RENDERED: OCTOBER 29, 2009
TO BE PUBLISHED
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2008-SC-000795-DG
KENTUCKY ASSOCIATED GENERAL
CONTRACTORS SELF-INSURANCE
FUND (KAGC) APPELLANT
ON REVIEW FROM COURT OF APPEALS
V. CASE NOS . 2007-CA-000699-MR AND 2007-CA-000736-MR
MONTGOMERY CIRCUIT COURT NO . 07-CI-90021
MUSIC CONSTRUCTION, INC . APPELLEE
OPINION OF THE COURT
REVERSING AND REMANDING
This appeal is taken from a Court of Appeals decision to affirm the trial
court's dismissal of a complaint by Kentucky Associated General Contractors
Self-Insurance Fund (KAGC) for failure to state a claim for which relief may be
granted. We accepted discretionary review to consider whether AIG AIU
Insurance Co . v . South Akers Mining Co ., LLC , 192 S .W .3d 687 (Ky. 2006),
bars an action by a workers' compensation insurance carrier, based on the
terms of the contract with its insured, to be reimbursed for the 30% increase in
benefits that resulted from the insured's intentional safety violation .' We have
concluded that it does not.
1 See KRS 342 .165(1).
Donnie Thacker sustained a work-related injury on July 12, 2001, while
working for Music Construction (Music) . Thacker was placing pipe in a 13-foot
deep trench when the wall collapsed, burying him to the waist for 10 1/2 hours
and causing serious injuries . His left leg required seven surgeries and was
amputated ultimately . Music received KOSHA citations for violating three
specific safety regulations 2 and was assessed penalties totaling $4,500. As a
consequence, Thacker sought the 30% increase in workers' compensation
benefits provided by KRS 342 .165(l) .
KAGC asserted that Music bore liability for any additional benefits
awarded under KRS 342 .165(1) based on the parties' contract for workers'
compensation insurance . The contract provided the following exclusions from
coverage:
F Payments You Must Make
You are responsible for any payments in excess of the
benefits regularly provided by the workers[']
compensation law including those required because:
1 . of your serious and willful misconduct ;
2 . you knowingly employ an employee in
violation of law;
3 . you fail to comply with a health or safety law
or regulation ; or
2 The KOSHA investigator determined that Music violated 29 CFR 1926 .6516)(2) by
failing to protect employees from a cave-in by placing the spoil pile too close to the
excavation ; 29 CFR 1926 .651 (k)(1) by failing to have a properly-trained individual
inspect the excavation daily for evidence of circumstances that could result in a
cave-in ; and 29 CFR 1926.652(a)(1) by failing to provide an adequate protective
system, such as by sloping or shoring the walls of the trench.
4 . you discharge, coerce or otherwise
discriminate against any employee in violation of
the workers' compensation law.
If we make any payments in excess of the benefits
regularly provided by the workers['] compensation law
on your behalf, you will' reimburse us ,promptly .
(emphasis added) .
An Administrative Law Judge (ALJ) found that Thacker's injuries
rendered him permanently and totally disabled . The ALJ also found that Music
failed intentionally to comply with the safety regulations for which it was cited
and that Thacker was entitled to a 30% increase in his income benefits under
KRS 342 .165(l) . Relying on the decision in AI G AIU, the ALJ ordered KAGC to
pay the increased benefit on Music's behalf despite the terms of the policy.
KAGC states that it has paid permanent total disability benefits from the
date of Thacker's injury. It has also made an initial lump-sum payment of
$51,222.79 to cover the 30% increase in benefits and interest accrued from the
date of injury through April 27, 2006, and has continued since then to pay
$159 .02 per week to cover the 30% increase. KAGC states that it notified
Music of the payments and requested reimbursement twice without success.
Thus, it filed a complaint in circuit court based on the terms of their contract.
The trial court granted Music's motion to dismiss for failure to state a claim for
which relief may be granted . Affirming, the Court of Appeals held that AIG AIU
barred the present action because it addressed the same issue that KAGC
raises presently. We disagree and, hence, we reverse.
AIG AIU was a workers' compensation case in which the insurance
policy at issue contained a provision holding the employer responsible for any
additional benefits awarded due to the employer's failure to comply with a
health or safety law or regulation . The policy also required the employer to
reimburse the carrier in the event that the carrier paid such benefits . At issue
was whether the ALJ erred by requiring the carrier to pay the injured worker's
surviving spouse the increased benefits that were awarded under KRS
342 .165(1) despite the contractual terms .
The surviving spouse noted that KRS 342 .340(1) and KRS 342.375
require employers to insure their entire liability. She argued that to permit a
carrier to exclude liability under KRS 342 .165(1) subjects the injured worker to
the risk of being unable to collect benefits from an insolvent or recalcitrant
employer. She also argued that carriers are free to include the risk of loss
under KRS 342.165(1) when setting an employer's premium. The court agreed,
also pointing to KRS 342 .365. KRS 342 .365 requires a workers' compensation
carrier to agree to pay promptly all benefits conferred by Chapter 342 and
construes the agreement as a direct promise to the injured worker, which is
enforceable in the worker's name.
Unlike AIG AIU, this is not a workers' compensation case . This case
involves a contract dispute between a carrier and its insured in which the
injured worker has no interest, a matter that was not at issue in AIG AIU.
The parties were without the benefit of the decision in AIG/AlU when
contracting for workers' compensation coverage because Thacker's injury
occurred in 2001, long before the decision was rendered. 3
The contract at issue required the employer to reimburse -the carrier for
payments due to the employer's failure to comply with safety regulations, a
provision likely to involve a lower premium than if coverage for benefits
awarded under KRS 342 .165(l) had been included . Having paid such benefits,
the carrier sought reimbursement under the terms of the contract. Hence, the
trial court erred by dismissing the action for failure to state a claim for which
relief may be granted .
The decision of the Court of Appeals is reversed and this claim is
remanded to the Montgomery Circuit Court for further proceedings.
All sitting. All concur.
3 The question of reimbursement should not arise with respect to claims for injuries
occurring after the decision in AIG/AIU. In such claims, carriers had and continue
to have the opportunity to charge premiums commensurate with their obligation to
pay all benefits conferred by Chapter 342, including benefits paid under KRS
342 .165(l).
COUNSEL FOR APPELLANT,
KENTUCKY ASSOCIATED GENERAL
CONTRACTORS SELF-INSURANCE
FUND (KAGC)
Douglas Anthony U'Sellis
U'Sellis 8s Kitchen, PSC
600 East Main Street
Suite 100
Louisville, KY 40202
COUNSEL FOR APPELLEE,
MUSIC CONSTRUCTION, INC . :
Shawn C . Conley
Vanantwerp, Monge, Jones & Edwards
1544 Winchester Ave ., 5th Floor
P.O . Box 1111
Ashland, KY 41105-1111