ZURICH AMERICAN INSURANCE COMPANY V. JOURNEY OPERATING, LLC, ET AL.
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RENDERED : OCTOBER 21, 2010
TO BE PUBLISHED
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2009--SC-000796-WC
ZURICH AMERICAN INSURANCE
COMPANY
V.
DATIEdahallrig 11
APPELLANT
ON APPEAL FROM COURT OF APPEALS
CASE NO . 2009-CA-000279-WC
WORKERS' COMPENSATION BOARD NOS. 05-151 AND 06-341
JOURNEY OPERATING, LLC;
ANGELA JEFFERS, INDIVIDUALLY
AND AS ADMINISTRATRIX OF THE
ESTATE OF PATRICK JEFFERS,
DECEASED;
SUSIE BELL, INDIVIDUALLY AND AS
ADMINISTRATRIX OF THE ESTATE
OF WILLIAM BELL, DECEASED ;
MYERS COMPLETION, INC . ;
HONORABLE DONNA H. TERRY,
CHIEF ADMINISTRATIVE LAW
JUDGE; AND
WORKERS' COMPENSATION BOARD
APPELLEES
OPINION OF THE COURT
AFFIRMING
This appeal concerns whether KRS 342.125(1) permits an Administrative
Law Judge (ALJ) to reopen a final award in order to prevent an insurer from
benefiting from its constructive fraud on the tribunal. If so, the question
becomes whether substantial evidence supports the finding of constructive
fraud and decision to estop the insurer from denying liability at ,reopening. The
-[V
Court of Appeals reversed a decision of the Workers' Compensation
Board, reinstating the ALJ's decision by holding that an ALJ has such
authority; that the evidence supports the finding of constructive fraud on
the part of Zurich-American Insurance Company (Zurich) ; and that
Zurich must comply with the ALJ's order to continue paying benefits
based on its admitted liability under Tennessee law.
Appealing, Zurich asserts that the ALJ lacked jurisdiction to
consider the matter at issue as well as the authority to reopen. Zurich
also asserts that no evidence supported the finding of constructive fraud .
We disagree with both assertions and affirm.
The workers' compensation claims that underlie the present action
were considered together. The claimants, Angela Jeffers and Susie Bell,
are the widows of Patrick Jeffers and William Bell, both of whom were
Tennessee residents employed by Myers Completion, Inc . (Myers) . Myers
was a Tennessee corporation that maintained oil and gas wells and had
no office in Kentucky. The men were killed in Kentucky, in an explosion
that occurred while they were servicing a well owned by Journey
Operating LLC (Journey) . The Uninsured Employers' Fund (UEF) was
joined as a party to the claims after the Office of Workers' Claims
determined that Myers did not have workers' compensation coverage in
Kentucky . Journey was joined as a party with potential up-the-ladder
liability at the UEFs request. I Kentucky Employers' Mutual Insurance
(KEMI) covered Journey's Kentucky workers' compensation liability.
Zurich provided Myers'Tennessee workers' compensation
coverage. Having determined that the widows were entitled to benefits
under Tennessee law, Zurich paid the decedents' medical expenses, paid
some funeral expenses, and began to issue the widows checks for weekly
survivors' benefits under its Tennessee policy. Zurich maintained that
the policy did not provide coverage for the widows' Kentucky claims but
continued to pay benefits under the Tennessee policy throughout
litigation of the claims.
The Benefit Review Conference Memorandum in Mrs . Jeffers'claim
lists only "which carrier is responsible for the payment of benefits" as
being at issue . Mrs. Jeffers testified that Zurich paid the funeral home
$7,500 towards her husband's final expenses and that she received other
workers' compensation checks but did not cash them. The Benefit
Review Conference Memorandum in Mrs . Bell's claim indicates that
Zurich paid $7,500 for her husband's funeral expense and continued to
pay Tennessee income benefits of $322 .05 per week. The contested
issues included: 1 .) responsible insurer - whether Zurich had coverage
KRS 342.610(2) deems a contractor who subcontracts work that is a regular
or recurrent part of its business to an uninsured subcontractor to be the
employer of the subcontractor's employees and to be liable for their workers'
compensation benefits .
for a Kentucky injury; 2 .) coverage under the Act for Zurich and KEMI ;
and 3 .) credit to KEMI for benefits paid by Zurich.
The AIJ determined on February 9, 2007 that the Kentucky
Workers' Compensation Act covered the claims . Noting that Zurich
admitted liability for benefits afforded by Tennessee law but denied
liability for benefits afforded by Kentucky law, the ALJ found that
Zurich's policy covered benefits awarded under Tennessee's workers'
compensation system but failed to cover those awarded under the
Kentucky Act. Noting that the Act requires every employer in Kentucky
to compensate employees who are injured ;2 requires employers to insure
that liability ; 3 and imposes liability on a contractor to compensate the
injured employee of an uninsured subcontractor, 4 the ALJ found Journey
to be a contractor that was liable for the decedents' injuries because
Myers'liability was uninsured in Kentucky . As a consequence, the ALJ
ordered Journey to pay the survivors' benefits provided in KRS
342 .750(l) . Noting, however, that KRS 342 .670(2) provides credit for
compensation paid under another jurisdiction's workers' compensation
law, the ALJ granted Journey credit for the death and income benefits
"paid and owing" under the Tennessee policy that Zurich issued to
Myers .
2
KRS 342 .610(1} .
KRS 342.340(l) .
4 KRS 342.610(2) .
3
Journey filed a petition for reconsideration in each claim, but
Zurich did not. Journey's petitions requested the ALJ to specify the
amount of weekly credit Journey would receive due to Zurich's payments
under Tennessee law . Zurich responded that the petitions were attempts
to reargue the merits ; that the ALJ interpreted Zurich's policy correctly;
and that Zurich could not be compelled to pay Kentucky workers'
compensation benefits "in addition to the benefits it had already paid (or
had offered to pay) under Tennessee law."
The ALJ denied Journey's petitions . Finding that the credit
awarded for benefits "paid and owing" provided "sufficient protection and
explanation of Journey's rights and responsibilities," the ALJ noted that
"the amount of payments under the Tennessee policy will change and
vary with time as the children became emancipated or in the event of
remarriage." Neither Myers nor Zurich objected to the latter finding
based on a contrary interpretation of their continuing obligations under
the Tennessee Workers' Compensation Act. Nor did they appeal the
ALA decision.
Journey appealed both decisions, asserting that the ALJ erred by
failing to find that Zurich's policy provided coverage ; that Zurich should
be estopped from denying coverage because its agent failed to inform
Myers that he needed separate coverage for employees who worked in
Kentucky ; and that the ALJ erred by failing to specify the amount of
weekly credit to which it was entitled due to Zurich's payments under
Tennessee law. The Board affirmed the awards on November 8, 2007,
finding that the credit protected Journey's rights adequately .
Zurich ceased paying Tennessee benefits when the Board's
decision became final. This appeal concerns subsequently-filed motions
to reopen in which Journey sought an order requiring Zurich to resume
paying weekly income benefits . Relying on Wheatley v. Bryant Auto
Services as providing the ALA with authority to reopen on the ground of
mistake, Journey asserted that Zurich's conduct affected the credit the
ALJ awarded and violated multiple sections of the regulations adopted
under the Unfair Settlement Practices Act6 as well as KRS 342.3 10 .
Journey reasoned that it was liable for benefits only because Myers had
no Kentucky insurance for its employees; that Zurich not only admitted
liability for benefits owed under Tennessee law throughout litigation of
the widows' Kentucky claims but also continued to pay the benefits
throughout the litigation; and that the widows' awards granted Journey
credit for benefits due and owing under Tennessee law.
Zurich asserted that Journey was not entitled to reopen and relied
on Tennessee's election of remedies doctrine as a basis to deny any
liability for additional benefits . Zurich argued that its admission of an
obligation to pay benefits under Tennessee law during litigation did not
oblige it to continue paying benefits "after the widows elected to pursue
5 860 S.W.2d :767 (Ky. 1993) (an ALJ may reopen a final award sua sponte in
order to correct a mistake in applying the law to the facts as found).
6 803 KAR 25 :240.
claims under Kentucky's Workers' Compensation Act and were awarded
benefits."
The ALJ rejected Zurich's jurisdictional argument, finding that
KRS 342.125 permitted reopening because Journey alleged that Zurich
should be estopped from denying liability insofar as it committed
constructive fraud in the initial proceeding. The ALJ found that the
reopening involved the type of mistake contemplated in Messer v. Drees7
and also involved constructive fraud because Zurich's conduct, though
not actually fraudulent, produced the consequences and legal effects of a
fraudulent action .$ Moreover the doctrine of collateral estoppel
precluded re-litigation of Zurich's liability for continuing payments under
the Tennessee policy because it had a full opportunity to litigate the
matter in the initial proceeding . 9
Finding that Zurich committed constructive fraud and was
estopped from denying liability, the ALJ noted that Zurich planned
during the initial litigation to terminate benefits based on its
interpretation of Tennessee's election of remedies doctrine. Yet, Zurich
failed to disclose its plan to the ALJ and represented through its conduct
during the initial litigation and appeal that it would continue to pay
benefits under its Tennessee policy. As a consequence, the other parties
7 382 S .W.2d 209 (Ky. 1964) .
8 See Kendrick v. Bailey Vault Co., Inc., 944 S.W.2d 147 (Ky. App. 1997) .
9 See 17 COUCH ON INSURANCE 239 :34 (3rd ed. 2006) .
received no opportunity to address Zurich's plan and the ALJ received no
opportunity to consider it when deciding the initial claim. .
Having found that Zurich committed constructive fraud in the
initial proceeding, the ALJ ordered it to continue making payments
under the Tennessee policy and to tender within ten days a statement of
the bi-weekly amounts due each plaintiff. The ALJ denied Zurich's
motion under KRS 342 .310 for costs against Journey and KEMI, finding
that no evidence supported the motion. Finally, the ALJ gave Zurich ten
days to show cause why it should not be held liable for defending
Journey's motion to reopen without reasonable grounds.
Zurich appealed, arguing that the ALJ lacked jurisdiction to decide
the matters at issue as well as the authority to reopen . The Board
agreed with Zurich and reversed . Journey then sought review in the
Court of Appeals.
Noting that KRS 342.325 and KRS 342 .125(1) give an ALJ the
jurisdiction and authority to reopen upon an allegation of mistake or
fraud, Journey argued that Zurich pursued a fraudulent litigation
strategy that worked Wits own advantage and Journey's detriment.
Journey reasoned that the ALJ based the award on Zurich's
representations that it owed and was paying survivors' benefits under the
Tennessee policy but that Zurich then denied liability after the award
became final. Convinced that Chapter 342 permitted reopening under
the circumstances and that Zurich committed constructive fraud on the
tribunal, the Court of Appeals reversed and reinstated the decision
rendered at reopening.
Appealing, Zurich continues to assert that the ALJ lacked
jurisdiction to decide the matter at issue and that no evidence supported
the finding of constructive fraud on the tribunal . We disagree.
I. JURISDICTION.
Although KRS 342 .305 gives a circuit court jurisdiction over
matters concerning the enforcement of a final award, KRS 342 .325 gives
an ALJ jurisdiction over all questions arising under Chapter 342 . KRS
342 .125(1) permits an ALJ to reopen a final workers' compensation
award based upon an allegation of mistake 10 or fraud . 11 KRS
342 .125(1)(a) includes an allegation of fraud. or constructive fraud on the
tribunal. 12
The ALJ recognized properly that the present reopening differed
from a simple attempt to enforce a final award and differed from a
dispute between insurance carriers over reimbursement for previously
paid benefits, such as occurred in Custard Ins. Adjusters, Inc. v.
Aldridge. 13 At issue was whether Zurich's conduct during the initial
to KRS 342 .125(1)(c) .
11 KRS 342 .125(1)(a).
12
13
See, for example, Crummies Creek Coal Co. v. Hensley, 144 S.W.2d 206 (Ky.
1940); Ray v. Black Mountain Corporation, 72 S.W.2d 477 (Ky. 1934) .
57 S.W.3d 284 (Ky. 2001) (ALJ lacked jurisdiction to decide dispute between
two carriers over reimbursement of erroneously-paid benefits where dispute
did not involve a provision of Chapter 342) .
workers' compensation proceeding amounted to a constructive fraud that
affected the accuracy and integrity of the ALJ's decision and, thus,
estopped Zurich from later denying that it was liable for continued
payments under the Tennessee policy.
II. SUFFICIENCY OF THE EVIDENCE OF CONSTRUCTIVE FRAUD.
Zurich asserts that the ALJ erred by applying the doctrine of
equitable estoppel to preclude it from terminating benefits paid under
Tennessee law because no evidentiary foundation existed for finding that
Zurich engaged in constructive fraud . Zurich maintains that it "properly
represented that it owed benefits by operation of Tennessee law" during
the initial litigation and acted fully within its rights under Tennessee's
election of remedies doctrine by terminating payments after the award
became final because it owed no additional benefits under the Tennessee
policy at that point . Zurich states that the doctrine "completely
terminates any obligation to continue paying benefits pursuant to
Tennessee law when benefits are awarded in any other jurisdiction" and
also states that its "obligation to pay those benefits did not end until the
award of benefits in Kentucky became final ."
Zurich's argument overlooks the fact that these appeals concern
the integrity of judgments in claims that were brought under the
Kentucky Act. A trial court has the inherent power to determine that its
judgments reflect the truth, a power that extends not only to fraud but
also to bad faith, abuse ofjudicial process, deception of the court, and
10
lack of candor to the court. 14 Estoppel is an equitable remedy that
courts often invoke to prevent a party from benefiting from its
misconduct. 15 The facts and circumstances of a case determine the
propriety of resorting to an equitable remedy . 16 Conduct that works a
fraud or constructive fraud on the tribunal and has a detrimental effect
on the accuracy and integrity of a judgment warrants such a remedy.
The facts and circumstances of the present case support the decision to
estop Zurich from denying liability at reopening and order it to continue
paying the benefits for which it admitted both liability and coverage
throughout the initial proceeding.
The widows filed claims against Myers in Kentucky . Zurich knew
that the policy it issued to Myers did not cover Kentucky claims but did
cover Tennessee claims. It also knew that Tennessee's election of
remedies doctrine would bar such a claim if the widows acted
affirmatively to obtain benefits in another state or knowingly and
voluntarily accepted benefits under the law of another state . 17
Acting with that knowledge, Zurich admitted that it was liable for
benefits provided by Tennessee law and paid Tennessee benefits
voluntarily throughout the litigation . Moreover, it failed to object to
either the initial order granting Journey credit for Tennessee benefits
Potter v. Eli Lilly and Co., 926 S.W.2d 449, 455 (Ky. 1996) .
is Akers v. Pike County Board of Education, 171 S.W.3d 740, 743 (Ky. 2005) .
16 Patrick v. Christopher East Health Care, 142 S.W.3d 149 (Ky. 2004) .
14
17
Eadie v. Complete Co., Inc., 142 S.W.3d 288, 291 (Tenn. 2004) .
paid by Zurich or the order on reconsideration, which indicated clearly
that the ALJ construed Zurich's admission of liability for such benefits to
mean that it would continue to pay them in the future . Zurich's
litigation strategy worked to Journey's detriment (and perhaps the
widows) by discouraging the widows from filing Tennessee claims and
obtaining a Tennessee judgment against Zurich until such time as the
election of remedies doctrine would bar them from doing so. Moreover, it
deceived the ALJ .
If allowed to succeed, Zurich's strategy would enable it to avoid
paying the bulk of its admitted liability under Tennessee law by
rendering worthless most of the credit that Journey received against the
widows' awards of income benefits. By misrepresenting its true position
throughout the initial litigation, Zurich denied the parties and the ALJ an
opportunity to address its plan of action and undermined the integrity of
the resulting judgment. Such circumstances warranted an estoppel and
an order requiring Zurich to pay the Tennessee benefits that its policy
covered and for which it admitted having liability initially.
The decision of the Court of Appeals is affirmed.
All sitting. All concur.
COUNSEL FOR APPELLANT,
ZURICH AMERICAN INSURANCE
COMPANY:
A. Stuart Bennett
Jackson Kelly, PLLC
175 East Main Street
Suite 500
P.O . Box 2150
Lexington, KY 40588-9945
COUNSEL FOR APPELLEE,
JOURNEY OPERATING, LLC :
Barry Lewis
Lewis and Lewis Law Offices
151 East Main Street
Suite 100
P.O . Box 800
Hazard, KY 41702-0800
COUNSEL FOR APPELLEE,
ANGELA JEFFERS, INDIVIDUALLY AND
AS ADMINISTRATRIX OF THE ESTATE OF
PATRICK JEFFERS, DECEASED :
Marcus L. Vanover
Law Offices of Howard 0 . Mann, PSC
117 West Vernon Street
Somerset, KY 42501
COUNSEL FOR APPELLEE,
SUSIE BELL, INDIVIDUALLY AND
AS ADMINISTRATRIX OF THE ESTATE OF
WILLIAM BELL, DECEASED :
Paul F. Henderson
301 West Mt . Vernon Street
P.O. Box 783
Somerset, KY 42502
COUNSEL FOR APPELLEE,
MYERS COMPLETION, INC. :
Kimberly K. Van Der Heiden
Allen, Kopet & Associates, PLLC
P.O. Box 34048
Lexington, KY 40588
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