Opinion
Civil Action No. 3:99-CV-88-H
September 28, 1999
MEMORANDUM OPINION
Having sustained personal injuries in a 1996 car accident, Plaintiff Heather Lee Kircher sued Defendant State Farm Mutual Automobile Insurance Company ("State Farm"), alleging coverage arising from an underinsured motorist provision in an automobile insurance policy between the two parties. State Farm has moved this court for a summary judgment that it owes Kircher nothing under the terms of that provision. In this case, the motion's success depends on the resolution of a conflict between the state insurance laws of Kentucky and Indiana.
The success of this motion will not eliminate the need for trial. The Court will reform the agreement if a jury finds that State Farm failed to fulfill an obligation to issue a different policy. See infra note 3.
The material facts of this case are not in dispute. On July 9, 1995, Plaintiff and Defendant entered an automobile insurance contract to cover Plaintiff's 1995 Honda Civic (the "Policy"), and that contract was in effect at the time of the accident. Defendant is incorporated in Illinois, but the contract was entered into in Lafayette, Indiana. Under the heading "Named Insured," Plaintiff listed her address as Jeffersonville, Indiana. At all relevant times, Plaintiff drove with an Indiana driver's license. The car had an Indiana license plate, registration, and title. Plaintiff paid a premium calculated on the risks incident to coverage pursuant to Indiana law.
From at least the fall of 1994 until the time of the accident, Plaintiff was living in Kentucky. She leased an apartment in Kentucky. She held a full-time job in Kentucky and filed state income tax returns in Kentucky. On April 20, 1996, the accident occurred in Kentucky.
According to the Restatement, a person's "home" is "the place where a person dwells and which is the center of his domestic, social and civil life." Restatement, Second, Conflict of Laws § 12. From the facts in the record, the Court concludes that Plaintiff's home at the time of the accident was Kentucky. It is less certain whether Plaintiff was a Kentucky domiciliary i.e., whether she intended to make Kentucky her home. See Restatement, Second, Conflict of Laws §§ 11, 18. But because the Court finds that choice of law in this case is determined by the parties' understanding about the principal location of the insured risk, see infra, it is unnecessary to decide Plaintiff's legal domicile on April 20, 1996.
Plaintiff claimed that her injuries were caused by the negligent driving of Linda Steinberg. After negotiations between Plaintiff and Steinberg, Steinberg's insurer settled with Plaintiff for $100,000 — the upper limit of Steinberg's liability insurance policy. After Plaintiff received this amount, she claimed that, because Steinberg was an "underinsured motorist," Defendant State Farm owed Plaintiff an additional $100,000 under her own policy. Whether State Farm owes Plaintiff that amount is the subject of this suit.
State Farm agreed to pay certain damages that Kircher is legally entitled to collect from the owner or driver of an "underinsured motor vehicle." According to the Policy, an "underinsured motor vehicle" is one whose liability limits are less than Kircher's underinsured motorist coverage, which was $100,000. See Policy, at Underinsured Motor Vehicle, Coverage W. State Farm did not agree to pay her this entire amount. Rather, State Farm would "offset" the $100,000 limit on its payments by the amount Kircher received from all other sources, such as those received from a tortfeasor's insurance. See Policy, at Limits of Liability — Coverage W. In essence, State Farm agreed to pay Kircher an amount sufficient to bring her total payments up to $100,000. Since Steinberg's insurer already paid $100,000 to Kircher, if the "offset" provision is legally valid, Steinberg is not an underinsured motorist, and Kircher's $100,000 policy must be offset by the $100,000 she already received. If the "offset" provision is valid, State Farm owes nothing to Kircher.
Kircher also claims that, in the fall of 1994, her mother gave notice to State Farm that Kircher was living in Kentucky full-time. State Farm denies this claim. If such notice were given, the contract demanded that State Farm "replace this policy with the policy form currently in use in the new state of garaging [Kentucky]" or stop insuring Kircher and refer her to an insurer in Kentucky. See Policy, at Conditions, "6. Change of Residence." Regardless of the understanding between the parties as to the car's principal location as evidenced in the contract, the Court will reform the agreement to reflect Kentucky law (i.e., disallowing an "offset") if Plaintiff did put State Farm on notice of a change in the car's principal place of garage and State Farm failed to replace the policy. Whether notice was given is a factual matter to be determined by the jury at trial.
The Policy's definition of an underinsured motorist and its "offset" provision are both valid and enforceable under Indiana law. See Ind. Code Ann. §§ 27-7-5-4, 27-7-5-5(c) (Burns 1998); Allstate Ins. Co. v. Sanders, 644 N.E.2d 884, 885-86 (Ind.Ct.App. 1994); Hammer v. State Farm Mut. Auto. Ins. Co., 950 F. Supp. 192, 195-96 (W.D. Ky. 1996); Owens v. DeClark, No. 94-265, 1995 U.S. Dist. LEXIS 21408, at *17-*20 (E.D. Ky. Dec. 8, 1995). Kentucky law, however, defines an underinsured motorist as one whose liability insurance cannot cover all of Plaintiff's damages. See Ky. Rev. Stat. Ann. § 304.39-320(1) (Michie 1996 Supp. 1998). Under this definition, Steinberg may be an underinsured motorist. Furthermore, Kentucky law would render the "offset" provision invalid. See Ky. Rev. Stat. Ann. §§ 304.39-320(2), (5) (Michie 1996 Supp. 1998); Coots v. Allstate Ins. Co., 853 S.W.2d 895, 900 (Ky. 1993). Thus, if Kircher can prove damages in excess of the $100,000 received from Steinberg's insurer, Kentucky law would require State Farm to cover those excess damages up to Kircher's own $100,000 limit.
Since there is an actual, material conflict between Kentucky law and Indiana law, the Court must determine which one applies. The conflict of laws rules to be applied by a federal court in Kentucky must conform to those prevailing in Kentucky's state courts. See Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496 (1941). Kentucky has abandoned the "mechanical approach" of lex loci contractus, under which the place of making or performing a contract exclusively determined the law to be applied. See Lewis v. American Family Ins. Group, 555 S.W.2d 579, 581 (Ky. 1977). In the place of that rigid rule, the Kentucky courts adopted the Restatement's "modern test," applying the law of the state with the "most significant relationship to the transaction and the parties." Id. at 581; see Restatement, Second, Conflict of Laws § 188. When choosing the law to be applied to insurance contracts, Kentucky adheres to § 193 of the Restatement:
Contracts of Fire, Surety or Casualty Insurance
The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.
Restatement, Second, Conflict of Laws § 193; see Lewis, 555 S.W.2d at 582; Bonnlander v. Leader Nat'l Ins. Co., 949 S.W.2d 618, 620 (Ky.Ct.App. 1996). The rationale for this "risk location" rule is clear — a risk's "location has an intimate bearing upon the risk's nature and extent and is a factor upon which the terms and conditions of the policy will frequently depend." Restatement, Second, Conflict of Laws § 193 cmt. c.
The Court finds that Indiana is the state which Kircher and State Farm "understood to be the principal location of the insured risk" under the terms of their agreement. In the policy, Jeffersonville, Indiana, is listed as the car's principal garage. The car was registered, titled, and licensed in Indiana, and its owner was driving with an Indiana driver's license. The parties entered into the contract in Indiana. Most important, the underinsured motorist provision specifically adhered to and is valid under Indiana law; on the other hand, it conflicted with and violated Kentucky law. The terms of the contract were tailored to an Indiana risk. See Bonnlander, 949 S.W.2d at 620 (an insurance contract's specific reference to applicable Indiana law evidences the parties' expectation that Indiana law would control). This is why the underinsured motorist clause matches Indiana's insurance statutes, and for this reason Kircher paid an Indiana premium. Clearly, the parties' expectation was that Indiana law would apply. Considering these facts and observing § 193's policy of vindicating the parties' justified expectations, the Court concludes that the parties understood that the insured risk's principal location was Indiana. See Lewis, 555 S.W.2d at 582. That the accident occurred in Kentucky and that Kircher was living in Kentucky at that time do not change that contractual understanding.
Having determined that the parties intended and understood that Indiana law would apply to determine the validity of the underinsured motorist provision, the Court must consider whether Kentucky had a more significant relationship to the transaction or the parties under § 6 of the Restatement:
Choice-of-Law Principles
. . .
(2) . . . the factors relevant to the choice of the applicable rule of law include
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Restatement, Second, Conflict of Laws § 6(2); see Breeding v. Massachusetts Indem. and Life Ins. Co., 633 S.W.2d 717, 719 (Ky. 1982) ("Justice, fairness and the best practical result may best be achieved by giving controlling effect to the law of the jurisdiction which, because of its relationship or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation.") ( citing Babcock v. Jackson, 191 N.E.2d 279, 283 (N.Y. 1963)).
The policies of Indiana and Kentucky are in a "true conflict." Indiana law limits an insured's recovery to the amount of her underinsured motorist coverage, and this limitation favors State Farm, a business operating in Indiana. Kentucky law, on the other hand, favors Kircher by disallowing the insurance contract's "offset" clause. The Court cannot choose between these conflicting policies; each policy will be impinged if the other state's law is applied, and neither policy is objectively superior to the other. The needs of the interstate system are not better vindicated by Kentucky law than by Indiana law. Since the parties contracted for Indiana law, the protection of justified expectations and the promotion of certainty, predictability, and uniformity are all better served by applying Indiana law. Finally, the Court is no less able to determine and apply Indiana's insurance law than Kentucky's. Weighing all these factors, the Court finds that Indiana has "the greater interest in and the most significant relationship to this transaction and the parties." Breeding, 633 S.W.2d at 719.
As to the contractual issues, material disputed facts require a jury trial. A jury must determine whether State Farm received contractual notice of Kircher moving the car's principal garage to Kentucky. Absent such a jury finding, the Court will apply Indiana law and dismiss this case.
The Court will enter an order consistent with this Memorandum Opinion.
ORDER
Defendant moved this Court for a summary judgment that Defendant has no contractual obligation to Plaintiff pursuant to Indiana law. Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Indiana law applies to the underinsured motorist provision of the insurance policy.
IT IS FURTHER ORDERED that the scheduled trial will determine whether Plaintiff gave contractual notice of the relocation of her automobile's principal garage in Kentucky. If Plaintiff did give such notice, the Court would proceed to try the issue of damages.