St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc.

• Decision Date: 31 January 1994
• Docket Number: POWELL-WALTON-MILWAR,INC,No. 93-SC-418-CL,93-SC-418-CL
• Citation: 870 S.W.2d 223
• Parties: ST. PAUL FIRE & MARINE INSURANCE COMPANY, Movant, v., Respondent.
• Court: United States State Supreme Court — District of Kentucky

Page 223

870 S.W.2d 223

ST. PAUL FIRE & MARINE INSURANCE COMPANY, Movant, v. POWELL-WALTON-MILWARD, INC., Respondent.

No. 93-SC-418-CL.

Supreme Court of Kentucky.

Jan. 31, 1994.

Gordon Moss, Hays, Moss & Lynn, Lexington, for movant.

Mark T. Hayden, Greenebaum, Doll & McDonald, Lexington, for respondent.

CERTIFICATION OF THE LAW

Inasmuch as the issues addressed herein are likely to arise again in both state and federal courts in Kentucky, the United States Court of Appeals for the Sixth Circuit requests certification of the law as to the following questions:

(1) When an insurer (St. Paul) of an insurance broker (Powell-Walton-Milward) issues a liability insurance policy which promises coverage to the insurance broker for losses resulting from "an error, omission or negligent act committed in the ... sale and placement of insurance," but which also excludes from coverage claims by customers of the insurance broker "that result from the inability of an insurance company ... to pay all or part of insured claims," does the exclusion unambiguously deny coverage to the insurance broker who suffers losses as a result of negligently recommending an insurance company that subsequently becomes insolvent?

(2) If such an exclusion is given effect, does it violate the public policy of the state of Kentucky, defeating the express purpose of KRS 304.9-105 (insurance brokers to carry liability insurance "for the protection of the people of this state")?

The challenges giving bases to the issues herein arise from the following statement of facts and nature of controversy:

Powell-Walton-Milward, Inc. (P-W-M) is an insurance agency and was insured by St. Paul Fire & Marine Insurance Co. under a general insurance policy that promised the following: "We'll pay amounts you and other protected persons are legally required to pay to compensate others for loss that results from an error, omission or negligent act committed in the conduct of your insurance business." Insurance business is then defined to include "the sale and placement of insurance." P-W-M is required by KRS 304.9-105(5) to carry such insurance or to take equivalent alternative measures to protect customers against any negligence on its part. P-W-M's policy also contained an exclusion: "We won't cover claims that result from the inability of an insurance company, joint underwriting association, or any similar entity to pay all or part of insured claims."

P-W-M recommended to several of its clients that they join a self-funded insurance trust called National Business Association Trust ("the Trust") for the purpose of providing health and medical insurance benefits to their employees. In 1990, the Trust stopped paying medical claims filed by employees of its member trustees, including the clients of P-W-M to whom P-W-M had recommended membership in the Trust. The Trust fired all its employees and closed its doors. The Kentucky Department of Insurance seized the books of the Trust, and assumed all the contractual rights and causes of action of the Trust. In its status as liquidator of the Trust, the Department of Insurance is currently marshalling the assets of the Trust to pay its claims.

The Trust members who were clients of P-W-M asserted claims against it for claims filed by their employees against the Trust that were not paid. P-W-M settled the claims and then asserted claims against St. Paul under its policy, contending that the claims it had settled with its clients resulted from its negligent investigation and recommendation of the Trust. St. Paul denied the claim on the ground that P-W-M's losses were a result of the Trust's insolvency, not P-W-M's errors or omissions, and brought a declaratory judgment action before Judge Forester in the U.S. District Court for the Eastern District of Kentucky. Judge Forester agreed with St. Paul and granted its motion for summary judgment. The next day another U.S. District Court in the Eastern District of Kentucky, Judge Wilhoit presiding, issued a contrary opinion in another case, involving an identical policy issued by St. Paul, this time to an agency called Putnam Agency, Inc. Judge Wilhoit held that the policy is susceptible to two different interpretations, depending on whether the agency's losses are considered to be a consequence of its negligence in deficiently investigating the Trust and recommending it to its clients, or a consequence of the Trust's "inability to pay." The court then held that, under Kentucky law, where a policy is susceptible to two different interpretations, the interpretation favorable to the insured is adopted.

The case therefore turns on whether the two clauses of the policy, when read together, create an ambiguity which must be construed in favor of the insured. Alternatively, in the case before Judge Wilhoit, one party argues that the exclusion should be construed to violate the public policy of the Commonwealth of Kentucky under the reasoning expressed in Beacon Ins. Co. of America v. State Farm Mut. Ins. Co., Ky., 795 S.W.2d 62 (1990), because KRS 304.9-105(5) protects Kentucky citizens by requiring insurance brokers to carry liability insurance, and because the exclusion at issue denies coverage in cases where losses result from negligent recommendation of an insolvent insurer, leaving citizens unprotected under those circumstances.

We determine that the literal meaning of the coverage phrase "loss that results from an error, omission or negligent act committed in the ... sale and placement of insurance" when considered with the phrase which excludes coverage claims "that result from the inability of an insurance company ... to pay all or part of insured claims" is susceptible to two reasonable meanings. St. Paul, on one hand, maintains that although the claims asserted by customers against P-W-M sound in tort for the negligence of P-W-M and failing to adequately investigate the Trust, the injury giving rise to such claims was the inability of the Trust to pay the claims for medical expenses due to the insolvency of the Trust.

The parties acknowledge that the Trust was not a licensed or authorized insurance business in the Commonwealth of Kentucky. The memorandum...