United States District Court, E.D. Kentucky, Northern Division, Ashland
ASHLAND HOSPITAL CORPORATION, d/b/a King's Daughters Medical Center, Plaintiff,
RLI INSURANCE COMPANY, Defendant.
MEMORANDUM OPINION AND ORDER
DAVID L. BUNNING, District Judge.
This insurance coverage dispute is before the Court on cross-motions for summary judgment. Defendant RLI Insurance Company contends that it does not have to provide coverage to Plaintiff Ashland Hospital Corporation because Ashland gave untimely notice of a claim. Ashland asserts that notice was timely, but that even if it was not, RLI must show substantial prejudice to deny coverage. The matter is fully briefed and ripe for review. (Docs. # 28, 38, 51, 52, 75, 77-2, 78). Because the Court concludes that Ashland failed to comply with two conditions precedent to coverage by not providing timely notice, and predicts that the Kentucky Supreme Court would not require RLI to show substantial prejudice, Ashland's motion is denied and RLI's motion is granted.
I. FACTUAL AND PROCEDURAL BACKGROUND
The following facts are undisputed. Ashland owns and operates King's Daughters Medical Center in Ashland, Kentucky. On July 25, 2011, the United States Department of Justice issued a subpoena to Ashland as part of a Health Insurance Portability and Accountability Act (HIPAA) investigation. (Doc. # 28-1 at 5). Among other documents, the subpoena requested e-mails, medical records, insurance billings, medical malpractice claims, and employment contracts related to nine doctors associated with Cumberland Cardiology and the Kentucky Heart Institute. (Doc. # 28-2). Ashland ultimately agreed to pay $40.9 million to resolve allegations that it billed federal health care programs for heart procedures that patients did not medically need. (Doc. # 38-2). This insurance coverage dispute stems from that investigation.
Ashland purchased a $15 million directors and officers liability insurance policy from Darwin National Assurance Company (the Primary Policy) covering the time period from October 1, 2010 through October 1, 2011. (Doc. # 28-1 at 5). Ashland also purchased a $10 million excess policy from Defendant RLI Insurance Corporation (the Excess Policy) covering the same time period, which is the policy in dispute. ( Id. at 6). Ashland renewed both policies for October 1, 2011 through October 1, 2012. ( Id. at 7).
Both the Primary Policy and the Excess Policy are "claims-made" policies, as opposed to "occurrence" policies. The Excess Policy's insuring clause followed form to the Primary Policy, stating: "[c]overage hereunder shall then apply in conformance with the terms and conditions of the Primary Policy." (Excess Policy; Doc. # 28-13 at 10).
Ashland notified Darwin of the HIPAA investigation on December 30, 2011. (Doc. # 28-1 at 5). In June 2012, Darwin acknowledged that its policy covered the investigation. ( Id. ). Darwin made its final payment covering the $15 million policy limit in April 2014. ( Id. at 6).
Ashland first gave RLI notice of the HIPAA investigation on June 29, 2012. ( Id. at 8). This set off a string of correspondence between the two parties with a central theme: Ashland asserting RLI had to provide coverage; RLI denying coverage on the basis of late notice. On July 5, 2012, RLI sent Ashland a letter denying coverage on two grounds: (1) Ashland failed to give RLI notice within 30 days of giving notice to Darwin, and (2) Ashland failed to give notice before the policy terminated on October 1, 2011. ( Id. at 8, Ex. 16). A few weeks later, Ashland sent RLI a letter contesting RLI's basis for denial, asking RLI to clarify its position, and inquiring into any prejudice that RLI may have suffered. (Doc. # 28-1 at 8, Ex. 17). RLI responded with a letter stating that the notice requirement was a condition precedent and that it did not have to show prejudice in order to disclaim coverage. (Doc. # 28-1 at 8, Ex. 18).
Nine months later, on April 9, 2013, Ashland asked RLI to reconsider its position because of, among other reasons, the Kentucky Supreme Court's holding in Jones v. Bituminous Casualty Company, 821 S.W.2d 798 (Ky. 1991). (Doc. # 28-1 at 9, Ex. 19). In response, RLI stated that it believed Jones did not apply, and reaffirmed its position on coverage. (Doc. # 28-1 at 9, Ex. 20). Ashland sent RLI another letter, to which RLI did not reply. (Doc. # 28-1 at 10, Ex. 21). This action followed.
In Ashland's Second Amended Complaint, it brings claims for breach of contract, common law failure to act in good faith, and statutory failure to act in good faith in violation of Ky. Rev. Stat. § 304.12-230. (Doc. # 25). In addition, Ashland requests relief under the Declaratory Judgment Act, 28 U.S.C. § 2201. ( Id. ). After filing suit, Ashland gave RLI notice that the Primary Policy had been exhausted. (Doc. # 28-23).
A. Standard of review
A court must grant "summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A genuine dispute of material fact exists when there are "disputes over facts that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When a court reviews cross-motions for summary judgment, it must evaluate each motion on its own merits and draw all facts and inferences in the light most favorable to the nonmoving party. Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991).
B. Breach of contract claim
Kentucky substantive law applies in this diversity case. Hanover Ins. Co. v. Am. Eng'g Co., 33 F.3d 727, 730 (6th Cir. 1994). In Kentucky, "the law of the state with the most significant relationship to the transaction and the parties' governs the dispute." Pedicini v. Life Ins. Co. of Ala., 682 F.3d 522, 526 (6th Cir. 2012) (quoting State Farm Mut. Auto. Ins. Co. v. Marley, 151 S.W.3d 33, 42 (Ky. 2004)). Because the insurance contract was issued in Kentucky to a Kentucky corporation, the Court will apply Kentucky law. When the Kentucky Supreme Court has ruled on a relevant issue, the Court will apply that holding; when it has not, the Court will "anticipate how" it would rule. Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 563 (6th Cir. 2008). Intermediate appellate decisions are persuasive authority "unless it is shown that the state's highest court would decide the issue differently." Id. (citation omitted).
Under Kentucky law, "the construction and legal effect of an insurance contract is a matter of law for the court." Bituminous Cas. Corp. v. Kenway Contracting, Inc., 240 S.W.3d 633, 638 (Ky. 2007). A court's duty is to determine the parties' intent at the time they entered into the contract. Nationwide Mut. Ins. Co. v. Nolan, 10 S.W.3d 129, 132 (Ky. 1999). Ky. Rev. Stat. § 304.14-360 mandates that "[e]very insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy."
Insurance contracts are "interpreted in light of the usage and understanding of the common man." Bituminous Cas. Corp., 240 S.W.3d at 638. When an insurance contract is clear and unambiguous, it is enforced as written. Kemper Nat. Ins. Companies v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 873 (Ky. 2002). However, when it is "susceptible to two reasonable interpretations, the interpretation favorable to the insured is adopted." St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226 (Ky. 1994). But, that "does not mean that every doubt must be resolved against [the insurer]." Id. A court must still give the contract "a reasonable interpretation consistent with the parties' object and intent." Id.
Relevant to this case, "under Kentucky law, conditions precedent are given full effect and may not be eliminated from insurance contracts by the courts." Estate of Riddle ex rel. Riddle v. S. Farm Bureau Life Ins. Co., 421 F.3d 400, 406 (6th Cir. 2005) (citing Investors Syndicate Life Ins. & Annuity Co. v. Slayton, 429 S.W.2d 368, 370 (Ky. Ct. App. 1968) and Northwestern Mut. Life Ins. Co. v. Neafus, 40 S.W. 1026, 1028-29 (Ky. 1911)). Therefore, "[i]n an action on an insurance policy, the insured must prove compliance with the policy's conditions precedent or a waiver thereof to recover under its terms." Id. (citing Am. Centennial Ins. Co. v. Wiser, 712 S.W.2d 345, 346 (Ky. Ct. App. 1986)). Finally, notice provisions are generally enforceable in Kentucky. One Beacon Ins. Co. v. Chiusolo, 295 F.Appx. 771, 776 (6th Cir. 2008).
1. Ashland failed to give timely notice after the Excess Policy expired
RLI asserts that it does not have to provide coverage for the HIPAA investigation because Ashland did not give notice within 90 days after the Excess Policy expired. (Doc. ## 38 at 13, 24 n. 11; 75 at 6-8). The Primary Policy requires:
As a condition precedent to any right to payment in respect of any Claim... [Ashland] must give [Darwin] written notice of such Claim, with full details, as soon as practicable after it is received... [i]n no event may notice be provided more than ninety (90) days after expiration... of the Policy Period."
(Endorsement No. 8; Doc. # 28-3 at 12) (emphasis added). Meanwhile, the Excess Policy's insuring clause states that "[c]overage hereunder shall then apply in conformance with the terms and conditions of the Primary Policy... except as otherwise provided herein. In no event shall this Policy grant broader coverage than would be provided by [the Primary Policy]." (Endorsement to the Insuring Clause; Doc. # 28-13 at 10). The Excess Policy is therefore a "follow-form" policy.
When an excess insurance contract "follows form" to the primary policy, it incorporates the primary policy's terms and conditions, unless there is a conflict. See GenCorp, Inc. v. Am. Intern. Underwriters, 178 F.3d 804, 819 (6th Cir. 1999) (stating that when the insured, GenCorp, "acquired the Excess Policies, it agreed that they would follow form to the Genco Policies. This means that, with certain exceptions, the provisions of the Genco Policies would be read into the Excess Policies."). The Court predicts that the Kentucky Supreme Court would follow the weight of authority and hold that the Excess Policy incorporated the Primary Policy's conditions. See State Farm Mut. Auto. Ins. Co. v. Marley, 151 S.W.3d 33, 44 n.1 (Ky. 2004) (Cooper, J., dissenting) ("A follow form' policy is an excess liability or reinsurance policy that simply extends the limits of the underlying policy by incorporating by reference all of the terms and conditions of the underlying policy except as specifically stated otherwise.").
Ashland admits that the Excess Policy followed-form to the Primary Policy (Doc. # 28 at 6), but argues that it did not need to report the HIPAA claim "to RLI at any time" because the Primary Policy, and therefore the Excess Policy, are "claims-made" policies, not "claims-made-and-reported" policies. (Doc. ## 28 at 7, 23, 25; 51 at 11; 75 at 6). Ashland gives the following definition of the two types of policies: "a claims-made policy... obligate[s] the insurer to insure claims made against the insured during the policy period... a claims-made-and-reported policy, by contrast, obligates the insurer to insure only those claims that are both made during the policy period and are reported to the insurer during the policy period (or during some extended period following the policy period)." (Doc. # 28 at 23).
First, Ashland suggests that the notice provision is ambiguous because it does not appear on the first page of the Primary Policy nor in either policy's insuring clause. (Doc. # 51 at 11-12). Courts, however, have routinely rejected arguments that a notice provision is ambiguous just because it does not appear on a certain page or in a certain section of the insurance agreement. A.C. Strip, 868 F.2d 181, 186-87 (6th Cir. 1989) (holding that a notice provision was unambiguous even though it did not appear on the agreement's cover sheet); Wendy's Int'l, Inc. v. Ill. Union Ins. Co., No. 2:05-CV-803, 2007 WL 710242, at *9 (S.D. Ohio Mar. 6, 2007) ("[T]he fact that the Policy is not titled a "claims-made-and-reported" policy does not negate the reporting requirement contained in the notice provision."); Janjer Enter., Inc. v. Exec. Risk Indem., Inc., 97 F.Appx. 410, 415 (4th Cir. 2004) ("[P]lacing a reporting requirement in a policy's declaration page or insuring agreement is... not the exclusive manner. Parties may also create a claims made and reporting' policy... in another part of the policy."); 4th St. Investors LLC v. Dowdell, No. 06-536, 2008 WL 163052, at *3-4 (W.D. Pa. Jan. 15, 2008). But see Newlife Sciences LLC v. Landmark Am. Ins. Co., 2014 WL 631141, at *3-4 (N.D. Cal. Feb. 18, 2014). Moreover, because the Excess Policy's insuring clause expressly states that coverage applies " in conformance with the terms and conditions of the Primary Policy, " the notice requirement is part of the Excess Policy's insuring clause. (Doc. # 28-13 at 10) (emphasis added).
The general description provided on the first page of the Primary Policy does not render ambiguous the more specific provisions contained in the policy. See A.C. Strip, 868 F.2d at 186. The second page states: "[t]hese declarations, the policy form, any endorsements and the application constitute the entire agreement between the insurer and the insured relating to this insurance." (Doc. # 28-3 at 3). The notice requirement then appears in Endorsement No. 8, which is on its own page, and in bold and capital letters is titled "Amend reporting of claims provision notice to specific insureds." ( Id. at 12). There is no indication that the Kentucky Supreme Court would require that the notice provision appear elsewhere in order to be effective.
Next, Ashland argues that because the Excess Policy contains its own notice requirements in Section 10, it does not incorporate Endorsement No. 8 of the Primary Policy. (Doc. # 77-2 at 11). In support, Ashland notes that the follow-form clause in the Excess Policy incorporates the Primary Policy "except as otherwise provided herein." (Endorsement to the Insuring Clause; Doc. # 28-13 at 10). Ashland cites to case law that suggests conditions in a ...