Point/Arc of N. Ky., Inc. v. Phila. Indem. Ins. Co.

• Decision Date: 22 December 2015
• Docket Number: CIVIL ACTION NO. 09-81-DLB-CJS
• Citation: 154 F.Supp.3d 503
• Parties: The Point/Arc of Northern Kentucky, Inc., et al. Plaintiffs v. Philadelphia Indemnity Insurance Company, Defendant
• Court: U.S. District Court — Eastern District of Kentucky

154 F.Supp.3d 503

The Point/Arc of Northern Kentucky, Inc., et al. Plaintiffs

v.Philadelphia Indemnity Insurance Company, Defendant

CIVIL ACTION NO. 09-81-DLB-CJS

United States District Court, E.D. Kentucky, Northern Division . at Covington .

Signed December 22, 2015

Alice Gailey Keys, Robert W. Carran, Philip Taliaferro, III, Taliaferro, Carran & Keys, PPLC, Covington, KY, David W. Walulik, Frost Brown Todd LLC, Cincinnati, OH, for Plaintiffs.

Robert D. Bobrow, Robert Estes Stopher, Boehl, Stopher & Graves, Louisville, KY, for Defendant.

MEMORANDUM OPINION AND ORDER

David L. Bunning

, United States District Judge

This breach of contract, bad faith, and Kentucky Unfair Claims Settlement Practices Act action arises from Defendant Philadelphia Indemnity Insurance Company's failure to defend and indemnify Plaintiffs, The Point/Arc of Northern Kentucky, Inc., Judi Gerding, and Jo Anne Mahorney, during and after the settlement of a tort case. The parties have filed Cross-Motions for Summary Judgment (Docs. # 90 and 91). The matter is fully briefed (Docs. # 93, 96, 100, and 101) and ripe for review. For the reasons stated below, Plaintiffs' Motion for Summary Judgment is granted , and Defendant's Motion for Summary Judgment is denied .

I. Factual and Procedural Background

The Point is a non-profit corporation which owns and operates eight group homes for the developmentally disabled. Among these eight homes is Point Ridge Group Home in Burlington, Kentucky. Joseph Daniel was a sixty-one-year-old mentally handicapped man who resided at Point Ridge. While under The Point's care, Daniel was allegedly neglected and abused, physically and fiscally, by Mary Ellen Allen, a live-in manager at Point Ridge. Allen was accused of neglecting Daniel by failing to provide adequate healthcare and nutrition and of misappropriating Daniel's personal funds. Daniel was left unsupervised and suffered multiple falls. He was also fed food that was over two years out-of-date.

On April 19, 2006, two weeks after one of his falls, Daniel died. Concerned about the circumstances surrounding Daniel's death, The Point contacted their Directors and Officers policy provider, Defendant Philadelphia Indemnity, and asked it to confirm its responsibilities and intentions regarding defense and indemnity of The Point in the event of a lawsuit or other claim against the company. Defendant denied any coverage for a claim arising from Allen's conduct or that of any other The Point employee.

On March 24, 2008, Carl Daniels,¹ brother of Joseph Daniel, filed suit in Boone County, Kentucky, Circuit Court, alleging, among other things, negligence by The Point in supervising and auditing Daniel's funds. After this suit was filed, The Point again contacted Defendant to apprise them of the situation and to seek another opinion as to defense and coverage of the Daniel Estate's claim. Defendant again denied any duty to defend and all responsibility for indemnifying a potential claim.

Meanwhile, Great American Insurance, which provided general liability coverage to The Point, agreed to defend the company against Daniel's suit. The case ultimately settled in mediation for $350,000. Great American and The Point then executed a “Loan and Prosecution Agreement” in which Great American agreed to loan The Point the settlement funds in exchange for a promise to seek indemnity against Defendant.

Following through with their promise to seek indemnity from Defendant, Plaintiffs filed the instant action on June 15, 2009 (Doc. # 1). The Court previously found that Defendant had breached its duty to defend Plaintiffs in the underlying tort case (Doc. # 12). The remaining issues are: (1) whether Defendant is obligated to indemnify Plaintiffs for some or all of the settlement amount; (2) if so, what amount do they owe Plaintiffs; (3) whether Defendant must reimburse Plaintiffs' defense costs; and (4) whether Defendant's conduct rises to the level of bad faith. Plaintiffs and Defendant have each moved for summary judgment on these issues.

II. Analysis

A. Standard of Review

Summary judgment is appropriate if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a)

. In deciding a motion for summary judgment, the Court must view the evidence and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp ., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The “moving party bears the burden of showing the absence of any genuine issues of material fact.” Sigler v. Am. Honda Motor Co. , 532 F.3d 469, 483 (6th Cir.2008).

Once the movant has satisfied its burden, the nonmoving party must “do more than simply show that there is some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. , 475 U.S. at 586, 106 S.Ct. 1348

; rather, it must produce specific facts showing that a genuine issue remains. Plant v. Morton Int'l, Inc. , 212 F.3d 929, 934 (6th Cir.2000). If, after reviewing the record in its entirety, a rational fact finder could not find for the nonmoving party, summary judgment should be granted.

Ercegovich v. Goodyear Tire & Rubber Co. , 154 F.3d 344, 349 (6th Cir.1998)

.

Importantly, the standard of review does not change simply because the parties present cross-motions. Taft Broad. Co. v. United States , 929 F.2d 240, 248 (6th Cir.1991)

. Such motions require the Court to “evaluate each motion on its own merits and view all facts and inferences in the light most favorable to the non-moving party.” Beck v. City of Cleveland, Ohio , 390 F.3d 912, 917 (6th Cir.2004) (quoting Wiley v. United States , 20 F.3d 222, 224 (6th Cir.2004).

B. Defendant Philadelphia Indemnity's Director & Officer's Policy covers the Daniel's Settlement

The Court must now consider under what circumstances, and pursuant to what legal standard, an insurer that has breached its duty to defend must indemnify its insured for the costs of settlement. Neither Kentucky courts nor the Sixth Circuit have addressed the precise question raised in this case, so the Court must survey related case law in order to formulate an appropriate rule.

1. Relevant Case Law

a. Kentucky Case Law

If an insured asked its insurer to defend it in an action, the insurer has several options. Of course, it can defend its insured. If, however, the insurer does not believe its policy provides defense coverage for the underlying matter, it can either outright refuse to defend or offer its defense under a reservation of rights. But the latter is the preferred course of action, Philadelphia Indem. Ins. Co. v. Youth Alive, Inc. , 732 F.3d 645, 652 (6th Cir.2013)

, and an insurer that elects not to defend its insured does so at its own peril. Cincinnati Ins. Co. v. Vance , 730 S.W.2d 521, 522 (Ky.1987). However, even defending under a reservation of rights involves some risk:

“If [the insurer] is correct in its position that the policy does not afford coverage or has been breached in some way, then it prevails regardless of whether the insured accepts the defense [under a reservation of rights] – but it offers such a defense at its peril, because if the insured refuses to accept it and elects to defend himself, the [insurer] is bound by the result, in the absence of fraud or collusion, unless it can establish that the policy did not afford coverage or was breached by the insured.”

Medical Protective v. Davis , 581 S.W.2d 25, 26–27 (Ky.Ct.App.1979)

.

As a general matter, Kentucky courts have long recognized that an insurer that breaches its duty to defend will be liable to its insured for judgments and settlements obtained after that breach. See Interstate Cas. Co. v. Wallins Creek Coal Co. , 164 Ky. 778, 176 S.W. 217, 219 (1915)

. In more recent times the Kentucky Supreme Court has further developed this rule by applying the reasonableness and absence-of-fraud provisions from Medical Protective to breach of the duty to defend cases. Specifically, the Kentucky Supreme Court has held that the insurer is bound by the result in the underlying case so long as that result is within coverage and reached in the absence of fraud or collusion. See

O'Bannon v. Aetna Cas. & Sur. Co ., 678 S.W.2d 390, 393 (Ky.1984).

b. Actual Versus Potential Legal Liability

The above-cited cases emphasize that the claim must come within policy coverage in order to trigger indemnity. To determine whether the claim is within coverage, one must look to the provisions of the indemnity agreement itself.² See United States Fidelity & Guar. Co. v. Napier Elec. & Const. Co. , Inc., 571 S.W.2d 644, 646 (Ky.Ct.App.1978)

. Under Kentucky law, parties may contract “for indemnification for—among other things—the costs incident to potential legal liability as well as for the legal liability itself.” See

Thompson v. The Budd Co. , 199 F.3d 799, 806–07 (6th Cir.1999). Thus, there are two conceivable bases for holding an insurer liable for insured's legal liabilities—a judgment or a contractual agreement covering potential legal liability. Martin Cnty. Coal Corp. v. Universal Underwriters Ins. Co. , 792 F.Supp.2d 958, 961 (E.D.Ky.2011) (holding that there are only two conceivable bases for holding an insurer liable for its insured's liabilities: 1) a judgment; or 2) a contractual agreement between the parties that the insurer would pay for its “insured's voluntary settlements no matter whether the insured could have actually have been held liable.”).³

c. Defendant's Arguments Are Not Grounded in Law or Sound Policy

Regardless of above-cited case law or its contractual agreement to the contrary, Defendant insists that actual legal liability is the standard required for it to indemnify Plaintiffs in this case. The Court disagrees. Defendant relies primarily on two recent Sixth Circuit decisions interpreting Kentucky insurance law: Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co. , 598 F.3d 257, 269–70 (6th Cir.2010)

, and Martin Cnty....