NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 09a0006n.06
Filed: January 7, 2009
No. 07-6443
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
OLD REPUBLIC INSURANCE )
COMPANY, ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
Plaintiff-Appellee, ) COURT FOR THE WESTERN
) DISTRICT OF KENTUCKY
v. )
) OPINION
UNDERWRITERS SAFETY AND )
CLAIMS, INC., )
)
Defendant-Appellant. )
Before: DAUGHTREY and GILMAN, Circuit Judges; MILLS, District
Judge.*
RICHARD MILLS, District Judge. Gregory McCord, an employee of the
City of Louisville, sustained a serious injury on the job in 1987. The City was self-
insured up to a $250,000 retention limit for workers’ compensation liability, and
carried an excess-liability policy from Old Republic Insurance Company. In a 1998
proceeding, an administrative law judge (“ALJ”)found that McCord was permanently
*
The Honorable Richard Mills, United States District Judge for the Central
District of Illinois, sitting by designation.
Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443
disabled. By 2004, the City had paid more than $44,000 of excess compensation
above its retention limit. Old Republic was not provided notice of the McCord claim
until 2004. Old Republic filed this declaratory judgment action, asserting that it
should be relieved of its obligation to reimburse the City for the excess because the
City and its third-party administrator, Underwriters Safety and Claims, Inc., had failed
to provide notice of the McCord claim as required by the policy. Underwriters has
been substituted for the City as the defendant in this case.
The district court held that before an insurance company may avoid liability on
a claim because of late notice, Kentucky law requires the company to show a
reasonable probability that it suffered prejudice as a result of the delay. Applying this
rule, the court concluded that because Old Republic lost its right to participate in the
defense of the McCord claim, it was prejudiced as a matter of law, regardless of
whether Old Republic would in fact have participated or whether its participation
could have affected its liability. Accordingly, the district court entered summary
judgment in favor of Old Republic. For the reasons set forth below, we reverse the
judgment of the district court and remand for a consideration of whether Old
Republic was prejudiced because of the late notice.
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I. BACKGROUND
On March 9, 1987, McCord sustained a lower back injury during the course of
his employment. The City voluntarily paid McCord temporary total disability
benefits for eleven months from March 9, 1987 through February 1, 1988. On
February 27, 1990, the ALJ ruled that McCord’s period of temporary total
occupational disability extended from March 9, 1987 to September 11, 1987.
McCord was determined to have a 50% permanent partial disability. The ALJ further
found: (1) McCord suffered a 12.5% disability as a result of the March 9 injury,
which became the liability of the City; (2) McCord had a 25% pre-existing
occupational disability which was non-compensable; and (3) he had an additional
12.5% disability which was determined to be due to the arousal of a dormant, non-
disabling condition which became the liability of the state fund. The ALJ ordered the
City to pay McCord $164.80 per week from March 9, 1987 to September 11, 1987,
and thereafter the sum of $20.60 per week for 425 weeks. By the end of 1997, the
total payments made to McCord because of his March 1987 work injury equaled
$92,778.46. On April 30, 1998, an ALJ found McCord to be totally and permanently
disabled.
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By late July of 2004, when Old Republic received its first notice of the McCord
claim, payments exceeding $250,000 had been made to McCord. Underwriters
forwarded to Old Republic a request for reimbursement on the McCord claim in the
amount of $44,178.12, representing the approximate amount by which payments of
workers’ compensation benefits exceeded the City’s retention limit. Underwriters
concedes that its notice to Old Republic was not contractually timely, though the
parties dispute exactly how late the notice was.
The district court found that Old Republic was entitled to notice in 1988 based
on Part 7(d)(4) of the policy, which provides that immediate notice shall be given in
any case involving “disability for a period of nine months or more.” However, it also
determined that, pursuant to Kentucky law, Old Republic must show that it was
prejudiced because of the late notice. The district court concluded prejudice did
result from the late notice because Old Republic was exposed to liability without
having its contractual right to participate in or control the investigation, defense,
settlement and/or appeal of the McCord claim.
The district court entered judgment in favor of Old Republic, finding that the
City, individually and by and through its third-party administrators, failed to comply
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with the notice provisions of the policy. This appeal followed.
II. ANALYSIS
(A)
This is a diversity action in which Kentucky law applies. In applying Kentucky
law, this Court follows the decisions of Kentucky’s highest court. See Bailey Farms,
Inc. v. Nor-Am Chemical Co., 27 F.3d 188, 191 (6th Cir. 1994) (citation omitted).
“Where a state’s highest court has spoken to an issue, we are bound by that decision
unless we are convinced that the high court would overrule it if confronted with facts
similar to those before us.” Kurczi v. Eli Lilly and Co., 113 F.3d 1426, 1429 (6th Cir.
1997). If the issue has not yet been addressed by the state supreme court, it is this
Court’s duty to anticipate how that court would rule. See Bailey Farms, 27 F.3d at
191.
Insurance contracts must be liberally construed in the insured’s favor. See
Kentucky Farm Bureau Mut. Ins. Co. v. McKinney, 831 S.W.2d 164, 166 (Ky. 1992).
Moreover, a policy’s “exceptions and exclusions should be strictly construed to make
insurance effective.” Id. (citations omitted). However, the Kentucky Supreme Court
has cautioned:
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The rule of strict construction against an insurance company
certainly does not mean that every doubt must be resolved against it and
does not interfere with the rule that the policy must receive a reasonable
interpretation consistent with the parties’ object and intent or narrowly
expressed in the plain meaning and/or language of the contract. Neither
should a nonexistent ambiguity be utilized to resolve a policy against the
company. We consider that courts should not rewrite an insurance
contract to enlarge the risk to the insurer.
St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223,
226-27 (Ky. 1994) (citing U.S. Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d
31 (6th Cir. 1988)).
(B)
Old Republic claims that the district court correctly determined pursuant to Part
7(d)(4) of the policy that notice was due in 1988, after nine months had passed and
McCord had not returned to work. Underwriters acknowledges that notice was due,
at the latest, in 1998 when the ALJ found that McCord was permanently disabled.
Part 7(d)(5) of the policy provided that notice is due immediately in any case which
involves “permanent total disability.” Accordingly, the 2004 notice to Old Republic
was late by at least six years.
We must determine whether, having established that notice was very late, Old
Republic may escape liability under the policy. Underwriters asserts, and the district
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court held, that Kentucky law requires Old Republic to demonstrate a reasonable
probability that it suffered substantial prejudice as a result of the late notice. See
Jones v. Bituminous Casualty Corp., 821 S.W.2d 798, 803 (Ky. 1991) (holding that
an insurance company may not avoid payment of a claim based on late notice unless
it was reasonably probable that the insurer suffered substantial prejudice). Old
Republic, however, argues that the Kentucky Supreme Court would not apply the
Jones rule to the present case, but would instead distinguish excess-liability insurers
from primary liability insurers. See Hiscox Dedicated Corporate Member Ltd. v.
Wilson, 246 F. Supp. 2d 684 (E.D. Ky. 2003) (holding that, under Kentucky law, an
equine-property insurer did not have to demonstrate probable prejudice resulting from
an insured’s failure to comply with a notice requirement in the policy). Accordingly,
in this case involving an excess policy, Old Republic argues that Kentucky law does
not require it to show that it probably suffered prejudice when Underwriters failed to
provide timely notice of the McCord claim.
There is no Kentucky Supreme Court decision which extends the prejudice
requirement to excess liability policies. Thus, we must predict the future
development of Kentucky law. The reasoning in Jones is instructive. The court in
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Jones discussed four factors to support its shift from the traditional “no prejudice”
rule to the modern view requiring insurance companies to show prejudice. See Jones,
821 S.W.2d at 801-03. We believe that these factors would lead the Kentucky
Supreme Court to extend the Jones rule to the excess-liability context, and therefore
reject Old Republic’s assertion that it need not make any showing of prejudice. We
turn now to the factors discussed by the court in Jones.
(C)
First, the court noted that many modern insurance policies are contracts of
adhesion. Such contracts have two notable characteristics: disparate levels of
sophistication between the parties and a one-sided “take it or leave it” form that does
not allow for even-handed bargaining. See Jones, 821 S.W.2d at 801-02. Unlike the
typical individual consumer in Jones, the City and Underwriters (and its predecessor
third-party administrators) are sophisticated parties. Nonetheless, the policy in this
case was apparently a pre-printed form contract that did not include individually
bargained-for provisions. The policy in Hiscox, by contrast, contained at least one
bargained-for provision specific to the individual insured. See Hiscox, 246 F. Supp.
2d at 692.
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Second, the court in Jones cited the doctrine of reasonable expectations.
Kentucky law requires “an unequivocally conspicuous, plain and clear manifestation
of the company’s intent to exclude coverage” to defeat the insured’s expectation.
Woodson v. Manhattan Life Ins. Co. of N.Y., 743 S.W.2d 835, 839 (Ky. 1987)
(citation omitted). The court in Jones stated that the policy in that case, while plainly
including a notice requirement, did not make clear to an “ordinary insurance
consumer” that coverage could be denied if notice was not timely provided. See
Jones, 821 S.W.2d at 802. Old Republic focuses on the “ordinary consumer”
language in Jones, suggesting that the doctrine of reasonable expectations does not
apply to sophisticated insurance consumers in the excess-liability context. To the
extent that this factor can be examined in that context, Old Republic contends that
when the expectations of an excess insurer are balanced against those of a
sophisticated consumer, it favors neither party. However, we believe that
sophisticated consumers may also rely on reasonable expectations as to the
consequences of a failure to provide notice. The policy in Hiscox expressly
conditioned coverage on notice. 246 F. Supp. 2d at 690. The policy in this case, like
the one in Jones, does not.
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The third factor discussed in Jones relates to public policies underlying
statutorily mandated insurance coverage. The insured in that case owned a mine and
was required by law to carry the policy at issue. The court reasoned that defeating
coverage under the policy solely because of a lack of notice would interfere with the
public policy underlying the statutory mandate. See Jones, 821 S.W.2d at 802.
Although Old Republic asserts that the City was not required by law to carry an
excess-liability policy, Kentucky law does in fact require self-insuring employers to
carry such insurance. See 803 Ky. Admin. Regs. 25:021 § 5 (2008). Old Republic
argues that in the excess-liability context, unlike in the primary-liability context, there
is no vulnerable third party who may suffer if it does not pay a claim. However,
Kentucky law requires the purchase of excess-liability insurance to protect the third-
party employees in the event that their self-insured employers cannot meet their right
to compensation.
The final factor is the possibility that if an insurer may avoid payment on
claims where lack of notice created no prejudice, then the premiums paid by the
insured will constitute a windfall to the insurer. See Jones, 821 S.W.2d at 802-03.
Although Old Republic asserts that the Jones rationale was fact-specific and has no
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bearing in the excess-liability context, we see no reason why it would not also apply
to excess-liability policies. Without some showing of prejudice, allowing Old
Republic to escape its contractual obligation on the notice technicality would result
in a windfall to the company.
(D)
After weighing each of the factors relied on by the Kentucky Supreme Court
in Jones, we conclude that the court’s reasoning supports extension of the rule
articulated in that case to excess-liability cases such as this. Accordingly, we agree
with the district court’s finding that Old Republic must show a reasonable probability
that it was substantially prejudiced by the late notice. The district court went on to
conclude that Old Republic was not required under Jones to establish that “it would
have actually become involved in resolving the McCord claim and that its
involvement could have effected a different result.” Instead, the court held that “Old
Republic’s undisputed loss of its contractual right to [to participate in defense of the
claim] is conclusive” in establishing prejudice. In so doing, the court discounted as
“irrelevant” Underwriters’ evidence that Old Republic, in more than 1,700 cases, had
never associated in or taken over the defense of any workers’ compensation claim.
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We believe that something more than the loss of the right to participate in
defense of the claim is necessary in order to show prejudice. Prejudice requires
“injury or damage.” See Merriam Webster’s Collegiate Dictionary 919 (10th ed.
1997). At the very least, a showing of prejudice requires the insurer to point to some
reasonable possibility that the outcome would have been different had it received
notice. One treatise describes the prejudice rule as follows:
In proving prejudice as a result of a delay in providing notice, it has
been stated that an insurer is not required to show precisely what
outcome would have been had timely notice been given to make [a]
showing of substantial prejudice. However, an insurer must show the
precise manner in which its interests have suffered, meaning that an
insurer must show not merely the possibility of prejudice, but, rather,
that there was a substantial likelihood of avoiding or minimizing the
covered loss, such as that the insurer could have caused the insured to
prevail in the underlying action, or that the insurer could have settled the
underlying case for a small sum or smaller sum than that for which the
insured ultimately settled the claim.
Russ & Segalla, 13 Couch on Insurance, § 193:29.
The Jones rule would be completely eviscerated if an insurer could simply
point to the lack of notice itself to establish prejudice, even where, as here it presents
no evidence to suggest that notice would have made any difference. Old Republic
contends that prejudice should be presumed if the notice is between six and sixteen
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years late. However, we decline to hold that substantial prejudice should be
conclusively presumed in cases where the notice is extremely late.
Based on the foregoing, we will remand the matter to the district court for
reconsideration of whether a reasonable trier of fact could conclude that, with timely
notice from Underwriters, there is a reasonable probability that Old Republic might
have achieved a more favorable resolution of the McCord claim. If the district court
determines that a genuine issue of material fact exists on this issue, then the question
of “substantial prejudice” should be submitted to a jury. See Jones, 821 S.W.2d at
803 (“If the evidence on [the substantial prejudice] issue is in conflict, or if
reasonable minds could differ as to what the evidence proves in this regard, the issue
is one for the trier of fact.”).
III. CONCLUSION
For all of the reasons set forth above, we reverse the judgment of the district
court and remand the case for further proceedings as set forth in this opinion.
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MARTHA CRAIG DAUGHTREY, Circuit Judge, concurring in part and dissenting in part.
I agree with the majority’s prediction that, if confronted with the dispositive legal issue in
this late-notice case, the Kentucky Supreme Court would extend to excess-liability insurers such as
the defendant the rule in Jones v. Bituminous Casualty Corporation, 821 S.W.2d 798, 803
(Kentucky. 1991), that requires a demonstration of prejudice. On the other hand, I also concur in
the district court’s determination that the notice in this case was 16 years late. Given the extreme
lateness of notice by plaintiff – in the face of the clear import of Part 7(d)(4) of the agreement, as
well as signs along the way that excess liability might well arise – it seems only fair that the court
impose a rebuttable presumption that the delay caused prejudice and let the plaintiff bear the burden
of establishing that it should be allowed to recover despite its obvious failure to honor the terms of
its contract with the defendant.
For that reason, I, too, would remand but with slightly different directions to the district
court.
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