RENDERED: OCTOBER 20, 2016
TO BE PUBLISHED
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2014-SC-000354-DG
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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.
3
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
AmongthewryaspcoftheMVRAindvualmtefor
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." 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).
to 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
"fflusory." 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. Glass22 , 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
30 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
schethiled 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.corn/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. Cont'l 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