philadelphia Indemnity Ins. Co. v. Morris

Citation990 S.W.2d 621
Decision Date22 April 1999
Docket NumberNo. 97-SC-887-DG,97-SC-887-DG
PartiesPHILADELPHIA INDEMNITY INSURANCE COMPANY, Appellant, v. Stephen W. MORRIS, Medora Sanitation, Inc., Appellees.
CourtUnited States State Supreme Court (Kentucky)

Raymond G. Smith, Boehl Stopher & Graves, Louisville, KY, for appellant.

Barry Willett, Weiss Frederick Willett & Haynes, P.S.C., Louisville, KY, Charles H. Zimmerman, Jr., Louisville, KY, Bernard F. Lovely, Jr., Vimont & Wills, PLLC, Lexington, KY, for appellees.

Mark K. Gray, O'Koon, Menefee & Gray, Louisville, KY, Richard Hay, Somerset, KY, for Amicus Curiae, Kentucky Academy of Trial Attorneys.

LAMBERT, Chief Justice.

This case presents questions of first impression in this Commonwealth regarding the relationship between workers' compensation benefits and underinsured motorist coverage. The first issue is whether KRS 342.690(1), the exclusive remedy provision of the Kentucky Workers' Compensation Act, bars an employee from recovering underinsured motorist ("UIM") benefits from his employer's motor vehicle insurance policy. The second issue is whether a provision in the employer's UIM endorsement, which requires that workers' compensation benefits be reduced or "set off" against the UIM policy limits, violates public policy and is thereby unenforceable.

On December 20, 1993, Stephen Morris was struck and injured by a vehicle while he was loading refuse onto a sanitation truck owned by his employer, Medora Sanitation, Inc. ("Medora"). At the time of the injury, the sanitation truck was covered by a liability insurance policy purchased by Medora and issued by Philadelphia Indemnity Insurance Company ("Philadelphia"). Morris suffered traumatic injuries from the accident, including the severance of his right leg and a closed head injury. Since Morris was working within the scope of his employment at the time of the accident, the workers' compensation carrier for Medora made voluntary payments to Morris of approximately $200,000 in medical expenses and wage loss benefits.

On August 30, 1994, Morris filed a civil action in Jefferson Circuit Court against William Tedford, the party who caused Morris' injuries. Tedford's liability insurer, Allstate Insurance Company, subsequently tendered its policy limits of $25,000 to Morris pursuant to a settlement agreement, and the claim against Tedford was dismissed. On April 3, 1995, Morris added Philadelphia as a party defendant and sought a declaration of rights as to whether he was entitled to underinsured motorist (UIM) benefits pursuant to the policy issued to Medora. Morris claimed that he should receive the UIM limits of $100,000 because his damages exceeded by at least that amount the workers' compensation benefits he had received and the policy limit paid by Tedford's insurer.

Morris and Philadelphia filed cross-motions for summary judgment. On June 4, 1996, the Jefferson Circuit Court dismissed Morris' amended complaint and entered an order granting summary judgment to Philadelphia on the narrow issue of the exclusive remedy provision of KRS 342.690(1). The trial court held that the Kentucky Workers' Compensation Act provided Morris with an exclusive remedy and thus barred recovery of UIM benefits under the Philadelphia policy. The Court of Appeals, in a unanimous opinion, reversed and remanded. This Court granted discretionary review, and for the reasons stated hereinafter, we affirm the Court of Appeals' opinion.

I. KRS 342.690(1): THE EXCLUSIVE REMEDY PROVISION OF THE WORKERS' COMPENSATION ACT

The Kentucky Workers' Compensation Act is predicated on the concept of 'no-fault' liability. Each employer subject to the Act agrees to pay both lost wages and medical expenses to an employee injured on the job. In return, each employee subject to the Act relinquishes all common law claims against the employer arising out of a work-related injury. See, e.g., Zurich Insurance Company v. Mitchell, Ky., 712 S.W.2d 340, 341 (1986); General Accident Insurance Company v. Blank, Ky.App., 873 S.W.2d 580, 581 (1993). Under the Act, the employer's liability is exclusive.

The exclusive remedy provision of the Act states in relevant part:

If an employer secures payment of compensation as required by this chapter, the liability of such employer under this chapter shall be exclusive and in place of all other liability of such employer to the employee, his legal representative, ... and anyone otherwise entitled to recover damages from such employer at law .. on account of such injury or death.

KRS 342.690(1) (emphasis added). Philadelphia contends that this provision precludes recovery of UIM benefits from the employer's policy when workers' compensation benefits have been paid. In the Court of Appeals, the statute was interpreted as establishing an exclusive remedy against an employer only when the employer is legally liable for the injuries sustained. It reasoned that since legal liability was upon the third party tortfeasor, Tedford, and not the employer, Medora, that KRS 342.690(1) did not bar Morris from recovering under Medora's UIM coverage. Central to the view of the Court of Appeals was that UIM coverage was not payable as a result of the policy owner's tort liability, but payable by virtue of a contract.

Philadelphia contends that KRS 342.690(1) precludes recovery of UIM benefits by Morris regardless of whether such coverage is based on contract or tort. Philadelphia urges this Court to follow the rationale expressed in Berger v. H.P. Hood, Inc., 416 Mass. 652, 624 N.E.2d 947 (1993), a Massachusetts case in which the court held that the workers' compensation exclusive remedy provision could not be avoided merely by characterizing the claim as contractual. In Berger, the court stated The plaintiff's UM claim derives from the same incident, a personal injury sustained in the course of employment, which gave rise to the payment of Workers' compensation. Merely characterizing the claim as contractual does not alter the essential nature of this common law claim. Hood, if required to pay UM benefits, still would be paying a worker for an injury sustained in the course of employment.

Id. at 949 (citation omitted). The court then concluded that for liability purposes, the employer and the insurance company were synonymous, stating

Any suit against Fund and First is essentially a suit against Hood, as an owner of the policies. We have determined that suits against Hood are barred by [the exclusivity provision of the Workers' Compensation Act]. Thus, summary judgment in favor of First and Fund on Hood's UM coverage was appropriate.

Id. at 950.

We decline to follow Berger for the reason that the UIM coverage at issue here is not based on Medora's legal liability. Morris' UIM claim was against Philadelphia, the UIM insurance carrier, not against his employer, Medora. Medora's legal liability is unaffected. As stated in Coots v. Allstate Insurance Co., Ky., 853 S.W.2d 895, 903 (1993), a "suit to recover UIM coverage is a direct action" against the UIM carrier and "the [UIM] carrier alone is the real party in interest in UIM cases." Furthermore, under Kentucky law UIM coverage is contractual in nature. This principle is stated in State Farm Mutual Insurance Co. v. Fireman's Fund American Insurance Co., Ky., 550 S.W.2d 554, 557 (1977):

[P]ayment made in performance of a contractual obligation is not payment of "damages." Hence the liability of an insurance company under its uninsured motorist coverage cannot be "legal liability for damages."

The UIM coverage at issue was voluntarily purchased by Medora, presumably to apply in cases such as this. KRS 342.690(1) does not preclude recovery of UIM benefits, since it only protects the employer, not its UIM insurance carrier.

II. SETOFF

The UIM endorsement in the insurance policy here includes a provision which undertakes to reduce or setoff workers' compensation benefits against the UIM policy limits. Specifically, the provision states:

Limit of Insurance

2. Any amount payable for damages under this coverage shall be reduced by:

a. All sums paid or payable under any workers' compensation, disability benefits or similar law ...

The Court of Appeals held that this setoff provision was void as it violated the public policy of broad UIM coverage in this Commonwealth. Philadelphia contends that the offset provision does not violate public policy, and that the "doctrine of reasonable expectations," a rule of construction applied to ambiguous insurance policies, prohibits Morris' recovery of UIM benefits under the Philadelphia policy. Under this doctrine, an insured is entitled to have an ambiguous policy interpreted so as to provide all the coverage the insured may reasonably expect to have under the policy. Ohio Casualty Insurance Company v. Stanfield, Ky., 581 S.W.2d 555, 558 (1979); Simon v. Continental Insurance Co., Ky., 724 S.W.2d 210, 212 (1986); James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Insurance Co., Ky., 814 S.W.2d 273, 277 (1991). However, "a conspicuous, plain and clear manifestation of the [insurance] company's intent to exclude coverage will defeat that expectation." Simon at 212. The Court in Ohio Casualty noted a further refinement of this doctrine: that only a named insured, as a party to the contract, may have reasonable expectations regarding the extent of coverage under the policy; that an insured of the second class, who is not a party to the contract, may not rely on reasonable expectations' so as to avoid a policy's liability limitations clause. 581 S.W.2d at 558-559.

Philadelphia further contends that Morris, likewise, cannot avoid the limitations clause in the UIM endorsement because an insured of the second class could not have reasonable expectations regarding the extent of his coverage under the Philadelphia policy. Although the distinction between insureds of the first and second classes determined the outcome of the claim in Ohio Casualty, 581 S.W.2d at 557-559, the distinction...

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