Opinion
NO. 2019-CA-000071-MR
05-29-2020
JAMES D. NICHOLS APPELLANT v. ZURICH AMERICAN INSURANCE COMPANY APPELLEE
BRIEFS FOR APPELLANT: M. Austin Mehr Bartley K. Hagerman Lexington, Kentucky BRIEF FOR APPELLEE: Robert E. Stopher Robert D. Bobrow Louisville, Kentucky
TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE ANGELA MCCORMICK BISIG, JUDGE
ACTION NO. 05-CI-008961 OPINION
AFFIRMING
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BEFORE: CLAYTON, CHIEF JUDGE; DIXON AND TAYLOR, JUDGES. DIXON, JUDGE: James Nichols appeals various orders preceding and including the order entered on December 12, 2018, by the Jefferson Circuit Court granting summary judgment and dismissing his claims. Following review of the record, briefs, and law, we affirm.
FACTS AND PROCEDURAL BACKGROUND
This case, concerning underinsured motorist (UIM) benefits, was previously before the Supreme Court of Kentucky in Nichols v. Zurich American Insurance Company, 423 S.W.3d 698 (Ky. 2014). We adopt the facts, as follows:
Nichols was employed by Miller Pipeline Corporation (Miller), a corporation with its primary place of business in Indiana. On June 4, 2002, while driving a truck for Miller in Jefferson County, Kentucky, Nichols was severely injured in an automobile collision. Miller had a commercial fleet vehicle insurance policy issued by Zurich with an effective date of April 1, 2002. The policy included an UIM endorsement with $1,000,000.00 limits. The policy had been procured through Miller's use of an independent insurance broker, M.J. Insurance, Inc., of Indianapolis, Indiana.
As a result of his injuries, Nichols received workers' compensation benefits. Zurich was also Miller's workers' compensation carrier. The driver whose negligence had caused Nichols'[s] injuries had an insurance policy with a $25,000.00 liability limits [sic]. In September of 2003, the at-fault driver's insurance company offered to pay its policy limits in exchange for a release of its insured driver. Nichols, aware of the UIM coverage included in the April 2002 Zurich policy, notified Zurich of his proposed settlement with the tortfeasor pursuant to [Kentucky Revised Statutes (KRS)] 304.39-320(3) and Coots v. Allstate Insurance Co., [853 S.W.2d 895 (Ky. 1993)].
When Zurich did not respond to the Coots notice, Nichols accepted the settlement in the fall of 2003, thereby permanently foreclosing any potential to collect his damages short-fall from the tortfeaser [sic]. Nichols continued his efforts to recover the remainder of his damages from the UIM coverage in the Zurich policy. In
February of 2005, Nichols's attorney learned that Zurich was claiming that there was no UIM coverage because "Miller Pipeline had rejected the coverage both in the states of Kentucky and Indiana, as well as the majority of states where they conduct business."
In 2005, Nichols brought suit against Zurich in the Jefferson Circuit Court to recover his damages under the UIM coverage included in the Zurich policy. Zurich's answer, neither admitting nor denying that the policy included UIM coverage, simply asserted "the policy will speak for itself." In August 2006, Zurich moved for summary judgment upon the grounds that "Miller Pipeline had no UIM coverage for Nichols' [sic] accident and [therefore] Nichols has no UIM claim against Zurich American. It's that simple." Unfortunately, as set out below, it was not that simple. Initially, the trial court denied Zurich's motion for summary judgment, finding that genuine issues about the facts surrounding Miller's purported rejection of UIM coverage remained unresolved.
As the facts before the trial court developed, the policy issued to Miller by Zurich in April 2002 contained two endorsements providing for UIM coverage: Endorsement CA 21 79 ("Kentucky Underinsured Motorist Coverage") and Endorsement CA 21 17 ("Uninsured Motorist Coverage," which by its definitions provision included "underinsured" coverage). The form upon which Miller formally rejected Endorsement CA 21 79 was not submitted to Zurich by Miller until June 20, 2002—sixteen days after Appellant's accident, but it was back-dated to April 1, 2002. The first formal indication to Nichols that Miller had intended to reject UIM coverage did not arrive until February 3, 2005, thirty-four months after the policy was issued and thirty-two months after the accident.
[In] July 2009, after the parties had conducted discovery, Nichols moved for partial summary judgment
on the issue of liability, arguing that undisputed facts compelled the conclusion that his injuries were covered by the UIM provisions included in the 2002 insurance policy. In response, Zurich moved for summary judgment, arguing that the inclusion of UIM coverage in the policy was a mutual mistake by Miller and Zurich that required reformation of the policy to reflect Miller's intent to reject UIM coverage. In connection with that motion, Zurich was granted leave of court to amend its answer to assert the equitable defense of mutual mistake.Id. at 701-02 (footnotes omitted). The Supreme Court reversed the summary judgment dismissing Nichols's complaint and set aside the order denying Nichols's motion for partial summary judgment. Id. at 708. The case was remanded to the trial court for entry of an order granting Nichols's motion for partial summary judgment finding UIM coverage, and for further proceedings. Id.
Ultimately, the trial court denied Nichols's motion for partial summary judgment and granted Zurich's motion for summary judgment. Nichols then moved the court to alter, amend, or vacate its order. He also moved at that time for leave to amend his complaint to add a statutory bad faith claim. Both motions were denied; Nichols appealed. The Court of Appeals affirmed the trial court. We granted discretionary review.
On remand, Nichols amended his complaint to include claims against Zurich for: bad faith, violation of the Unfair Claims Settlement Practices Act (UCSPA) under KRS 304.12-230 and KRS 304.12-235, and engaging in unfair methods of competition or unfair or deceptive acts or practices in the business of insurance under KRS 304.12-010. Shortly thereafter, Nichols and Zurich entered into a settlement. Nichols executed a partial release acknowledging the receipt of $1,000,000.00, representing payment of UIM benefits from Zurich, but preserving his pending claim against Zurich for bad faith.
Nichols made various discovery requests to Zurich on the remaining claims. After receiving Zurich's answers and responses to his discovery requests, Nichols moved the trial court to compel production of certain answers and responses deemed deficient, which the trial court granted, in part, and denied, in part. The parties eventually filed cross-motions for partial summary judgment and summary judgment. The trial court granted the motions for summary judgment and denied all other pending motions as moot. This appeal followed.
DISCOVERY RULINGS
Nichols's first argument concerns the trial court's discovery rulings. He maintains the discovery rulings were erroneous and directly contrary to granting summary judgment. Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." CR 56.03. An appellate court's role in reviewing a summary judgment is to determine whether the trial court erred in finding no genuine issue of material fact exists and the moving party was entitled to judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App. 1996). A grant of summary judgment is reviewed de novo because factual findings are not at issue. Pinkston v. Audubon Area Community Servs., Inc., 210 S.W.3d 188, 189 (Ky. App. 2006) (citing Blevins v. Moran, 12 S.W.3d 698, 700 (Ky. App. 2000)).
Kentucky Rules of Civil Procedure. --------
It is well-established that a party responding to a properly supported summary judgment motion cannot merely rest on the allegations in his pleadings. Continental Casualty Co. v. Belknap Hardware & Mfg. Co., 281 S.W.2d 914, 916 (Ky. 1955). "[S]peculation and supposition are insufficient to justify a submission of a case to the jury, and . . . the question should be taken from the jury when the evidence is so unsatisfactory as to require a resort to surmise and speculation." O'Bryan v. Cave, 202 S.W.3d 585, 588 (Ky. 2006) (citation omitted). "[T]he proper function of summary judgment is to terminate litigation when, as a matter of law, it appears that it would be impossible for the respondent to produce evidence at the trial warranting a judgment in his favor." Steelvest, Inc. v. Scansteel Serv. Ctr, Inc., 807 S.W.2d 476, 480 (Ky. 1991).
"A summary judgment is only proper after a party has been given ample opportunity to complete discovery, and then fails to offer controverting evidence." Pendleton Bros. Vending, Inc. v. Commonwealth Fin. & Admin. Cabinet, 758 S.W.2d 24, 29 (Ky. 1988) (citation omitted). "Our standard of review in matters involving a trial court's rulings on evidentiary issues and discovery disputes is abuse of discretion." Manus, Inc. v. Terry Maxedon Hauling, Inc., 191 S.W.3d 4, 8 (Ky. App. 2006) (footnote omitted). "The test for an abuse of discretion is whether the trial judge's decision was arbitrary, unreasonable, unfair, or unsupported by sound reasonable principles." Penner v. Penner, 411 S.W.3d 775, 779-80 (Ky. App. 2013) (citation omitted).
Additionally, the law is well-settled regarding what is required to prove a claim alleging bad faith against an insurer.
[A]n insured must prove three elements in order to prevail against an insurance company for alleged refusal in bad faith to pay the insured's claim: (1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed . . . . [A]n insurer is . . . entitled to challenge a claim and litigate it if the claim is debatable on the law or the facts.Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993) (citation omitted). With these standards in mind, we turn to Nichols's arguments.
A. Post-Litigation Claim File and Communications
Nichols contends he lacked certain critical evidence in responding to Zurich's motion for summary judgment on his bad-faith claims. Specifically, Nichols propounded interrogatories and requests for production of documents relating to Zurich's conduct and communications after the filing of his lawsuit which he believed were relevant to his bad-faith claims. Nichols moved the trial court to compel Zurich to respond, and thereafter, the court entered an order addressing the discovery motion. On appeal, Nichols claims the trial court ruled Zurich's post-litigation claim file and communications were non-discoverable. However, upon review of the court's order, this is not entirely accurate. The order states:
Nichols may discover evidence concerning Zurich's settlement behavior after October 17, 2005, when Nichols filed suit.Thus, while the trial court did not compel the production of all post-litigation conduct and communications, it did compel production concerning settlement offers and negotiations.
Thus, Zurich should respond to Interrogatory No. 6, [N]o. 7, and No. 8, so as to include the time period after October 16, 2005. The Court fails to see the relevance of Interrogatory No. 1 as to this issue, so Zurich need not supplement this response.
As to Request No. 1, No. 3, and No. 21, Zurich indicates it has already produced non-privileged portions of the UIM claim file for the period of June 4, 2002 to October 17, 2005. The Court concludes Zurich should produce the UIM claim file and privilege log for the period after October 17, 2005 if the documents or communications contain any reference to settlement offers or negotiations. This includes any reports or communications for vendors of service if there is any reference to potential settlement offers made to Nichols.
Nichols'[s] Motion to Compel is GRANTED IN PART with respect to the above mentioned Interrogatories and Requests for Production of Documents.
Nichols, nevertheless, claims the trial court's refusal to compel all post-litigation conduct and communications is contrary to Knotts v. Zurich Insurance Company, 197 S.W.3d 512 (Ky. 2006), "where the Court held that the insurer's post-filing claims conduct is generally admissible." However, Nichols misinterprets Knotts. Knotts held an insurer's post-filing claims conduct is generally inadmissible. More specifically, Knotts held:
Public policy favors the exclusion of evidence of an insurer's post-filing litigation conduct in at least two respects. First, permitting such evidence is unnecessary because during the initial action, trial courts can assure that defendants do not act improperly. Next, and more importantly, the introduction of such evidence hinders the right to defend and impairs access to the courts.
The Rules of Civil Procedure control the litigation process and, in most instances, provide adequate remedies for improper conduct during the litigation process. . . .
. . . .
. . . In general, an insurer's litigation tactics and strategy in defending a claim are not relevant to the insurer's decision to deny coverage. Indeed, if the insured must rely on evidence of the insurer's post-filing conduct to prove bad faith in denial of coverage, questions arise as to the validity of the insured's initial claim of bad faith. One court has gone so far as to hold
that "once litigation has commenced, the actions taken in its defense are not, in our view, probative of whether defendant in bad faith denied the contractual lawsuit."Id. at 520, 521-22 (citations omitted). Therefore, under Knotts, the admissibility of post-litigation conduct and communications is the exception rather than the rule. As noted by Knotts, this does not entirely prohibit trial courts from allowing discovery or admission of such evidence, but instead requires the courts to cautiously weigh the relevance against the prejudice to the insurer.
After the onset of litigation, an insurer begins to concentrate on supporting the decisions that led it to deny the claim. The insurer relies heavily on its attorneys using common litigation strategies and tactics to defend against a debatable claim. Consequently, actions taken after an insured files suit are at best marginally probative of the insurer's decision to deny coverage.
In some instances, however, evidence of the insurer's post-filing conduct may bear on the reasonableness of the insurer's decision and its state of mind when it evaluated and denied the underlying claim. Therefore, we do not impose a blanket prohibition on such evidence.
In its order, the trial court did not permit discovery of all post-litigation conduct and communications but, rather, only allowed discovery of such related to settlement that was not otherwise privileged. This is permissible under Knotts, which also held:
Our preferred rule as to what evidence of post-filing conduct may be admissible in a bad faith action is best summed up as follows:
One should note a distinguishing factor between the insurer's settlement behavior during litigation and its other litigation conduct. The Rules of Civil Procedure provide remedies for the latter. To permit the jury to pass judgment on the defense counsel's trial tactics and to premise a finding of bad faith on counsel's conduct places an unfair burden on the insurer's counsel, potentially inhibiting the defense of the insurer. An insurer's settlement offers, on the other hand, are not a separate abuse of the litigation process itself. If a litigant refuses to settle or makes low offers, his adversary cannot avail himself of motions to compel, argument, or cross-examination to correct his failure.
In principle, an insurer's duty to settle should continue after the commencement of litigation. If the insurer were immunized for objectional settlement conduct occurring after litigation begins, the insured would be left without a remedy. It makes sense, therefore, to hold the insurer responsible for such conduct. The rules, however, provide litigants with protection against other forms of litigation [conduct], and for that reason a court could rationally exclude evidence of the insurer's other misdeeds committed during the litigation process.
Id. at 522-23 (footnote omitted). Therefore, considering the guidance from Knotts, we hold the trial court's discovery order was not arbitrary, unreasonable, unfair, or unsupported by sound reasonable principles. Consequently, the order did not constitute an abuse of discretion.
Stephen S. Ashley, Bad Faith Actions Liability and Damages § 5A:6 (2005).
We must add, however, that such evidence is not automatically admissible.
B. Underwriting File
Nichols also moved the trial court to compel—and later to reconsider its refusal to compel—production of Zurich's underwriting file. The trial court denied Nichols's requests as "irrelevant and overbroad." On appeal, Nichols asserts "[t]he underwriting file is perhaps the most relevant piece of evidence as to Zurich's bad faith defense, along with the claim file." Specifically, after the Supreme Court rendered its opinion in this case finding UIM coverage, Nichols sought to discover the underwriting file and the insurance application. Nichols insists "it is extremely probable that Miller's underwriting file and application—never to date shown to the Court—will reflect a clear request for the $1,000,000 of UIM."
As previously noted, an insured must prove three elements to prevail against an insurance company for an alleged bad-faith refusal to pay a claim. Wittmer, 864 S.W.2d at 890. First, the insurer must be obligated to pay the claim under the terms of the policy. Id. The Supreme Court eventually found UIM coverage under the policy; therefore, this first element is met. Second, the insurer must lack a reasonable basis in law or fact for denying the claim. Id. Third, it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. Id. Despite the eventual favorable coverage ruling from the Supreme Court, Nichols cannot prove lack of a reasonable basis in law or fact for denying the claim or that the insurer acted with reckless disregard that such a basis existed, as two other courts determined otherwise.
In Guaranty National Insurance Company v. George, 953 S.W.2d 946, 949 (Ky. 1997), as amended (Nov. 14, 1997), a case similar to the one herein, the Supreme Court held:
Though in retrospect these issues may appear clear and undebatable, when there is an ambiguity or suspected material error on the face of a policy that would exclude coverage, we do not believe it is bad faith for a party to ask a court to either reform or decline to reform the policy.There was ambiguity and suspected material error on the face of the 2002-2003 policy in this case, which provided UM and UIM coverage when such coverage was not sought by Miller, was refused by endorsement, and was excluded in the subsequent policy. This ambiguity prevents any conclusion of bad faith.
Similarly, "an insurer is entitled to challenge a claim which is fairly debatable on the law or the facts." Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv., Inc., 880 S.W.2d 886, 890 (Ky. App. 1994). Bad-faith claims are precluded, as a matter of law, so long as there is "room for reasonable disagreement as to the proper outcome of a contested legal issue, even if in hindsight it was 'fairly predictable' that the dispute would be resolved against the insurer." Philadelphia Indem. Ins. Co. v. Youth Alive, Inc., 732 F.3d 645, 650 (6th Cir. 2013) (citation omitted). Nichols's assertion that the underwriting file could have been used to establish the second and third elements of his bad-faith claim ignores evidence in the record. Even if the application says what Nichols alleges, Zurich still had reasonable basis in law or fact for denying the claim based on the policy language. The trial court and another panel of our Court found that a mutual mistake served to reform the 2002-2003 policy to exclude UIM coverage prior to being corrected by the Supreme Court. The evidence supporting Zurich's interpretation includes signed rejection forms, as well as the deposition testimony of Jeanne Fuqua, former risk manager for Miller, and Kathy Kebo, former producer for M.J. Insurance. Further evidence, in the form of various letters and "ZNOTES," documents the questions regarding coverage under the subject policy. There were reasonable factual and legal questions as to the coverage under the policy and concerning the application of the legal theory of mutual mistake, which were not clarified until the Supreme Court rendered its opinion in this case. Since nothing in the underwriting file could have negated the reasonable basis for Zurich's denial of Nichols's UIM claim, the trial court did not err in finding the production of the underwriting file irrelevant to Nichols's bad-faith claim.
Furthermore, while Nichols argues the trial court erred by granting summary judgment on his "fraud" claim for violation of the UCSPA, his failure to prove bad faith is fatal to this claim. See Wittmer, 864 S.W.2d at 890. Moreover, as Nichols has failed to prove an essential element of bad faith, we decline to address other alleged trial court errors as moot.
INTEREST AND ATTORNEY'S FEES
Finally, Nichols contends the trial court erred in granting summary judgment on his claim for interest and attorney's fees. The trial court found KRS 304.12-235 did not apply to Nichols because he was not a named insured; therefore, he was not entitled to interest or attorney's fees. KRS 304.12-235 provides:
(1) All claims arising under the terms of any contract of insurance shall be paid to the named insured person or health care provider not more than thirty (30) days from the date upon which notice and proof of claim, in the substance and form required by the terms of the policy, are furnished the insurer.(Emphasis added.) Thus, as "[t]his section applies only to an insurer's negotiations with its own policyholder or the policyholder's health care provider[,]" the statute cannot be read to apply to Nichols. Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 455 (Ky. 1997), as modified (Feb. 18, 1999), holding modified by Hollaway v. Direct Gen. Ins. Co. of Mississippi, Inc., 497 S.W.3d 733 (Ky. 2016).
CONCLUSION
Therefore, and for the foregoing reasons, the order entered by the Jefferson Circuit Court is AFFIRMED.
ALL CONCUR. BRIEFS FOR APPELLANT: M. Austin Mehr
Bartley K. Hagerman
Lexington, Kentucky BRIEF FOR APPELLEE: Robert E. Stopher
Robert D. Bobrow
Louisville, Kentucky