STEPHEN DAVIS v. USAA CASUALTY INSURANCE COMPANY
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RENDERED: JUNE 2, 2006; 2:00 P.M.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-002053-MR
STEPHEN DAVIS
v.
APPELLANT
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE MARY C. NOBLE, JUDGE
ACTION NO. 02-CI-04848
USAA CASUALTY INSURANCE COMPANY
AND
NO. 2004-CA-002147-MR
USAA CASUALTY INSURANCE COMPANY
v.
APPELLEE
CROSS-APPELLANT
CROSS-APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE MARY C. NOBLE, JUDGE
ACTION NO. 02-CI-04848
STEPHEN DAVIS; EMILY A. COX;
AND LEXINGTON-FAYETTE URBAN
COUNTY GOVERNMENT
CROSS-APPELLEES
OPINION
AFFIRMING IN PART; VACATING AND REMANDING IN PART
** ** ** ** **
BEFORE:
BARBER AND McANULTY, JUDGES; POTTER, SENIOR JUDGE.1
McANULTY, JUDGE: Appellant Stephen Davis appeals a grant of
summary judgment in the Fayette Circuit Court to appellee USAA
Casualty Insurance Co. (hereinafter USAA) on the basis that
Davis failed to give timely notice of his accident before
seeking underinsured motorist’s (UIM) coverage from USAA.
Davis
argues on appeal2 that the motion for summary judgment was
improperly granted because an insurance carrier alleging lack of
notice as a defense must demonstrate a probability of
substantial prejudice.
Davis also asserts that the filing of
the UIM claim against USAA was well within the time allowable
for such claims under Kentucky law.
The automobile collision in question occurred on
September 25, 2001, involving a vehicle owned and operated by
Emily Cox and a vehicle owned by the Lexington Fayette Urban
1
Senior Judge John W. Potter sitting as Special Judge by assignment of the
chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
KRS 21.580.
2
Davis filed a motion for reconsideration of the summary judgment the day
after it was granted. Davis also filed a notice of appeal to this Court.
The trial court entered an order reversing its decision as to the summary
judgment. Davis moved this Court to remand the case to the trial court
and/or dismiss the appeal. USAA opposed those motions on grounds that the
motion for reconsideration was not proper or timely.
This Court, in an order entered February 4, 2005, agreed that the
motion for reconsideration was not timely. The three-judge motion panel
found that Davis’s motion was not specific as to the grounds for relief and
that his memorandum in support of the motion was filed outside of the time
limits of the trial court’s jurisdiction. The panel concluded that the case
was properly brought before this Court by Davis’ filing of a notice of
appeal, and the case was ripe for appellate review.
Though the parties make arguments in this appeal regarding the
appropriateness of the motion for reconsideration, we will not revisit our
final decision on that matter herein.
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County Government (LFUCG) and operated by Davis, who was at the
time of the accident working for LFUCG as a police officer.3
USAA maintains that summary judgment was properly granted based
on Davis’ failure to provide notice of the accident or the
litigation against the tortfeasor, Cox, for approximately two
and a half years after the accident.
USAA notes that the
summary judgment was granted without any counter-affidavits
being filed.
Our review of a trial court’s grant of a summary
judgment concerns whether the circuit judge correctly found that
there were no issues as to any material fact and that the moving
party was entitled to a judgment as a matter of law. Pearson ex
rel. Trent v. National Feeding Systems, Inc., 90 S.W.3d 46, 49
(Ky. 2002).
Summary judgment is appropriate where the movant
shows that the adverse party could not prevail under any
circumstances.
Id.
The function of summary judgment is to
terminate litigation when it appears that it would be impossible
for the respondent to produce evidence at trial warranting
judgment in his or her favor.
Id.
When considering the notice a policy holder must give
regarding a claim, each case is governed by its own
circumstances and the terms of the insurance contract in
question.
Davis argues that in this case his notice was
3
Davis received payment for his medical expenses from the LFUCG workers’
compensation plan.
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reasonable given that it was not until he knew the extent of his
damages and the fact that the tortfeasor was underinsured that
he could make a UIM claim against USAA.
He contends that he did
not know that he would be unable to continue working as a police
officer since for a time he was able to perform light duty.
When the lawsuit was filed against Cox, he and his counsel did
not know the amount of Cox’s liability insurance limits.
He
states that he did not know that Cox had only $50,000 as a
liability limit until his opportunity to review interrogatories
and responses to requests for production in March 2003.
He
asserts that he promptly reviewed his USAA insurance policy and
determined that he had underinsured motorist coverage, and then
moved for leave to amend his complaint in June 2003.
The policy in this case, nevertheless, states simply,
“We must be notified promptly of how, when and where an accident
or loss happened.”
The policy further requires that the person
seeking coverage must cooperate with USAA in the investigation,
settlement, or defense of any claim or suit, including
submission to physical exams, authorization for obtaining
medical records, and submission of proof of loss.
Finally, the
policy states that: “No legal action may be brought against us
until there has been full compliance with all the terms of this
policy.”
USAA argues, as it did below, that Davis completely
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failed to comply with the terms of the policy and summary
judgment was therefore appropriate.
There was no question that there was a significant
delay in notice.
Davis is correct in stating, however, that
before a carrier is entitled to judgment for breach of a notice
provision, it must show that it was prejudiced as a result.
We
agree with Davis that USAA thus failed to show that it was
entitled to judgment as a matter of law.
Under Kentucky law,
once it is demonstrated that the insured failed to provide
timely notice, or, for that matter, a similar breach of the
policy requirements, the burden of proof is on the insurance
company to prove that it has been prejudiced by the breach.
Jones v. Bituminous Casualty Corp., 821 S.W.2d 798, 803 (Ky.
1991).
The question is
whether it is reasonably probable that the
insurance carrier suffered substantial
prejudice from the delay in notice. If the
evidence on this issue is in conflict, or if
reasonable minds could differ as to what the
evidence proves in this regard, the issue is
one for the trier of fact.
Id.
Davis asserted that USAA had not shown prejudice at the
hearing on the summary judgment motion.
USAA contends that its prejudice was obvious in that
it was unable to perform its own investigation of the accident,
and the investigation performed and information supplied to USAA
came from “adverse parties.”
Davis maintains that USAA suffered
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no actual prejudice.
He argues that it is unreasonable to
believe that USAA would have performed any better or more
extensive investigation than that conducted by the primary
party, Cox, and her counsel.
He states that following a
thorough inquiry it was determined that he and Cox were the only
witnesses to the accident, and both would be available for
depositions.
As for damages, he argues that Davis’ medical
records are available, and that USAA will actually benefit from
the existence of independent medical evaluations conducted at
the request of Davis’ employer, LFUCG, for workers’ compensation
purposes.
The trial court did not examine this issue before
ruling on the summary judgment motion.
We conclude that the
question, under Jones, of whether USAA was prejudiced is an
issue of fact which must be considered by the court below.
Therefore, we remand this case for a determination of whether
USAA has shown substantial prejudice from the failure of notice
and cooperation in this case.
USAA makes a supplemental argument that summary
judgment was proper because the UIM claim was untimely filed in
terms of statutes of limitation.
USAA alleges that because the
limitations period for Davis to file a claim for bodily injury
under KRS 304.39-230(6) of the Motor Vehicle Reparations Act
would be two years from the date of the accident (since no
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reparations payments were made), that should be the period of
limitations applicable to his UIM claim.
We disagree.
We
believe that this issue was settled in Gordon v. Kentucky Farm
Bureau Ins. Co., 914 S.W.2d 331 (Ky. 1995).
It was held that
the fifteen year statute of limitations for contracts governs
such actions rather than the statute of limitations for tort
actions in the Motor Vehicle Reparations Act, KRS 304.39-230(6).
Id. at 333.
If USAA required a shorter limitations period, it
could have included one in the insurance policy as long as that
shorter limitation was for a reasonable period.
Id.
As USAA
did not dictate a shorter limitation, it is bound by the
statutory limitation of fifteen years.
CROSS-APPEAL
USAA files a cross-appeal asking that we consider
whether its consent pursuant to KRS 304.39-320(3) may be held to
be substantial compliance when payment pursuant to KRS 304.39320(4) was not made within thirty days.
USAA argues that the
time period was not sufficient for it to comply with the statute
given the lack of notice from its insured, Davis.
The Underinsured Motorist Coverage statute, KRS
304.39-320, subsections (3) and (4) state:
(3) If an injured person or, in the case of
death, the personal representative agrees to
settle a claim with a liability insurer and
its insured, and the settlement would not
fully satisfy the claim for personal
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injuries or wrongful death so as to create
an underinsured motorist claim, then written
notice of the proposed settlement must be
submitted by certified or registered mail to
all underinsured motorist insurers that
provide coverage. The underinsured motorist
insurer then has a period of thirty (30)
days to consent to the settlement or
retention of subrogation rights. An injured
person, or in the case of death, the
personal representative, may agree to settle
a claim with a liability insurer and its
insured for less than the underinsured
motorist’s full liability policy limits. If
an underinsured motorist insurer consents to
settlement or fails to respond as required
by subsection (4) of this section to the
settlement request within the thirty (30)
day period, the injured party may proceed to
execute a full release in favor of the
underinsured motorist’s liability insurer
and its insured and finalize the proposed
settlement without prejudice to any
underinsured motorist claim.
(4) If an underinsured motorist insurer
chooses to preserve its subrogation rights
by refusing to consent to settle, the
underinsured motorist insurer must, within
thirty (30) days after receipt of the notice
of the proposed settlement, pay to the
injured party the amount of the written
offer from the underinsured motorist’s
liability insurer. Thereafter, upon final
resolution of the underinsured motorist
claim, the underinsured motorist insurer is
entitled to seek subrogation against the
liability insurer to the extent of its
limits of liability insurance, and the
underinsured motorist for the amounts paid
to the injured party.
(Emphasis added.)
The statute must be read as a coherent whole giving consistent
meaning to the terms throughout the statute.
-8-
Cosby v.
Commonwealth, 147 S.W.3d 56 (Ky. 2004).
In this case, USAA
essentially agreed to the terms of the statute by relating to
Davis and Cox its decision to substitute payment, but no payment
was made pursuant to section (4).
USAA reports that its failure to make the payment was
due to the dual problems of the lack of earlier notice from
Davis and its inability to complete the procedures for issuing
payment.
USAA reiterates that it did not receive notice of the
accident or litigation until it received a summons and amended
complaint on March 17, 2004.
(An amended complaint was filed on
August 1, 2003, but no summons was issued nor answer served on
USAA at that time.)
On March 26, 2004, Davis’ counsel sent a
letter by facsimile to USAA’s claims examiner purporting to
grant a 30 day extension of time in which to file an answer, and
enclosed a copy of the police report concerning the accident,
Cox’s insurance information, and “relevant medical reports”
consisting of one-page medical reports from two physicians.
On April 5, 2004, Davis’ counsel sent to USAA notice
by a certified letter, pursuant to KRS 304.39-320(2), of the
proposed settlement between Davis and the underinsured motorist,
Cox.
This letter, also known as a Coots letter4, starts the
running of the time period in KRS 304-39-320(3) and (4).
4
It was
Pursuant to Coots v. Allstate, 853 S.W.2d 895 (Ky. 1993), the opinion which
approved the procedure for an underinsured motorist carrier to protect its
subrogation rights when its insured proposes to settle with the tortfeasor,
now codified in KRS 304.39-320(3)and (4).
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received by USAA on April 8.
USAA received the additional
medical records it had requested from Davis’ counsel on April
20, 2004.
On May 7, 2004, USAA notified Davis’s counsel by
facsimile and mail that it would make advance payment of an
amount equal to Cox’s policy limits of $50,000 and asked to be
advised as to the exact manner in which the check was to be made
payable.
USAA reports that both the existence of a workers’
compensation lien from the LFUCG and not having Davis’ counsel’s
federal tax identification number precluded issuance of a check
until that information could be determined.
USAA states that
under federal tax regulations, it could not issue a check
without Davis’s counsel’s federal tax identification number or
withholding a significant portion thereof for mandatory tax
withholding.5
Communications difficulties ensued between the
parties, and the check was not received by Davis’ counsel until
May 17, 2004.
Thereafter, Davis moved for declaratory relief as
to his entitlement to execute a full release to Cox, and the
circuit court held a hearing.
The circuit court determined that
the statute reflected a “narrow window of opportunity expressly
5
At the hearing on this question, counsel for Davis agreed that this was the
law. On appeal, Cox argues that the check could have been issued and the tax
identification number supplied in a year-end return to the IRS, or that USAA
could have withheld the standard backup withholding amount from the check.
Cox believes USAA’s argument is a mere excuse for its inability to reach a
decision under the statute and timely act on it.
-10-
crafted by the legislature,” and that it contained mandatory
language which in the context of the statute established that it
was to be given strict enforcement.
Thus, the court held that
since USAA had failed to timely substitute payment of Cox’s
liability limits, Davis was entitled to accept Cox’s insurance
proceeds and provide her a full release.
USAA argues on appeal that it did not have sufficient
time to make an informed decision as to whether to substitute
payment due to the circumstances of this case.
USAA argues that
the problem arose because Davis violated the policy provisions
requiring prompt notice by an insured.
USAA argues that the
insured can place its insurance carrier in the “impossible
predicament” of having to make an uninformed decision as to the
election required by KRS 304.39-320(3) and (4).
He also argues
that Davis would be benefiting from his failure to abide by his
contractual obligations to his underinsured motorist carrier.
USAA argues that the words of a statute need not be
given their literal meaning when to do so would lead to an
absurd or wholly unreasonable conclusion, citing Bailey v.
Reeves, 662 S.W.2d 832, 834 (Ky. 1984).
USAA argues the
procedure is not workable and it defies common sense.
USAA
requests that we determine whether its substantial compliance
was suitable, or if the statute requires the actual payment of
funds to the injured party.
-11-
In order to determine whether strict compliance or
substantial compliance is sufficient to satisfy a statutory
provision, it first must be determined whether the applicable
provision is mandatory or directory.
129 S.W.3d 839, 842 (Ky. 2004).
Knox County v. Hammons,
In determining whether a
provision is mandatory or directory, form is not as important as
the legislative intent, which is derived from “consideration of
the entire act, its nature and object, and the consequence of
construction one way or the other.”
Id. at 843, citing Skaggs
v. Fyffe, 266 Ky. 337, 98 S.W.2d 884, 886 (1936).
The governing
standard is that if the directions given by the statute to
accomplish a given end are violated, but the given end is in
fact accomplished without affecting the real merits of the case,
then the statute may be regarded as merely directory.
Id.
We agree with the trial court that KRS 304.39-320(3)
and (4) provide mandatory requirements and “substantial
compliance” is not available as an exception.
In addition to
the mandatory language, there is a penalty for failure to comply
with the 30 day time limit in that that the opportunity to
preserve subrogation rights is lost.
When reading the statute,
it is the evident intention of the legislature that settlement
decisions be finalized expeditiously.
In addition, the
legislature evidently intended for the injured party to receive
the payment, rather than a mere agreement to pay, for the same
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reason of avoiding delay.
There is no way to allow compliance
outside the given time limit without impinging on the
underinsured motorist’s interest in resolution within the thirty
days.
This interpretation squares with the legislature’s
statement of “Policy and purpose” in KRS 304.39-010(2) of the
Motor Vehicle Reparations Act, “[t]o encourage prompt medical
treatment and rehabilitation of the motor vehicle accident
victim by providing for prompt payment of needed medical care
and rehabilitation”; and KRS 304.39-010(5), “[t]o reduce the
need to resort to bargaining and litigation through a system
which can pay victims of motor vehicle accidents without the
delay, expense, aggravation, inconvenience, inequities and
uncertainties of the liability system[.]”
The legislature evidently believed that thirty days
was a sufficient amount of time to make a decision as to
preserving subrogation rights and to tender payment.
Furthermore, we do not believe that USAA has shown that the
statute is impossible to comply with, particularly on the record
before us which only details the difficulty of one insurance
carrier’s attempt to follow the statute.
We do not agree that
USAA has shown that the statutory time period is absurd or lacks
common sense.
Finally, we do not agree that Davis has obtained any
sort of benefit or advantage since he is entitled to payment
-13-
either way, and presumably has no preference as to who issues
the check.
Thus, we affirm the declaratory judgment of the
circuit court.
For all the foregoing reasons, we vacate the summary
judgment in favor of USAA Casualty Insurance Co. and remand for
a determination of whether it was prejudiced by the lack of
timely notice from Davis.
We affirm the declaratory judgment
which allowed Davis to accept Cox’s insurance proceeds and
provide her a full release.
ALL CONCUR.
BRIEF FOR APPELLANT/CROSSAPPELLEE:
Thomas K. Herren
Herren & Adams
Lexington, Kentucky
BRIEF FOR APPELLEE/CROSSAPPELLANT, USAA CASUALTY
INSURANCE COMPANY:
Reford H. Coleman
Robert D. Johnston
Coleman Lochmiller & Bond
Elizabethtown, Kentucky
BRIEF FOR CROSS-APPELLEE EMILY
COX:
Whitney Dunlap III
Burnam, Thompson, Simons,
Dunlap and Fore, P.S.C.
Richmond, Kentucky
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