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West American Insurance Co. v. M&M Service Station Equipment Specialist, Inc.

United States District Court, W.D. Kentucky, Bowling Green Division

December 11, 2017



          Greg N. Stivers, United States District Court Judge

         This is a declaratory judgment action involving an underlying personal injury claim against Defendants M&M Service Station Equipment Specialist, Inc.'s (“M&M”) and Chad Henry (“Henry”)[1] by Defendant Taylor Montgomery (“Montgomery”) in Rowan Circuit Court. This matter is before the Court on Plaintiff's Motion for Summary Judgment (DN 32). The motion has been fully briefed by the parties and is ripe for adjudication. For the reasons outlined below, the motion is GRANTED IN PART and DENIED IN PART.


         Plaintiff West American Insurance Company (“West American”) seeks a declaratory judgment regarding its duty to defend or indemnify M&M in connection with personal injury claims asserted by Montgomery against M&M and its former employee, Henry, following a motor vehicle accident on August 28, 2015 in Rowan County, Kentucky. (Compl. ¶ 2, DN 1; Compl. Ex. B, ¶¶ 4-5, DN 1-3 [hereinafter Montgomery Compl.]). In that action, (the “Montgomery suit”) Montgomery has alleged that Henry negligently operated a vehicle owned by M&M which collided with her vehicle and that M&M is both vicariously and directly liable for Henry's negligence. (Montgomery Compl. ¶¶ 5-8, 10; Pl.'s Mot. Summ. J. Ex. F, ¶ 2, DN 32-7 [hereinafter Montgomery Am. Compl.]).

         M&M is the named insured on a business auto policy (the “Policy”) issued by West American for the period from May 1, 2015, to May 1, 2016. (Compl. ¶ 18; Pl.'s Mot. Summ. J. 2-3). The Policy contains the following provision for liability coverage:

We will pay all sums an “insured” legally must pay as damages because of “bodily injury” or “property damage” to which this insurance applies, caused by an “accident” and resulting from the ownership, maintenance or use of a covered “auto.” . . .
We have the right and duty to defend any “insured” against a “suit” asking for such damages . . . . However, we have no duty to defend any “insured” against a “suit” seeking damages for “bodily injury” or “property damage” . . . to which this insurance does not apply. We may investigate and settle any claim or “suit” as we consider appropriate. Our duty to defend or settle ends when the Liability Coverage Limit of Insurance has been exhausted by payment of judgments or settlements.

(Pl.'s Mot. Summ. J. 4; Pl.'s Mot. Summ. J. Ex. A (PageID # 615), DN 32-1 & 32-2 [hereinafter Policy]). The Policy's limit of insurance for covered damages resulting from a single accident is $1, 000, 000, regardless of the number of covered vehicles, drivers, premiums paid, claims made, or vehicles involved. (Pl.'s Mot. Summ. J. 4; Policy (PageID # 619)). The Policy defined the term “insured” to include “[a]nyone else while using with your permission a covered ‘auto' you own, hire, or borrow . . . .”[2] (Pl.'s Mot. Summ. J. 4; Policy (PageID # 615, 669)). Further, it contains an exclusion for “punitive or exemplary damages, ” which provides:

Regardless of any other provision of this policy, this policy does not apply to (and no coverage is provided for) “punitive or exemplary damages” or any costs, attorney's fees, interest, “damages” or any other amounts attributable to “punitive or exemplary damages.” However, if a suit is brought against an “insured” arising out of a claim which alleges both compensatory damages and “punitive or exemplary damages”, we will defend the entire suit despite the fact that coverage only applies to (and we will only pay for) the covered compensatory damages.

(Policy (PageID # 668)). “Punitive or exemplary damages” are defined as “includ[ing] damages which are intended to punish or deter wrongful conduct, to set an example, to fine, penalize or impose a statutory penalty, and damages which are awarded for any purpose other than as compensatory damages for ‘bodily injury' or ‘property damage'.” (Policy (PageID # 668)).

         The Policy was a renewal of insurance previously issued to M&M by West American. (Pl.'s Mot. Summ. J. 5). Henry and another M&M employee were excluded from M&M's coverage under the prior year's policy (beginning May 1, 2014). (Pl.'s Mot. Summ. J. 5). M&M's President informed Henry by email of his exclusion from M&M's insurance; Henry was thus prohibited from operating any M&M vehicle and was routinely so reminded. (Pl.'s Mot. Summ. J. 6-7). Henry did not remember receiving the email, but acknowledged being told he could not drive M&M vehicles and testified that he understood the prohibition. (Def.'s Mem. Opp. Pl.'s Mot. Summ. J. 7, DN 38 [hereinafter Montgomery Resp.]; C. Henry Dep. 91:13-19, Jan. 26, 2017, DN 38-2; Pl.'s Mot. Summ. J. 6-7; Pl.'s Mot. Summ. J. Ex. D, at 6, DN 32-5; Def.'s Mem. Opp. Pl.'s Mot. Summ. J. 2, DN 37 [hereinafter M&M Resp.]).

         Prior to issuing the Policy, West American informed M&M that it would be required to remove Henry from its list of authorized drivers and sign an “Exclusion of Named Person” endorsement for Henry. (Pl.'s Mot. Summ. J. 5). This endorsement, signed by M&M's vice president, stated in relevant part:

In consideration of the issuance and/or continuance of this policy, it is hereby agreed that the insurance provided by this policy does not apply to any person or entity for any “accident” or “loss” of any kind arising out of the operation or use of a covered “auto” by the following person(s):
. . . In the event that this endorsement excludes liability coverage for the Named Insured or others in violation of any law, then this exclusion shall apply to the extent the limits indicated in the declarations exceed the minimum limits required by law at the time of “loss”.

(Pl.'s Mot. Summ. J. Ex. C, at 2, DN 32-4). This endorsement, as added to the Policy, was in addition to a Kentucky-specific exclusion of Henry contained within the Policy which provided:

It is agreed the Company shall not be liable for loss, damage and/or liability due to the operation of a covered auto by the following person(s):
. . . The limit of the Company's liability shall not be more than the limit of the financial responsibility law of the state in which such finding was made. All other coverages, including no fault and physical damage coverages will remain in effect at limits thereby specified within the policy.

(Policy (PageID # 917, 918)).

         On August 28, 2015, Henry drove an M&M vehicle and was involved in the collision with Montgomery's vehicle. (Pl.'s Mot. Summ. J. 7). According to Defendants, Henry drove the M&M vehicle after a fellow M&M employee, Davey Steagall/Stigall[3] (“Steagall”), told him that he could drive himself home. Henry did not drive himself directly home, however, but detoured for “personal reasons” before he was involved in the collision with Montgomery.[4](M&M Resp. 3; Montgomery Resp. 8).

         On November 13, 2015, Montgomery filed suit against Henry and M&M, alleging Henry's negligence in operating the vehicle and M&M's liability for such negligence under the doctrine of respondeat superior. (Montgomery Compl. ¶¶ 6-8, 10). In addition, Montgomery seeks punitive damages stemming from Henry's admission to police that he had smoked marijuana prior to the collision. (Montgomery Compl. ¶ 9). Montgomery has also added a direct negligence claim against M&M alleging M&M knew or should have known that Henry was an “incompetent or reckless driver” due to his criminal record, and that M&M “failed to put sufficient safeguards in place and failed to take sufficient action” to prevent Henry's operation of M&M vehicles. (Montgomery Am. Compl. ¶¶ 2(B), 2(H)-2(O)). The Montgomery suit is still pending in Rowan Circuit Court. (M&M Resp. 3).

         West American has defended both M&M and Henry in the Montgomery suit, subject to a reservation of rights. (Pl.'s Mot. Summ. J. 8). West American acknowledges its liability for Henry's operation of a covered vehicle up to the amount required by Kentucky's motor vehicle financial responsibility law[5] but filed the instant action on April 13, 2016, asking the Court for a judgment as a matter of law on various issues, which are discussed below.


         The Court has subject matter jurisdiction under 28 U.S.C. §§ 2201 and 1332(a) because there is diversity of citizenship between the parties and the amount in controversy exceeds $75, 000, exclusive of interest and costs.

         III. STAN ...

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