Philadelphia Indemnity Insurance Company, Inc. v. Richard Tryon

RENDERED: OCTOBER 20, 2016
TO BE PUBLISHED
OMNI/

1_,1
,Sonjarritir Court of Ifirittlitt
Eliho114,14;.,Raimeri l bc
2014-SC-000354-DG

PHILADELPHIA INDEMNITY INSURANCE APPELLANT
COMPANY, INC.

ON REVIEW FROM COURT OF APPEALS
V. CASE NO. 2013-CA-001275-MR
JEFFERSON CIRCUIT COURT NO. 12-CI-04231

RICHARD TRYON AND APPELLEES
ENCOMPASS INDEMNITY COMPANY

AND 2014-SC-000357-DG

ENCOMPASS INDEMNITY COMPANY APPELLANT

ON REVIEW FROM COURT OF APPEALS
V. CASE NO. 2013-CA-001275-MR
JEFFERSON CIRCUIT COURT NO. 12-CI-04231

RICHARD TRYON AND APPELLEES
PHILADELPHIA INDEMNITY INSURANCE
COMPANY, INC.
 OPINION OF THE COURT BY CHIEF JUSTICE MINTON

AFFIRMING, IN PART, REVERSING, IN PART, AND REMANDING

This case involves the construction of motor vehicle liability insurance

policy provisions regarding Underinsured Motorist Insurance (UIM) coverage for

a motor vehicle owned by the insured but not scheduled for coverage under the

owner's policy. We granted discretionary review to determine whether such

owned-but-not-scheduled provisions are enforceable as a matter of public

policy to deny UIM benefits. We hold that they are, so long as the plain

meaning of the policy clearly and unambiguously excludes this type of

coverage.

I. FACTUAL AND PROCEDURAL BACKGROUND

Richard Tryon was driving his motorcycle when he was struck by an

automobile driven by Logan Hopkins. Tryon insured his motorcycle with

Nationwide Insurance Company of America, and the policy included

underinsured motorist (UIM) coverage. At the time of the accident, he also

owned two automobiles: a Lexus and an antique Pontiac Firebird. He insured

Lexus with Encompass Indemnity Company and the Firebird with Philadelphia

Indemnity Insurance Company, Inc. Both policies included UIM coverage

provisions.

Tryon made UIM claims under all three policies. As the insurer of the

motorcycle Tryon operated at the time of the accident, Nationwide's UIM

coverage was undisputed. But both Encompass and Philadelphia denied UIM

2
coverage for Tryon. Specifically, they contend that their respective insurance

policies have owned-but-not-scheduled-for-coverage exclusions—policy

provisions that deny UIM coverage for operating or occupying other vehicles

that Tryon owned but were not identified in the policy. Because Tryon did not

include his motorcycle in either policy, both insurers insist they are not

contractually obligated to provide him UIM benefits. Although similar in form,

the policies have distinct textual differences.

The Encompass policy excluded UIM coverage when:

While that covered person is operating or occupying a motor
vehicle owned by, leased by, furnished to, or available for the
regular use of a covered person if the motor vehicle is not
specifically identified in this policy under which a claim is made.

This statement is augmented in Encompass's definition of a covered person.

The policy specifically excludes from its definition insureds "while occupying, or

when struck by, a vehicle owned by you which is not insured for this coverage

under this policy."

Likewise, Philadelphia included a similar exclusion, although it is

structurally different. The policy provides the following:

A. We do not provide Uninsured Motorists Coverage for "bodily
injury" sustained:
1. By an "insured" while "occupying," or when struck by,
any motor vehicle owned by that "insured" which is not
insured for this coverage under this policy. This includes
a trailer of any type used with that vehicle.

Unlike the Encompass policy, the Philadelphia policy does not expressly

differentiate between UIM coverage and uninsured motorist (UM) coverage.
Instead, the owned-but-not-scheduled exclusion mentions only the

applicability of UM benefits with no reference whatsoever to UIM.

Tryon filed suit in circuit court. The trial court granted Encompass and

Philadelphia summary judgment. Persuaded by the unpublished Court of

Appeals opinion in Motorists Mutual Insurance Co. v. Hartley', the trial court

ruled that the "language in the policies issued by Encompass and Philadelphia

are (sic) unambiguous and clearly exclude coverage of Tryon's motorcycle."

The Court of Appeals reversed on appeal, noting that the trial court erred

in relying on the unpublished Hartley opinion and that this Court's holding in

Chaffin v. Kentucky Farm Bureau Ins. Companies 2 mandated coverage from

Encompass and Philadelphia. Most notably, in Chaffin, we held that coverage is

personal to the insured, an insured has a reasonable expectation of policy

benefits when paying multiple premiums for the same type of coverage, and

depriving an individual of such coverage is contrary to Kentucky's public

policy. 3 According to the Court of Appeals, this controlling precedent required

reversal of the trial court's summary judgment in favor of the insurers.

I. ANALYSIS.

A. Standard of Review.

On appellate review of the trial court's grant of summary judgment, we

must determine whether the record, examined in its entirety, shows there is

1 2010-CA-000202-MR (Ky. App. Feb. 11, 2011) (discretionary review denied
and opinion ordered unpublished (Ky. Feb. 15, 2012).
2 789 S.W.2d 754 (Ky. 1990).
3 Id. at 756.

4
"no genuine issue as to any material fact and the moving party is entitled to

judgment as a matter of law." 4 All factual ambiguities are viewed in a light most

favorable to the nonmoving party. 5 Because there are no factual disputes

before us today and only review of questions of law, the lower courts' opinions

are entitled to no deference and are reviewed de novo.

B. UM Coverage, UIM Coverage, and Controlling Kentucky Law.
1. Statutory authority.

The Kentucky Motor Vehicle Reparations Act (MVRA) was enacted in

1974 to establish a comprehensive motor-vehicle insurance system designed to

address the growing number of accidents on Kentucky roads each year. 6

Among the noteworthy aspects of the MVRA is the individual mandate for

Kentucky drivers to purchase a baseline level of motor-vehicle liability

insurance.' But the MVRA also addresses other forms of coverage incidental to

the mandatory liability coverage, including direction to insurers on the role of

underinsured motorist coverage (UIM).

The statute first defines an underinsured motorist as "a party with motor

vehicle liability insurance coverage in an amount less than a judgment

recovered against that party for damages on account of injury due to a motor

vehicle accident." 5 Insurers are required to make UIM coverage "available upon

4 Kentucky Rules of Civil Procedure (CR) 56.03.
5 See Hammons v. Hammons, 327 S.W.3d 444, 448 (Ky. 2010).
6 KRS 304.39-010.
7 KRS 304.39-110.
8 KRS 304.39-320(1).

5
request to its insureds," but "subject to the terms and conditions of such

coverage not inconsistent with this section." 9 So the MVRA takes two strong

positions on UIM coverage. First, UIM coverage is supplemental—insurers are

not forced to offer it unless the insured requests this additional coverage. And

second, insurers are free to contract with insureds on the form and scope of

coverage, so long as the terms remain consistent with the remaining provisions

of the MVRA.

Interestingly, the legislature's position on UM coverage is not found in

the MVRA. Instead, the UM statute is found in a separate subsection as part of

the legislative enactments concerning casualty insurance contracts. There, the

term uninsured motor vehicle is robustly defined to include:

An insured motor vehicle where the liability insurer is unable to
make payment with respect to the legal liability of its insured
within the limits specified therein because of insolvency; an
insured motor vehicle with respect to which the amounts provided,
under the bodily injury liability bond or insurance policy applicable
at the time of the accident with respect to any person or
organization legally responsible for the use of such motor vehicle,
are less than the limits described in KRS 304.39-110; and an
insured motor vehicle to the extent that the amounts provided in
the liability coverage applicable at the time of the accident is
denied by the insurer writing the same. 10

With that definition firmly in place, the statute commands that all automobile

and motor-vehicle insurance contracts must include UM coverage in limits

consistent with the MVRA. 11 So while the MVRA makes UIM coverage optional,

9 KRS 304.39-320(2).
10 KRS 304.20-020(2).
11 KRS 304.20-020(1).

6
supplemental insurance, the subsection relating to casualty-insurance

contracts expressly forbids contracts that do not include UM benefits.

2. Jurisprudential distinctions.

As one of Tryon's primary arguments, he attempts to align his UIM policy

limitation with provisions we condemned as contrary to Kentucky's public

policy in Chaffin v. Kentucky Farm Bureau Ins. Cos. 12 Indeed, the Court of

Appeals relied on this case as a critical source of its ruling that summary

judgment in favor of Encompass and Philadelphia was improper. In Chaffin, a

motorist was injured by an uninsured motorist. She maintained three separate

policies with Kentucky Farm Bureau for UM coverage for three vehicles, paying

separate premiums. Her policy actually included language excluding UM

coverage for certain instances that was remarkably similar to Philadelphia's

policy in the instant case. We first addressed in Chaffin whether this exclusion

is an enforceable limitation or whether Chaffin was entitled to stack her

policies and recover from all three. A divided Court held that stacking was

permissible and that such anti-stacking exclusions were unenforceable.

Specifically, the majority held that "uninsured motorist coverage is

personal to the insured; that an insured who pays separate premiums for

multiple items of coverage has a reasonable expectation that such coverage will

be afforded; and that it is contrary to public policy to deprive an insured of

purchased coverage, particularly when the offer of such is mandated by

12 789 S.W.2d 754 (Ky. 1990).

7
statute." 13 The Chaffin Court's holding heavily depended on the doctrine of

reasonable expectations as understood in this context to mean that "when one

has bought and paid for an item of insurance coverage, he may reasonably

expect it to be provided." 14 The Court determined that when insurers include

anti-stacking limitations or exclusions of coverage for other vehicles owned but

not insured, the promise of the insurance coverage as required under the law is

"illusory." 15 So not only did Chaffin allow insureds to stack policies to recover

UM benefits, it also held that other-vehicle exclusions of UM coverage are

unenforceable as a matter of Kentucky public policy.

Although we recognize a number of factual similarities in Tryon's case,

we also see key reasons why the Chaffin doctrine is ultimately irrelevant to

today's issues. Most obviously, the type of coverage at issue is drastically

different—Chaffin disputed UM recovery, while Tryon seeks recovery of UIM

benefits. We see no reason to conflate UM and UIM when Kentucky statutory

law does not do so. One is mandatory. The other is not. One is a facet of the

MVRA, while the other is an aspect of enforceable casualty insurance

contracts. It would seem these differences alone should be enough for us to

determine that the outcome in Chaffin has no bearing on whether Tryon's

provisions are enforceable as a matter of public policy.

13 Id. at 756 (echoing a companion certification-of-law case rendered the same
day, in Hamilton v. Allstate Ins. Co., 789 S.W.2d 751 (Ky. 1990)).
14 Hamilton, 789 S.W.2d at 753.
15 Chaffin, 789 S.W.2d at 757-58.

8
 We encountered this contrast in Allstate Insurance Co. v. Dicke 16 , where

this Court extended the Chaffin anti-stacking policy to UIM claims. Although

the opinion largely retreads the familiar Chaffin position, statutory distinctions

between UM and UIM coverage were presented as material distinctions. But the

majority in Dicke dismissed these distinctions offhand as not "significantly

meaningful to permit a different result." 17 The problem with our result in Dicke,

of course, is that we failed explain why these distinctions are meaningless.

Perhaps if we conducted a more searching statutory analysis, we would have

discovered that the text stands squarely in opposition to our rule in Dicke.

The statutory language embodies legislative choices, a willful resolution

of the General Assembly's declaration of Kentucky law. The words of the

statute reflect a policy choice. As such, it follows that the use of particular

words and the placement of certain provisions in certain areas of the statutory

code are done so with care. It is accordingly the role of this Court to effectuate

those terms and there meanings. Under this analysis, it is clear that UM and

UIM coverage are separate facets of Kentucky insurance law.

If the legislature desired to make UIM coverage mandatory and thus

subject to the identical public-policy considerations as UM coverage, it

certainly could have. But instead, it elected to require such coverage "to be

furnished only on request." 18 Additionally, all specific UM policy provisions

16 862 S.W.2d 327 (Ky. 1993).
17 Id. at 329.
18 Id. at 330 (Spain, J., dissenting).

9
mandatory under law must be approved by the Commissioner of Insurance. 19

Incotras,heiuqrmntfoUIMplices;at,hUIM

statute expressly states that insurers are free to set their own terms and

conditions of coverage. 20 Despite the majority's holding in Dicke, we see a

meaningful distinction between the two statutes. And given the unmistakably

disparate treatment both in defining coverage and outlining acceptable

procedures, "we are left with the inescapable fact that the parties were free to

contract" UIM coverage. 21 And to the extent that Dicke is inconsistent with any

of today's analysis, it is accordingly overruled.

But it is also important to note that Chaffin was ultimately not a decision

reached through a methodical interpretation of various aspects of positive law.

Nowhere in the majority opinion appears a single assertion that the holding of

the case is a result of the meaning of a statutory command. Rather, the opinion

essentially stands on purely common-law rationale almost in spite of the

strictures in place detailing enforceable insurance policies within the state.

Because Chaffin relied so heavily on common-law principles and also because

there is significant statutory law regulating automobile insurance, that decision

is most appropriately limited to the facts of that case. Simply put, there is a

significant difference between UM and UIM coverage both in legislation and in

our own insurance-law jurisprudence.

19 See KRS 304.020(1) ("...under provisions approved by the commissioner...").
20 Dicke, 862 S.W.2d at 330 (Spain, J., dissenting). See also KRS 304.39-320(2)
("...subject to the terms and conditions of such coverage not inconsistent with this
section...").
21 Id.

10
 We have addressed the UIM statute in contexts not dissimilar from the

one presented today. In fact, in Motorists Mutual Ins. Co. v. Glass 22 , we

distinguished UIM principles from our position with respect to UM benefits in

Chaffin and its progeny. In that case, we held that a policy exclusion for any

"vehicle owned by or furnished or available for the regular use of the insured or

any family member" from its definition of an underinsured motorist is an

enforceable provision. 23 This "regular-use exclusion" has been upheld by the

Court of Appeals on at least three other occasions since Glass. 24

We more recently readdressed the regular-use exclusion in State Farm

Mutual Ins. Co. v. Hodgkiss-Warrick. 25 Although the case ultimately rested on

Pennsylvania substantive law, our choice-of-law principles required us first to

examine whether the policy provisions at issue could be supported as a matter

of Kentucky public policy. And in light of Glass, we held that the regular-use

exclusion did not run afoul of our public policy. We supported this ruling by

stating, "a contract term is unenforceable on public policy grounds only if the

policy asserted against it is clearly manifested by legislation or judicial decision

and is sufficiently strong to override the very substantial policies in favor of the

freedom of contract and the enforcement of private agreements." 26 Justice

22 996 S.W.2d 437 (Ky. 1997).
23 Id. at 449-50.
24 See Burton v. Kentucky Farm Bureau Mut. Ins. Co., 326 S.W.3d 474 (Ky. App.
2010); Edwards v. Carlisle, 179 S.W.3d 257 (Ky. App. 2004); and Murphy v. Kentucky
Farm Bureau, 116 S.W.3d 500 (Ky. App. 2002).
25 413 S.W.3d 875 (Ky. 2013).
26 Id. at 880 (quoting Restatement (Second) of Contracts § 178 (1979)).
Hughes, writing for the Court, noted that there is no "specific provision of the

MVRA...forbidding the sort of exclusion from underinsured motor vehicle

coverage at issue here." 27 Summing up our stance on regular-use exceptions,

"the gist of these cases is that it is not unreasonable or contrary to the MVRA

to exclude UIM benefits in that situation, because otherwise household

members would have an incentive to minimize their liability coverage in

reliance on less expensive UIM coverage, and because otherwise the insurer is

apt to be exposed to substantial risks it was not paid to underwrite." 28

In the wake of Glass and Hodgkiss-Warrick, we have made clear that the

MVRA does not outweigh the basic and fundamental liberty to contract and

create personal insurance policies. Instead, rules of contract ultimately guide

our analysis. And going full circle back to Chaffin, application of our contract

principles ultimately becomes an inquiry of reasonable expectations. We held

in Simon v. Continental Insurance Co., that reasonable expectations with

respect to insurance coverage essentially means that "the insured is entitled to

all the coverage he may reasonably expect to be provided under the policy. Only

an unequivocally conspicuous, plain and clear manifestation of the company's

intent to exclude coverage will defeat that expectation." 29 So this doctrine is

meant to be used "in conjunction with the principle that ambiguities should be

27 Id. at 881.
28 Id. at 882.
29 724 S.W.2d 210, 212-13 (Ky. 1986). See also Bidwell v. Shelter Mut. Ins. Co.,
367 S.W.3d 585, 588 (Ky. 2012) ("...[t]o be enforceable, Kentucky law requires a
limitation of insurance coverage, such as a permissive user step-down provision, to be
clearly stated in order to apprise the insured of such limitations.").

12
resolved against the drafter in order to circumvent the technical, legalistic, and

complex contract terms which limit benefits to the insured." 30 But we are

sufficiently satisfied that the terms in this policy are both reasonable and

plainly accessible.

We noted in Glass that there is a true distinction between illusory

coverage and instances where the policy simply does not apply to the facts of

the case. 31 Indeed, this is perfectly in line with the text of the UIM portion of

the MVRA—insurers may limit UIM coverage, at least within the confines of the

rest of the statute. We think this strikes an adequate balance between the

Commonwealth's interests in protecting drivers on its roadways with the

insurance companies' desires to assess accurately the underwriting risks

involved. Individuals are perfectly capable of negotiating UIM coverage, and it

strains credulity to suggest it is too tall a task for insureds to read their

policies.

The regular-use exclusion does not operate identically to the owned-but-

not-scheduled provision in the present case, to be sure, but it nevertheless

stands resolute as a bold statement from this Court that UIM coverage

exclusions are not impermissible under Kentucky public policy and parties are

at liberty to negotiate and customize policies to fit their own needs and desired

levels of coverage. We shielded insurers under the regular-use exclusion from

exposure to substantial risks they were not paid to underwrite. That rationale

3/3 Id.
31 Glass, 996 S.W.2d at 450.

13
is equally applicable to coverage in cases like Tryon's where the insured owns

several other vehicles and chooses not to insure them under a particular policy

or even with the same insurer. We see no reason to force insurers to bear the

burden of an underwriting risk against the rest of the world while allowing the

other contracting party to reap the benefits of multiple recoveries. There is no

meaningful distinction between our rationale upholding regular-use and

owned-but-not-scheduled exclusions, and the solution for both types of

coverage is identical: "the named insured can avoid the fact of underinsurance

by simply purchasing additional liability coverage for his vehicle." 32

This opinion does not necessarily overrule Chaffin or its precedent with

respect to UM coverage. But we do question whether the Chaffin Court's

reasonable-expectation analysis truly synthesizes Kentucky contract principles

or simply exists as a categorical rule to ensure that insureds always recover.

But that issue is not before us today. For now, we can only state with certainty

today that Kentucky public policy does not bar reasonable UIM exclusion

provisions.

In summation, there is nothing either in the MVRA or our public policy

prohibiting enforcement of exclusion of UIM coverage in certain scenarios. The

reasonable expectations of coverage are satisfied so long as the plain meanings

of the terms of the underlying policies are clear and unambiguous. We will now

review the Encompass and Philadelphia policies, respectively, under that

standard.

32 Id. at 450.

14
 C. The Encompass Provision.
On review of Encompass's UIM exclusion for vehicles owned but not

scheduled for coverage, we are persuaded that the policy is in fact a clear and

unambiguous statement that the policy does not pay benefits for vehicles it

does not insure. The Encompass policy creates a separate heading for UIM

coverage. In its definition of a covered person, the policy expressly states that

for the insured, his family members, and other occupants, UIM coverage will

not be extended to vehicles owned by Tryon but not insured for coverage under

this policy. In the provision defining insured motor vehicle, the policy goes on to

contemplate the existence of additional automobiles, motorcycles, or motor

homes. The policy contains a grace period of thirty days for newly acquired

vehicles, where Encompass agrees to extend UIM coverage. But after that

thirty-day period elapses, Tryon "must ask us [Encompass] to insure the

automobile, motorcycle, or motor home, and we [Encompass] must agree." And

finally, the Encompass policy includes a separate subsection for "Underinsured

Motorists Losses We Do Not Cover." Detailed in that subsection, Encompass

explicitly states that it does not provide .UIM coverage for bodily injury for any

covered person "operating or occupying a motor vehicle owned by, leased by,

furnished to, or available for the regular use of a covered person if the motor

vehicle is not specifically identified in this policy under which a claim is made."

There is no way we can say that, on plain reading of the policy provisions

at issue, Tryon had any reasonable expectation of UIM coverage. The policy

repeatedly instructs Tryon that Encompass has no intention of insuring any

other vehicles Tryon may happen to own but chose not to insure under that

15
policy. This information is offered in plain language and presented boldly

within the four corners of the agreement—this cannot be said to be hidden in

the small print. All Tryon needs to do to understand his coverage is to simply

read his policy. Encompass's policy is a clear and unambiguous manifestation

of its intent to deny coverage in certain scenarios.

Because the terms are clear and because UIM exclusions like this are not

unenforceable as a matter of law, we accordingly reverse the Court of Appeals'

decision and reinstate the trial court's summary judgment in favor of

Encompass.

D. The Philadelphia Provision.

Unlike the Encompass policy, Philadelphia does not include a separate

section marking the company's position on UIM coverage. Instead, it asks us to

interpret the portion of the policy labeled "Uninsured Motorists Coverage" to

include UIM. To be sure, the Philadelphia policy contains a familiar provision

excluding coverage for bodily injury while "occupying, or when struck by, any

motor vehicle owned by that insured which is not insured for this coverage

under this policy." But this only expressly claims to exclude uninsured

motorist coverage—the policy is silent with respect to underinsured motorist

benefits.

We do not doubt that the text included in the policy is unambiguous—it

seems quite clear that Philadelphia intends to exclude UM coverage for vehicles

Tryon owned but did not insure under this policy. 33 But under the doctrine of

33 This is actually a remarkably similar provision to the one we found
unenforceable as a matter of public policy in Chaffin. Today's issue focuses solely on

16
reasonable expectations we updated above, there is no such clear statement

with respect to UIM coverage. Assuming Tryon contracted for UIM coverage at

all—an assertion that both parties at least implicitly concede—there is nothing

in the policy reasonably to place him on notice that his UIM benefits are

subject to certain situational exclusions.

We stated above that to defeat an insured's reasonable expectation of

coverage, exclusions must be plainly and unequivocally presented in the four

corners of the policy to satisfy the well-established rule of contract that

ambiguous language must be construed against the drafter. It is evident that

the excluded coverage in this policy is ambiguous at best, if not totally absent.

Philadelphia is completely capable of drafting reasonable exclusions of UIM

coverage under both the MVRA and our public policy, but if it chooses to do so,

it must do so with certainty. Because this policy inadequately rebuts Tryon's

reasonable expectation of coverage, we have no choice other than to affirm the

Court of Appeals' decision reversing Philadelphia's summary judgment.

II. CONCLUSION.

For the foregoing reasons, we hold that that owned-but-not-scheduled

provisions for UIM coverage are enforceable under Kentucky law so long as

they expressly and plainly apprise insureds of the exclusion. We reverse the

Court of Appeals' decision and affirm summary judgment in favor of

Encompass because the terms of its policy plainly excluded coverage. But

UIM coverage, so we need not address the applicability of Chaffin to Philadelphia's UM
provision—that is a question for a different day.

17
 because the Philadelphia policy failed to plainly exclude coverage in these

circumstances, we affirm the Court of Appeals' reversal of summary judgment.

Accordingly, the case is remanded to the trial court for proceedings consistent

with this opinion.

All sitting. Minton, C.J.; Cunningham, Hughes and Keller, JJ., concur.

Wright, J., concurs in part and dissents in part by separate opinion in which

Noble and Venters, JJ., join.

WRIGHT, J., CONCURRING IN PART AND DISSENTING IN PART: While I

concur with the majority insofar as it affirms the Court of Appeals' holding

regarding the Philadelphia Indemnity Insurance policy, I respectfully dissent as

to the Encompass Indemnity Company policy.

Ultimately, my view boils down to a simple premise: a reasonably

prudent person purchasing insurance should not have to wrestle to divine the

meaning of overly technical, vague, and legalistic terms; nor should he have to

flip between unclear policy provisions to ascertain what his policy covers.

Society benefits from contracts—from people fulfilling their promises. I would

hold the exclusion unenforceable for two reasons. First, it would force

insurance companies to find a way to clearly and unmistakably state what a

plan covers and what it does not. Second, it would level the playing field so

that a reasonably prudent purchaser of insurance would be capable of

understanding the terms and provisions of a policy. This would go a long way

, in ensuring that consumers get what they bargain for.

18
 The majority indicates that all Tryon had to do was to read his policy to

know whether he was covered. I disagree. We cannot hold the average person

to the same standard as we hold ourselves. We cannot forget that we have

gone to school, practiced law (some of us in the very area of insurance law), sat

on the benches of various courts in this Commonwealth and risen to the

Supreme Court of Kentucky. We simply cannot expect the average person to

have the same level of understanding we do when reading these contracts.

Even if the majority believes that an average person would understand

this insurance policy, it is fatally easy to overestimate the average person's

ability to understand legal concepts, language, and construction of contracts.

It can be extremely difficult to set aside all of our background, education, and

experience to determine what would be clear and easily understood by an

average person. The typical consumer of insurance is unaccustomed to

referencing various sections and subsections in order to ferret out the meaning

of a term. Yet, the majority implies he should easily be able to do just that in

order to know what is covered and what is not.

What is the reading level of the average adult? The Literacy Project

Foundation's published statistics show that fifty percent of adults cannot read

a book written at an eighth-grade level. (http://literacyprojectfoundation.org/

community/statistics). According to the Clear Language Group "[t]he average

reading level of American adults is about seventh to eighth grade level."

(http://www.clearlanguagegroup.com/readability) . The Clear Language Group

goes on to clarify that even though readability scores are given as a "grade

19
level," that does not mean that an individual who has completed that grade

level will understand the text. Id. There are many factors that affect

understanding and the grade level is merely a determination if you are in the

right "ballpark."

I used an online software tool (found at http:/ /www.online-

utility.org/english/readability_test_and_improve.jsp) to calculate readability by

typing in the ninety-eight words that were the passages that the majority relied

on in determining that Appellant was not covered under these circumstances.

The actual document would have been much more difficult than the analysis

showed, because of such factors as: the length of the entire document (one-

hundred-thirteen pages); the fact that the document was written with many

subsections; and the need to reference various sections in order to understand

any particular phrase. The analysis determined that, according to the Gunning

Fog Index, a person would need 13.96 years of formal education to understand

the text on the first reading. The approximate representation of the U.S. grade

level needed to comprehend the limited text that was analyzed was:

Flesch Kincaid Grade level 12.88

ARI (Automated Readability Index) 10.05

SMOG 15.00

This one-hundred-thirteen-page document would be much more difficult for

the average American to read and understand than the majority believes.

This is further complicated by the way in which most insurance policies

are sold. The person fills out an application and submits it to the insurance

20
company along with payment. The insurance company decides if it will insure

the individual. If accepted, the individual is then mailed the insurance policy.

(We do not know if these were the actual steps in this case because evidence

was not taken on this issue.) The purchaser of the insurance is then left with

the task of reading, understanding, and determining what his insurance

coverage is and the dangers of all the exceptions. The purchaser then would

have to determine whether to renegotiate any problem areas, purchase

additional insurance, or begin searching for a new insurance policy. An

average American could easily be overwhelmed with the task.

Furthermore, the majority deviates from nearly seventy years of

precedent in this Court's construction of insurance policies. In 1950, our

predecessor Court stated, "[a] policy or contract of insurance ordinarily is to be

construed liberally in favor of the insured and strictly as against the insurer."

Koch v. Ocean Acc. & Guar. Corp., 313 Ky. 220, 224, 230 S.W.2d 893, 895

(1950). Likewise, for nearly a half century, this Court has held, "exceptions

and exclusions [of insurance policies] should be strictly construed so as to

make insurance effective." State Auto. Mut. Ins. Co. v. Trautwein, 414 S.W.2d

587, 589 (Ky. 1967). In fact, we have said, "as to the manner of construction of

insurance policies, Kentucky law is crystal clear that exclusions are to be

narrowly interpreted and all questions resolved in favor of the insured." Eyler

v. Nationwide Mut. Fire Ins. Co., 824 S.W.2d 855, 859 (Ky. 1992)(citing Koch v.

Ocean Accident & Guaranty Corp., 313 Ky. 220, 230 S.W.2d 893 (1950); Webb

v. Kentucky Farm Bureau Ins. Co., Ky. App., 577 S.W.2d 17 (1978)). While

21
these long-held tenets of our law are firmly established, I also agree that, "[t]he

rule of strict construction against an insurance company certainly does not

mean that every doubt must be resolved against it . . . [because] the policy

must receive a reasonable interpretation consistent . . . [with] the plain

meaning and/or language of the contract." St. Paul Fire & Marine Ins. Co. v.

Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226 (Ky. 1994).

In Bidwell v. Shelter Mut. Ins. Co., 367 S.W.3d 585, 588 (Ky. 2012), this

Court unanimously held:

[t]o be enforceable, Kentucky law requires a limitation of insurance

coverage, such as a permissive user step-down provision, to be

`clearly stated in order to apprise the insured of such limitations.'

St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870

S.W.2d 223, 227 (Ky.1994). [N]ot only is the exclusion to be

carefully, expressed, but . . . the operative terms clearly defined.

Id.

(Emphasis added.) The majority's opinion alters this Court's precedent by

holding that owned-but-not-scheduled exclusions of underinsured motorist

insurance policies are enforceable as long as they "expressly apprise insureds

of the exclusion," without the additional requirement that the operative terms

be clearly defined. I believe the Court should not break with its precedent and

should, instead, continue to require the policy to clearly define its operative

terms.

22
 In its exclusions, Encompass lists losses the company does not cover.

Specifically, the policy states:

[w]e do not provide Underinsured Motorists Coverage for bodily

injury sustained by any covered person . . . [w]hile that covered

person is operating or occupying a motor vehicle owned by, leased

by, furnished to, or available for the regular use of a covered

person if the motor vehicle is not specifically identified in this

policy under which a claim is made.

Encompass's policy also defines the operative term "covered person" as

"[y]ou for the ownership, maintenance or use of any vehicle, except while

occupying, or when struck by, a vehicle owned by you which is not insured for

this coverage under this policy." We will examine these policy provisions in

turn.

First, the policy fails to define a phrase used in its exclusions. It is

unclear what constitutes a "motor vehicle . . . not specifically identified in this

policy under which a claim is made." This term could potentially mean motor

vehicles covered under the policy. However, that is not the only possible

meaning. "Identified" could also mean a vehicle "excluded by endorsement," as

contemplated elsewhere in the policy—as that vehicle would be "identified" by

policy documents.

Just like the exclusion provision in Bidwell, Encompass's policy

exclusion, "leaves the policyholder guessing as to this provision's meaning."

23
Bidwell, 367 S.W.3d at 590-91. "And since the policy is drafted in all details by

the insurance company, it must be held strictly accountable for the language

used. Wolford v. Wolford, 662 S.W.2d 835 (Ky. 1984)." Eyler, 824 S.W.2d at

859-60. Thus, "when ambiguities exist, we resolve them against the drafter 'in

order to circumvent the technical, legalistic and complex contractual terms

which limit benefits to the insured.' Simon v. Conti Ins. Co., 724 S.W.2d 210,

213 (Ky.1986) (quoting R.H. Long, The Law of Liability Insurance, § 5.10B)."

Bidwell, 367 S.W.3d at 588-89.

The majority holds that owned-but-not-scheduled exclusionary

provisions are enforceable "so long as they expressly apprise insureds of the

exclusion." And the majority concludes that the Encompass exclusion meets

that standard. I disagree. In order for the apprisal to be express, the provision

must be "[c]learly and unmistakably communicated; [or] stated with directness

and clarity." EXPRESS, Black's Law Dictionary (10th ed. 2014). Encompass

failed to unmistakably communicate the parameters of the exclusion. As this

Court unanimously said:

"An essential tool in deciding whether an insurance policy is

ambiguous, and consequently should be interpreted in favor of the

insured, is the so-called 'doctrine of reasonable expectations."'

[Simon v. Continental Ins. Co., 724 S.W.2d 210, 212 (Ky. 1986).]

We explained in Simon that "[t]he gist of the doctrine is that the

insured is entitled to all the coverage he may reasonably expect to

be provided under the policy. Only an unequivocally conspicuous,

24
 plain and clear manifestation of the company's intent to exclude

coverage will defeat that expectation." Id. (internal citation and

quotation marks omitted).

Bidwell, 367 S.W.3d at 589 (Ky. 2012).

Furthermore, the majority uses the policy's definition of "covered person"

to support its claim that "the policy is in fact a clear and unambiguous

statement that the policy does not pay benefits for= vehicles it does not insure."

However, this is a misstatement of the material terms of the policy.

The definition of covered person reads "[y]ou for the ownership,

maintenance or use of any vehicle . . . . "34 (Emphasis added.) Thus, contrary to

the majority's contention, the policy covers virtually any vehicle used by the

insured. The sole exception under the definition of "covered person" is for

those vehicles owned by the insured but not covered under this policy. 35

Ther fore,hadTryonbe nridnghisfriend'smot rcy lewhenhe xperi nced

an underinsured loss (assuming that motorcycle was not available for his

regular use, pursuant to the policy's exclusionary provisions), Encompass

34 The syntax of the phrase "you for the ownership, maintenance or use" frankly
puzzles me and further supports my contention that the language throughout the
policy relating to underinsured motorists coverage is, indeed, ambiguous.
35 If one applies the language from the underinsured motorists exclusion
instead of the definition of covered person, the corpus of what the policy excludes
potentially changes. Instead of whether the vehicle is covered under this policy, the
determinative factor is whether a vehicle owned by the insured is specifically identified
in the policy—further evidence of the plan's ambiguity relating to underinsured
motorists coverage.

25
would pay underinsured motorists benefits to him, irrespective of the liability

insurance carrier for his friend's motorcycle. As this hypothetical illustrates, it

is clear that the policy does, in fact, pay benefits for vehicles it does not insure.

Therefore, the majority's statement that "the policy is in fact a clear and

unambiguous statement that the policy does not pay benefits for vehicles it

does not insure," is simply incorrect.

Finally, I point out that the policy does not use the language

"except . . . a vehicle owned by you which is not insured under this policy"

when describing the "Underinsured Motorists Losses We Do Not Cover," but

rather, only when defining "covered person." That begs the question: which is

it? Does the exclusion mean any vehicle owned by the insured but not covered

by Encompass? Or, does the exclusion apply to motor vehicles not "identified"

under this policy? This key difference between policy terms creates further

ambiguity. Whether the ambiguity arises from structural issues or whether it

is a result of inconsistent or confusing language, courts should interpret the

ambiguous terms in favor of the insured and in favor of insurance coverage—

just as courts of this Commonwealth have done for more than a half century.

It is for these reasons that I dissent and would affirm the Court of

Appeals.

Noble and Venters, JJ., join.

26
COUNSEL FOR:

PHILADELPHIA INDEMNITY INSURANCE
COMPANY, INC.:
Robert E. Stopher
Robert Dmitri Bobrow
Boehl, Stopher & Graves, LLP.

ENCOMPASS INDEMNITY COMPANY:
William Baxter Orberson
Patricia Colleen Le Meur
James Crockett Wade
Phillips Parker Oberson & Arnett, PLC.

COUNSEL FOR RICHARD TRYON:

A. Thomas Johnson

COUNSEL FOR AMICUS CURIAE: KENTUCKY DEFENSE COUNSEL, INC.:

Eric Allen Hamilton
Coleman Lockmiller & Bond

COUNSEL FOR AMICUS CURIAE: KENTUCKY JUSTICE ASSOCIATION:

Kevin Crosby Burke
Burke Neal PLLC.

27