LECIA TRUE V. MABLE RAINES and PREFERRED RISK FINANCIAL, INC.
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AMENDED : APRIL 2, 2003
RENDERED : MARCH 2,0,2003
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2000-SC-0493-DG
LECIA TRUE
ON REVIEW FROM COURT OF APPEALS
1998-CA-2684-MR
LINCOLN CIRCUIT COURT NO . 97-CI-00164
V.
MABLE RAINES and
PREFERRED RISK FINANCIAL, INC .
AND
APPELLEES
2000-SC-0495-DG
PREFERRED RISK FINANCIAL, INC .
APPELLANT
ON REVIEW FROM COURT OF APPEALS
1998-CA-2684-MR
LINCOLN CIRCUIT COURT NO. 97-CI-00164
V.
LECIA TRUE and
MABLE RAINES
APPELLEES
OPINION OF THE COURT BY JUSTICE KELLER
REVERSING
I . ISSUES
This appeal presents two (2) significant issues concerning underinsured motorist
(UIM) coverage:
11. FACTUAL BACKGROUND
On January 20, 1996, Raines, while operating an automobile owned by her, was
injured in a two-vehicle accident caused by True . At the time of the accident : (1) True
had liability coverage of $100,000.00 under a policy with Farm Bureau ; (2) Raines had
UIM coverage of $50,000.00 under a policy with Preferred Risk; and (3) Rice, with
whom Raines lived in a residence they jointly owned, had UIM coverage of $50,000.00
under a separate Preferred Risk policy that was identical to Raines's policy. Neither
Raines's policy nor Rice's policy listed the other on the declaration page as a "named
insured," but each person was listed on the other's policy as a driver "residing in your
household ." No additional premium was charged for this listing .
Raines filed a negligence suit against True seeking damages that she claimed to
have suffered as a result of the automobile accident . In the same action, Raines
named her UIM insurer, Preferred Risk, as a defendant and sought UIM benefits under
both her policy and Rice's policy in the event that True's liability insurance was
insufficient to compensate her fully for her damages . Preferred Risk filed a cross claim
against True seeking subrogation from her for any sums it was required to pay Raines
under the UIM coverage of either policy.
At the close of Raines's proof on the second day of trial, and after an offer by
Farm Bureau to settle Raines's claim against its insured, True, for its policy limits of
$100,000 .00, Raines, True, and Farm Bureau tentatively agreed to settle for the policy
limits . Preferred Risk, however, wanted to preserve its subrogation rights against True,
and thus followed what is commonly referred to as the "Coots procedure" (shorthand for
the procedure described in Coots v . Allstate Insurance Co.) by agreeing to substitute
its funds for the $100,000 .00 that Farm Bureau had agreed to pay Raines.
The trial continued and, at the close of the proof, the trial court directed a verdict
in favor of Raines as to True's liability to her and instructed the jury solely on damages .
The jury determined Raines's damages to be $219,071 .00, 2 and pursuant to the jury's
finding, the trial court entered a judgment awarding Raines: (1) a $109,071 .00 judgment
against True ; (2) a $50,000 .00 judgment against Preferred Risk under the terms of her
UIM policy; and (3) a judgment against Preferred Risk and True "for the balance of the
verdict in the sum of $5.0,000 .00 to be allocated between those Defendants contingent
upon a ruling by the Court as to the applicability of [the UIM coverage under Rice's
policy] ." The trial court also entered a $50,000 .00 judgment for Preferred Risk on its
subrogation cross claim against True.
However, Preferred Risk and True filed separate motions to alter, amend or
vacate the judgment, and, upon consideration of these motions, the trial court reduced
Raines's total recovery to $150,000 .00 instead of the $209,071 .00 awarded in the
original judgment. After ruling that Raines, "[b]y settling with the Defendant and
accepting the settlement amount," had waived "any claim for additional recovery
against [True]," the trial court reduced Raines's judgment against True to $100,000 .00.
And, after concluding that Raines was not entitled to stack the UIM benefits under
'Ky., 853 S .W .2d 895 (1993) (hereinafter " Coots").
2The total award consisted of verdicts for the following : medical expenses $19,920 .00 ; physical pain and mental suffering - $50,000.00 ; lost wages - $24,151 .00;
impairment of Raines' power to earn money in the future - $125,000.00. Pursuant to
KRS 304 .39-020(2),the trial court then deducted basic reparations benefits of
$10,000 .00 from the total jury verdict of $219,071 .00 .
Rice's policy because she was not a named insured thereunder, the trial court awarded
Raines a judgment on only $50,000 .00 against Preferred Risk.
Raines appealed, and the Court of Appeals, sitting en banc: (1) unanimously
reversed the trial court's judgment to the extent that it relieved True of liability to Raines
for that portion of the jury's award in excess of the insurance coverage of Farm
Bureau's liability coverage and Preferred Risk's UIM coverage ; and (2) in a vote divided
eight (8) to six (6) in favor of reversal, held that Raines was entitled to stack the UIM
coverage under Rice's policy. As to the Coots issue, the majority opinion stated that
"the trial court's characterization of the negotiations which transpired between True and
Raines as a `settlement,' subject to enforcement after the matter had been concluded
by a jury verdict, is clearly erroneous," and that "the trial court erred as a matter of law
in interpreting Coots as relieving True of liability to Raines for the jury's award in excess
of the insurance coverage." With respect to the UIM coverage issue, the majority
reasoned that Rice's policy "created an ambiguity implicating the doctrine of reasonable
expectations" and that "it was reasonable for Raines and Rice to expect that they
purchased coverage entitling the `driver' named in their respective policies to have all
the protections and coverage afforded thereunder ." Accordingly, the Court of Appeals
remanded the case for the trial court to enter judgment for Raines in the amount of
$209,071 .00 . 3 We now reverse the decision of the Court of Appeals and reinstate the
judgment of the trial court .
3 Because the Court of Appeals held that there was no settlement (and True was
thus personally liable to Raines) and that Raines could stack the UIM coverage under
both her policy and Rice's policy, the holding of the Court of Appeals would result in a
judgment against True for the total amount of the damage award -- $209,071 .00 -- of
which Farm Bureau would pay its policy limits of $100,000 .00 . Preferred Risk would
pay $100,000 .00, but would receive a judgment in that amount against True on its
Continued on next page . . .
Ill. ANALYSIS
A. STACKING OF UIM BENEFITS
Utilizing a rule of interpretation known as the reasonable expectation doctrine,
which resolves an insurance-policy ambiguity in favor of the insured's reasonable
expectation ,4 the Court of Appeals held that Raines was entitled to UIM benefits under
Rice's policy with Preferred Risk . The reasonable expectation doctrine "is based on the
5
premise that policy language will be construed as laymen would understand it and
applies only to policies with ambiguous terms 6 -- e.g ., when a policy is susceptible to
two (2) or more reasonable interpretations .' Under the reasonable expectations
doctrine, when such an ambiguity exists, the ambiguous terms should be interpreted "in
favor of the insured's reasonable expectations . ,8 However, "[t]he mere fact that [a
party] attempt[s] to muddy the water and create some question of interpretation does
not necessarily create an ambiguity," 9 Only actual ambiguities, not fanciful ones, will
trigger application of the doctrine .'o
subrogation claim . Raines would be entitled to recover the remaining unpaid portion of
her judgment -- $9,071 .00 -- from True personally.
4Simon v. Continental Ins. Co . , Ky., 724 S .W .2d 210 (1986).
5Ohio Cas . Ins . Co. v. Stanfield , Ky., 581 S .W .2d 555, 560 (1979).
6Consolida ted American Ins . Co . v. Anderson, Ky.App ., 964 S.W .2d 811 (1997).
7St . Paul Fire & Marine Ins . Co . v. Powell-Walton-Milward, Inc. , Ky., 870 S .W .2d
223, 227 (1994).
8 BLACK's LAW DICTIONARY 1273 (7th ed . 1999) .
9Sutton v. Shelter Mut. Ins . Co. , Ky .App ., 971 S .W.2d 807, 808 (1997) .
loSt. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc. , supra note 7 at
226 ; KRS 304.14-360 ("Every insurance contract shall be construed according to the
entirety of its terms and conditions as set forth in the policy, and as amplified, extended,
Continued on next page . . .
We find the reasonable expectation doctrine inapplicable in this case because
we discern no ambiguity within Rice's Preferred Risk policy as to whether that policy
extended UIM coverage to Raines. In fact, the policy's UIM coverage provisions
explicitly extend coverage only to "an `insured"':
We will pay . . . damages which an `insured' is
legally entitled to recover from the owner or
operator of an `underinsured motor vehicle'
because of bodily injury:
1 . Sustained by an `insured' ; and
2 . Caused by an accident .
The policy defines "insured," for the purpose of UIM coverage, as:
1.
2.
3.
You or any 'family member.'
Any other person 'occupying your covered auto .'
Any person for damages that person is entitled to
recover because of 'bodily injury' to which this
coverage applies sustained by a person described in
1 . or 2 . above.
And, in its general definitions provision, Rice's policy provided :
A. Throughout this policy, 'you' and 'your' refer to:
1 . The 'named insured' shown in the
Declarations ; and
2 . The spouse if a resident of the same
household .
F. "Family member" means a person related to you by
blood, marriage or adoption who is a resident of your
household . This includes a ward or foster child .
We find no ambiguity in the policy's terms defining those persons entitled to UIM
coverage, and, in fact, we view those terms as clear and unambiguous . And, because,
at the time of the accident, Raines was not an "insured, "named insured," "spouse," nor
or modified by any rider, indorsement, or application attached to and made a part of the
policy." Id .).
"family member," nor was she "occupying [the named insured's] covered auto," Raines
was not entitled to UIM coverage under the terms of Rice's Preferred Risk policy.
Raines's only connection to Rice's policy is her listing on the policy's declarations
page as a driver of his covered automobile . Raines argued below that, because Rice's
policy listed her as a "driver," but failed to define or otherwise explain the significance of
the word "driver," the policy created an ambiguity that implicates the reasonable
expectations doctrine . Although a majority of the Court of Appeals was persuaded by
this argument, we conclude that the policy's failure to define "driver" does not constitute
an ambiguity that reasonably permits Raines's interpretation of the policy's coverage.
When faced with an identical allegation, the appellate courts of Connecticut recently
found no ambiguity as to UIM coverage:
The declarations page in this case, even though it lists the
plaintiff as an additional driver without defining the rights
attaching to that designation, does not, per se, create an
ambiguity in the policy's definition of a "Covered person" for
a particular coverage. In our view, the policy is not
reasonably susceptible to more than one reading with regard
to a listed driver's right to underinsured motorist coverage .
For underinsured motorist coverage, the policy clearly and
unambiguously defines "you," the person covered in the
underinsured portion of the policy as the "`Named insured'
shown in the Declarations . . . . " Because these terms are
unambiguous, the coverage provisions as a whole are
unambiguous ."
" Kitmirdes v. Middlesex Mutual Assurance Co . , 783 A.2d 1079, 1083 (Conn.
App. Ct. 2001) (footnote omitted), aff'd 796 A.2d 1185, 1186 (Conn . 2002) ("The
thoughtful and comprehensive opinion of the Appellate Court properly resolved the
issue in this certified appeal . A further discussion by this court would serve no useful
purpose .") .
Further, former Chief Judge Gudgel, in his separate opinion dissenting from the result
reached by the majority of the Court of Appeals as to this issue, accurately describes
the purpose and significance of Raines's "driver" designation :
It is not unusual for a liability insurance company to list on
a policy's declarations sheet those persons who, in addition
to the named insured, will be driving the insured vehicle .
This not only serves an underwriting purpose, but it also
eliminates potential disputes as to whether the driver's use
was permissive, so as to obligate the insurer to provide
liability coverage under the policy in the event that person
subsequently is involved in an accident in the insured
vehicle. 12
Because the UIM provisions of Rice's policy clearly and unambiguously defined
"insured" (the person provided UIM coverage thereunder), the policy is not ambiguous
as to whether Raines was provided UIM benefits . She was not; and the trial court
properly ruled that Raines could not recover UIM benefits under Rice's policy.
B. COOTS SETTLEMENT AND TRUE'S PERSONAL LIABILITY
In Coots , this Court established a procedure whereby an injured party with UIM
coverage could settle with a tortfeasor and the tortfeasor's liability carrier and still retain
a claim against his or her UlM insurer . '3 Under the Coots procedure, when the injured
party, the tortfeasor and the tortfeasor's liability carrier tentatively agree to settle the
12
Accord _id . 1083 ("The plaintiff also argues that a listing of additional drivers
would be superfluous if the listed driver had no right to invoke all the coverages under
the policy . This argument overlooks the liability coverage that the policy afforded to her
father-in-law . That coverage presumably looks to the listing as dispositive evidence that
the covered vehicle was used with permission ."). We observe that this explanation
appears to ring true for the policy in question, which specifically excludes UIM coverage
for any person "[u]sing a vehicle without a reasonable belief that that person is entitled
to do so ."
13
The 1998 General Assembly substantially codified this procedure into KRS
304 .39-320 . As the effective date of the statutory change, July 15, 1998, occurred
subsequent to both the January, 1996 date of the accident, and the February, 1998 trial
Continued on next page . . .
injured party's claim against the tortfeasor for the policy limits, the injured party may
preserve his or her UIM claim by giving notice to its UIM insurer of the parties' intent to
settle and affording the UIM insurer the opportunity to preserve its subrogation rights
against the tortfeasor by paying the injured party the policy limit amount. If the UIM
insurer elects not to substitute its own funds by paying the liability insurer's policy limits
to the injured party: (1) the UIM insurer forfeits its subrogation rights against the
tortfeasor for any amounts that it is later required to pay the injured party under its UIM
coverage; (2) the tortfeasor's liability carrier pays the injured party the settlement
amount ; (3) the tortfeasor is released from all further liability to either the injured party
or UIM insurer ; and (4) the injured party may proceed against his or her UIM insurer for
any damages in excess of the liability insurer's policy limits . However, if the UIM insurer
elects to preserve its subrogation rights against the tortfeasor and substitutes its own
funds for the settlement amount by paying the policy limit to the injured party, the UIM
carrier : (1) has subrogation rights against the tortfeasor's liability carrier for the
substituted amount paid to the injured party ; and (2) retains its subrogation rights
against the tortfeasor for any amount that it is required thereafter to pay the injured
party under its UIM coverage .
The trial court found that True, her liability carrier Farm Bureau, Raines and her
UIM carrier Preferred Risk, utilizing the Coots procedure, effectuated a settlement of
Raines's claim against True . After its own review of the record, however, the Court of
Appeals found the trial court's finding clearly erroneous . We disagree with the Court of
Appeals because the trial court's finding was supported by substantial evidence . In
in the case, KRS 304 .39-320 is not applicable to this case .
-10-
particular, we observe that, although Raines has asserted a different state of facts on
appeal, the record reflects that Raines filed a post-verdict motion asking the trial court
to enforce the parties' Coots settlement . The body of that motion read :
Comes the plaintiff, Mable Raines, by counsel, and moves
the Court to compel the defendants, Lecia M . True, by and
through her insurer, Kentucky Farm Bureau Mutual
Insurance Company, and Preferred Risk Financial, Inc., to
immediately pay to the plaintiff the sum of $100,000 .00,
which represents the amount of the settlement agreement
achieved among these parties on the second day of trial and
prior to the return of a verdict by the jury.
In support of this Motion, the plaintiff states that on
February 25, 1998, after the return of the verdict by the jury
counsel for the plaintiff and counsel for the defendants .
agreed that rather than Preferred Risk issuing a check to the
plaintiff pursuant to Coots v. Allstate Insurance Company,
Ky., 853 S .W .2d 895 (1993), and then Farm Bureau being
required to issue a check to Preferred Risk for $100,000.00,
that it would be most time effective and cost effective for
Farm Bureau to directly issue a check in the sum of
$100,000 .00 to the plaintiff. More than thirty (30) days have
now elapsed since those terms of payment were agreed
upon by counsel for all parties, and yet no payment has
been made to the plaintiff pursuant to the settlement
agreement .
Shortly thereafter, the trial court entered an order sustaining Raines's motion and
directing Farm Bureau to pay Raines the $100,000 .00 settlement amount, which Farm
Bureau subsequently did .
Having determined that the parties reached a Coots settlement, we now address
the question of whether that settlement released True from any personal liability to
Raines .
Raines argues that because no settlement in the traditional sense was
reached between Raines and True, True was not released from further personal liability
to Raines . We disagree . We recognize that, technically, no settlement is reached
between the injured person and the tortfeasor when the UIM carrier follows the Coots
procedure and substitutes its funds for those of the tortfeasor's liability insurance carrier
by paying its UIM insured the contemplated settlement amount. 14 However, Coots
clearly contemplates that the procedure it adopted would release the tortfeasor from
further liability to the UIM insured :
What the statutory change does is recognize that the
subrogation right cannot be absolute because in some
instances it is inimical to the right of the UIM insured to settle
with the tortfeasor and his liability insurer for the policy limits.
This is so because, before making such payment of the
policy limits the tortfeasor's insurer will routinely demand, as
was done in the present cases, full release and
indemnification against future claims against the tortfeasor
by the UIM carrier. Indeed the liability carrier's obligation to
its own insured to defend in good faith requires that it extract
such a release rather than leave its own insured
unprotected . The 1991 statutory change recognizes that
there is potential for this irreconcilable clash of interest .
If UIM coverage is to accomplish its remedial purpose as
intended by the MVRA, the UIM carrier's contractual
subrogation right must not obstruct the UIM insured's right to
settle for the policy limits even if it means releasing
subrogation .
This is not to say the UIM carrier's contractual subrogation
should be totally disregarded . It should be disregarded only
to the extent it is in conflict with the UIM insured's superior
right to accept the tortfeasor's policy limits when offered,
when to do so requires executing a release and indemnity
agreement .
Again, turning to Widiss rUninsured and Underinsured
Motorist Insurance , 2d Ed . (1992)] ยง 43.5, p . 122:
" . . . if the claimant has initiated a lawsuit
against the tortfeasor, the settlement
agreement will usually require the claimant to
agree to have that suit `dismissed with
prejudice'so that no further legal action is
possible .
14Washington v. Milbank Ins . Co. , 562 N.W .2d 801, 806 n .3 (Minn . 1997);
Nationwide Mut. Ins. Co. v. State Farm Auto . Ins . Co ., Ky., 973 S .W .2d 56, 58 (1998).
- 1 2-
Addressing those cases where the UIM insurer believes
the tortfeasor has substantial assets beyond his policy limits
which should be pursued when those limits are paid, the
Minnesota Supreme Court has offered UIM insurers a viable
solution to their dilemma in Schmidt v. Clothier, 338 N .W .2d
256, 265 (Minn . 1983) :
"The underinsurer, however, will have this
subrogation right against the tortfeasor only if it
has paid underinsurance benefits prior to
release of the tortfeasor. Thus, the
underinsurer is entitled to notice of the
tentative settlement and an opportunity to
protect those potential rights by paying
underinsurance benefits before release ."
Nor do we write without recognizing that the claimant may
execute a release recognizing he intends to release not only
the tortfeasor, but his own UIM carrier, specifying he has
been "fully compensated for all damages and the release
constitutes payment in satisfaction of all claims ." Richardson
v. Eastland, Inc. , Ky., 660 S .W.2d 7, 9 (1983).' 5
And, because a UIM insurer's substitution of funds "operates as the equivalent of a
settlement between the party claiming damages and the tort-feasor because the tortfeasor is released from further liability to the party claiming damages, 06 we hold that,
when a Coots settlement has been effectuated, the tortfeasor is released from further
personal liability to the injured party.
While a Coots settlement does not release a tortfeasor's subrogation liability to
an injured party's UIM insurer, such settlement does release the tortfeasor from any
further liability to the injured party . To hold otherwise would remove the underlying
purpose behind the Coots procedure. After all, if a Coots settlement does not release
the tortfeasor from any further personal liability to the injured party, the tortfeasor would
1 5 Coots v. Allstate
Ins . Co . , supra note 1 at 901-903 (all emphasis added) .
16Washington v. Milbank Ins . Co., supra note 14 at 806 n .3.
- 1 3-
have no incentive to participate in a Coots settlement." Prior to Coots, an injured party
could not settle with a tortfeasor with a release from further liability to the tortfeasor and
still retain his or her claim against his UIM insured . Only after Coots was an injured
party permitted to do so, and, in turn, the Coots procedure allows the UIM insurer to
elect whether to preserve its subrogation rights . If the UIM insurer does not elect to
preserve its subrogation rights, the tortfeasor will certainly obtain a release from the
injured party and thereby be released from any further liability to the injured party and,
as a result of its inferred waiver, to the UIM insurer as well. To hold that the tortfeasor
is not released from further personal liability to the injured party if the UIM insurer does
elect to preserve its subrogation rights would abrogate an essential component of a
Coots settlement .
We hold, therefore, that, under Coots, a tortfeasor's liability carrier's settlement
offer is conditioned upon a release of its insured from any further liability to the injured
party, and the injured party's acceptance of the UIM insurer's payment of the
contemplated settlement is an acceptance of that condition and a release of the
tortfeasor from any further liability to the injured party. The injured party's UIM insurer,
however, preserves its subrogation claim against the tortfeasor for any amount that it is
thereafter required to pay its insured under its UIM coverage . Accordingly, by virtue of
the Coots settlement in this case, True was released from any further liability to Raines
personally . The trial court's final judgment thus properly adjudicated all claims .
" Nationwide Mut . Ins. Co . v. State Farm Auto . Ins . Co . , supra note 14 at 57 .
- 1 4-
IV. CONCLUSION
For the above reasons, we reverse the decision of the Court of Appeals and
reinstate the Lincoln Circuit Court's judgment in its entirety.
Lambert, C .J . ; Cooper, Graves, Johnstone, Stumbo, JJ., concur. Wintersheimer,
J., concurs in result only.
COUNSEL FOR APPELLANT, LECIA TRUE :
Robert R . Baker
Rankin, Baker & Teater
PO Box 225
Stanford, Kentucky 40484
COUNSEL FOR APPELLEE, MABLE RAINES :
Paul V . Hibberd
Connelly, Kaercher & Stamper
1610 Kentucky Home Life Building
Louisville, Kentucky 40202
COUNSEL FOR APPELLEE, PREFERRED RISK FINANCIAL, INC .:
O. Lee Cave, III
Clark, Ward & Cave
601 West Market Street
Suite 403
Louisville, Kentucky 40202
AI Miller
428 North Second Street
Central City, Kentucky 42330
COUNSEL FOR APPELLANT, PREFERRED RISK FINANCIAL, INC. :
O . Lee Cave, III
Clark, Ward & Cave
601 West Market Street
Suite 403
Louisville, Kentucky 40202
AI Miller
428 North Second Street
Central City, Kentucky 42330
Debbie D . Sandler
Clark, Ward & Cave
Republic Corporate Center
601 West Market Street
Suite 403
Louisville, Kentucky 40202
- 1 6-
Benjamin T. Owings
McKenzie & Peden, PSC
650 Starks Building
Louisville, Kentucky 40202
COUNSEL FOR APPELLEE, LECIA TRUE:
Robert R. Baker
Rankin, Baker & Teater
PO Box 225
Stanford, Kentucky 40484
COUNSEL FOR APPELLANT, MABLE RAINES:
Paul V. Hibberd
Connelly, Kaercher & Stamper
1610 Kentucky Home Life Building
Louisville, Kentucky 40202
~uyrrmr C~.auzf of firufurhV
2000-SC-0493-DG
LECIA TRUE
APPELLANT
ON REVIEW FROM COURT OF APPEALS
1998-CA-2684-MR
LINCOLN CIRCUIT COURT NO. 97-CI-00164
V.
MABLE RAINES and
PREFERRED RISK FINANCIAL, INC.
AND
APPELLEES
2000-SC-0495-DG
PREFERRED RISK FINANCIAL, INC .
APPELLANT
ON REVIEW FROM COURT OF APPEALS
1998-CA-2684-MR
LINCOLN CIRCUIT COURT NO. 97-CI-00164
V.
LECIA TRUE and
MABLE RAINES
APPELLEES
ORDER
The Opinion of the Court by Justice Keller rendered March 20, 2003 shall
be amended on page 9, footnote 13, by changing language in the third line of the
footnote and continuing to page 10, as attached hereto . Said modification does
not affect the holding .
Entered : April 2, 2003 .
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