Rehearing Denied Dec. 19, 2013.
Douglas Loy Hoots, Lexington, Tyler Griffin Smith, Timothy Edward Davis, Lexington, Counsel for Appellant.
Charles Clay Adams, Jr., Lexington, Counsel for Appellee.
Pennsylvania resident Karen Hodgkiss-Warrick brought suit to recover for injuries she sustained in a motor vehicle accident near Mt. Vernon, Kentucky while riding in a vehicle driven by her daughter, Heather, also a Pennsylvania resident. Because her daughter's liability coverage was insufficient to fully compensate Hodgkiss-Warrick, she included a claim against her own insurance carrier, State Farm Mutual Automobile Insurance Company, for underinsured motorist coverage pursuant to a policy issued in Pennsylvania and covering a vehicle that Hodgkiss-Warrick registered, garaged and used exclusively in Pennsylvania. This underinsured motorist (UIM) claim against State Farm by a Pennsylvania resident injured in Kentucky gives rise to the choice of law and public policy issues which are now before us.
Under longstanding choice of law principles recognized by this Court, Pennsylvania law governs the dispute between Hodgkiss-Warrick and her carrier regarding policy coverage, and both the trial court and Court of Appeals ruled accordingly. However, the two courts reached entirely different results. Applying the plain language of the insurance contract and Pennsylvania law, the trial court concluded that Hodgkiss-Warrick was not entitled to underinsured motorist coverage because her policy disallowed coverage when she was injured in an underinsured vehicle owned or regularly used by a " resident relative." Hodgkiss-Warrick resided
with her daughter, rendering Heather a " resident relative" and foreclosing any underinsured motorist coverage for Hodgkiss-Warrick on these facts. The Court of Appeals acknowledged that Pennsylvania law applies but found a recent " shift" in Kentucky public policy that would prohibit enforcement of a policy provision that disallows UIM coverage when the insured is injured in a vehicle owned or regularly used by a relative with whom the insured resides. Accordingly, the Court of Appeals panel adjudged Hodgkiss-Warrick was entitled to UIM coverage despite the plain language of her policy. We granted State Farm's motion for discretionary review and reverse. Pennsylvania law applies to this insurance coverage dispute and, contrary to the appellate panel's surmise about Kentucky public policy, there is no prohibition on the type of UIM exclusion at issue here, an exclusion expressly approved by this Court in Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437 (1999).
The underlying facts are not in dispute. On May 17, 2008, Karen Hodgkiss-Warrick suffered serious injuries in a two-vehicle accident in Mt. Vernon, Kentucky, at the intersection of Kentucky Highway 25 and the northbound entrance ramp to Interstate 75. Hodgkiss-Warrick was a passenger in a vehicle leased, insured, and operated at the time by her twenty-three year-old daughter, Heather Warrick. Also in the car were two friends, Pamela and Heather Reynolds, another mother-daughter pair. The four women, all Pennsylvania residents, had traveled from Pennsylvania to Burnside, Kentucky, where Hodgkiss-Warrick hoped to buy a special breed of puppy. They were on their way back to Pennsylvania when the accident occurred. Pamela and Heather Reynolds were also injured in the accident, as was the driver of the other car, Natalie Bussell, a resident of Brodhead, Kentucky. Hodgkiss-Warrick, the Reynoldses, and Bussell all brought tort actions against Heather Warrick in the Rockcastle Circuit Court, and those claims were eventually settled for the limits of Heather's liability insurance coverage with GEICO— $25,000 per person and $50,000 per accident, the minimum liability coverage required under Kentucky law. Kentucky Revised Statute (KRS) 304.39-100 and KRS 304.39-110. It is undisputed that Hodgkiss-Warrick's share of the settlement fell far short of the medical expenses she incurred.
Given that shortfall, Hodgkiss-Warrick included with her tort claim a claim for underinsurance benefits pursuant to two policies issued by State Farm. One of the policies was issued to Hodgkiss-Warrick in November 2007 for her own vehicle, and it provides underinsured motorist benefits of up to $50,000 per person and $100,000 per accident. The other policy was first issued to Hodgkiss-Warrick's husband, John Warrick, in 2001, and was certified to have been in effect when the accident occurred in May 2008. That policy, covering John Warrick's vehicle and under which he is the only named insured, also provides UIM benefits of up to $50,000 per person and $100,000 per accident.
State Farm denied both claims. With respect to John Warrick's policy, the company noted that an " insured" under that policy's underinsurance provisions is defined, in pertinent part, as " (1) you [and] (2) resident relatives." In pertinent part, the policy defines " you" as " the named insured ... [and] the spouse of the first person shown as a named insured if the spouse resides primarily with that named insured." Similarly, " resident relatives" are limited to persons who " reside[ ] primarily with the first person shown as a named insured on the Declarations Page."
Because at the time of the accident Hodgkiss-Warrick and John Warrick had been separated and living apart for about eight-and-a-half months, State Farm maintained that Hodgkiss-Warrick did not qualify as an insured under her husband's policy. Hodgkiss-Warrick has not pursued UIM coverage under John Warrick's policy before this Court and that claim is not before us.
As for the second policy, Hodgkiss-Warrick's own State Farm policy, she does not contend that she is entitled to underinsured benefits under the plain terms of the insurance contract. The policy provides that the company " will pay compensatory damages for bodily injury an insured is legally entitled to recover from the owner or driver of an underinsured motor vehicle," but it plainly excludes from the definition of " underinsured motor vehicle" " a land motor vehicle: ... (2) owned by, rented to, or furnished or available for the regular use of you or any resident relative."  " Resident relative" is defined in pertinent part as " a person, other than you, who resides primarily with the first person shown as a named insured oh the Declarations Page and who is: (1) related to that named insured or his or her spouse by blood ..." Shortly after Hodgkiss-Warrick separated from her husband, she and Heather moved to Oakdale, Pennsylvania into a former duplex which had been renovated and converted to a single residence. Hodgkiss-Warrick and her daughter had been living together in that residence for about eight months at the time of the accident. State Farm maintains that Heather was a " resident relative," as defined in Hodgkiss-Warrick's policy, and thus that the vehicle leased to Heather is not an " underinsured motor vehicle" under the policy's terms. Hodgkiss-Warrick concedes that that is the policy's plain meaning, but she contends, and the Court of Appeals agreed, that in the circumstances of this case the exclusion of Heather's vehicle from the policy's UIM coverage so offends the public policy of this state that Kentucky law, rather than Pennsylvania law, should apply and that under Kentucky law a " regular use" provision excluding UIM coverage is unenforceable.
I. Under Our Choice of Law Principles, Pennsylvania Law Governs the Insurance Coverage Dispute.
The questions presented are all purely legal ones concerning the scope of coverage provided by an insurance contract. Our standard of review, therefore, is de novo. Dowell v. Safe Auto Ins. Co., 208 S.W.3d 872 (Ky.2006). We may begin our analysis by noting that for many years now we have applied § 188 of the Restatement (Second) of Conflict of Laws (1971) to resolve choice of law issues that arise in contract disputes. In Lewis v. American Family Ins. Group, 555 S.W.2d 579 (Ky.1977), this Court abandoned the traditional rule according to which a contract's validity was determined by reference to the laws of the state in which it was made and adopted the Restatement's approach. Under the applicable section,
[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
Restatement (Second) Conflict of Laws § 188(1) (1971). Among the factors a court making that determination should consider are the place or places of negotiating
and contracting; the place of performance; the location of the contract's subject matter; and the domicile, residence, place of incorporation and place of business of the parties. Id. § 188(2). With respect to casualty insurance contracts in particular, a key factor is the expectation of the parties concerning the principal location of the insured risk. Id. § 193. Lewis involved two Indiana residents injured in a motor vehicle accident in Kentucky as a result of the negligence of an uninsured Kentucky motorist. This Court invoked § 188 in concluding that Indiana law would govern the dispute between the injured Indiana residents and the insurance carrier as to uninsured motorist coverage available under two policies issued in Indiana to cover automobiles registered, garaged and principally used in that state. Lewis, 555 S.W.2d at 581-82.
Here, Hodgkiss-Warrick, a Pennsylvania resident, entered into an auto insurance contract in Pennsylvania that makes specific reference to Pennsylvania law and that covers, primarily, the vehicle she registered, garaged, and used exclusively in Pennsylvania. The fortuitous fact that the accident occurred in Kentucky is far outweighed by the significant relationship Pennsylvania has with the parties and the insurance transaction, and so, absent some compelling reason not to apply our general choice-of-law rule, Pennsylvania law should control. See Lewis, 555 S.W.2d at 579 (applying Indiana law to insurance coverage dispute between Indiana residents injured in Kentucky and their insurer); Poore v. Nationwide Mut. Ins. Co., 208 S.W.3d 269 (Ky.App.2006) (same); Bonnlander v. Leader National Ins. Co., 949 S.W.2d 618 (Ky.App.1996) (same); Snodgrass v. State Farm Mut. Auto. Ins. Co., 992 S.W.2d 855 (Ky.App.1998) (applying Virginia law to Virginia insureds' dispute with their carrier over UIM coverage for Kentucky accident).
II. Kentucky Public Policy Does Not Prohibit the Policy Provision at Issue and, Therefore, Kentucky Law Does not Override Pennsylvania Law in this Case.
Hodgkiss-Warrick maintains that there is such a compelling reason to refrain from applying Pennsylvania law, namely Kentucky public policy disfavoring the type of policy exclusion which precludes her recovery of UIM benefits. As noted above, § 188 of the Restatement (Second) provides that the rule of that section is to be applied in light of the more general choice-of-law principles listed in § 6. That section provides that choice-of-law rules are to be applied in accord with the forum state's relevant policies and with basic policies underlying the particular field of law. It is, of course, a well-settled
principle of general contract law that courts are not to enforce contracts in contravention of public policy. Applying that principle in Hurd v. Hodge, 334 U.S. 24, 34-35, 68 S.Ct. 847, 92 L.Ed. 1187 (1948), the United States Supreme Court stated that
[t]he power of the federal courts to enforce the terms of private agreements is at all times exercised subject to the restrictions and limitations of the public policy of the United States .... Where the enforcement of private agreements would be violative of that policy, it is ...