RENDERED: JUNE 15, 2023 TO BE PUBLISHED
Supreme Court of Kentucky 2021-SC-0130-DG
KENTUCKY STATE UNIVERSITY APPELLANT
ON REVIEW FROM COURT OF APPEALS V. NO. 2019-CA-1811 FRANKLIN CIRCUIT COURT NO. 15-CI-00951
DARWIN NATIONAL ASSURANCE APPELLEE COMPANY N/K/A ALLIED WORLD SPECIALTY INSURANCE COMPANY
OPINION OF THE COURT BY CHIEF JUSTICE VANMETER
AFFIRMING
The primary issue in this case is whether the Darwin National Assurance
Company, now known as Allied World Specialty Insurance Company (“Allied
World”), claims-made-and-reported management liability policy (“Policy”) issued
to Kentucky State University (“KSU”) provided coverage when KSU did not
comply with the Policy’s notice provisions. The Franklin Circuit Court, finding
ambiguity in the notice provisions, applied the notice-prejudice rule adopted in
Jones v. Bituminous Casualty Corp.1 and granted summary judgment in favor of
KSU. The Court of Appeals, however, reversed the Franklin Circuit Court,
1 821 S.W.2d 798 (Ky. 1991). concluding that the notice-prejudice rule does not apply to the Policy and that
summary judgment in favor of Allied World was warranted. Upon discretionary
review, we hold that the rationale for applying the notice-prejudice rule in
Bituminous Casualty does not exist in this case. Thus, we affirm the Court of
Appeals and remand this case to the Franklin Circuit Court to enter a
judgment in favor of Allied World. We further clarify that, generally, the notice-
prejudice rule shall not apply to a claims-made-and-reported policy that
contains unambiguous notice requirements as a condition precedent to
coverage.
I. Facts and Procedural Background
The Policy KSU purchased from Allied World was for the period from July
1, 2014 to July 1, 2015. The Policy allows claims made against KSU within the
policy period to be reported to Allied World up to ninety days after the end of
the policy period. Thus, the Policy expired July 1, 2015, and the 90-day
extended reporting period ended September 29, 2015.
During the policy period, Dr. Maifan Silitonga and Dr. Teferi Tsegaye
submitted Notices of Charges of Discrimination to the United States Equal
Employment Opportunity Commission (“EEOC”) and Kentucky Commission on
Human Rights (collectively, “EEOC Charges”) related to their employment at
KSU. KSU received written notice of the EEOC Charges on June 23, 2015. On
September 2, 2015, Dr. Silitonga and Dr. Tsegaye brought employment-related
claims against KSU in Franklin Circuit Court, the substance of which would be
covered under the Policy. On October 2, 2015, three days after the extended
2 reporting period expired, KSU, by email, notified Allied World of the litigation
and sought coverage under the Policy. Allied World denied coverage.
KSU eventually filed a third-party complaint against Allied World,
requesting a declaration of rights under the Policy and asserting a breach of
contract claim based on the Policy. KSU also claimed that Allied World violated
the Unfair Claims Settlement Practices Act, engaged in bad faith, and violated
KRS2 304.12-235. KSU and Allied World filed cross-motions for summary
judgment on whether the Policy provided coverage to KSU. The circuit court
granted summary judgment in favor of KSU, relying on Bituminous Casualty.
The circuit court interpreted the Policy as not clearly providing that strict
forfeiture of coverage is a consequence of KSU’s failure to promptly notify Allied
World of a claim. Based upon that interpretation, the circuit court concluded
that the notice-prejudice doctrine applies, requiring coverage under the Policy
unless Allied World showed that the delay in notice caused it prejudice.
Because Allied World could not be said to be prejudiced by KSU being three
days late in providing notice of the claim, the circuit court determined that
Allied World was obligated to indemnify KSU for the underlying claims.
Furthermore, with timely notice being at the heart of this dispute, the circuit
court held that because the Policy is unclear as to how notice is required to be
given, the notice could be considered timely if a three-day mailbox rule were
applied.
2 Kentucky Revised Statutes.
3 The Court of Appeals disagreed and held that the terms of the Policy are
clear about the extended reporting period: KSU was required to provide written
notice of a claim against it within ninety days after the Policy ended. The Court
of Appeals further found that the Policy provided a certain procedure for
notifying the insurer of a claim. The Court of Appeals distinguished the instant
Policy from the Bituminous Casualty policy in that the latter, while requiring
“prompt notice” of a claim, failed to specify a reporting timeline. The Court of
Appeals determined that the notice-prejudice rule does not apply to the Policy
in this case.
The Court of Appeals also concluded that 806 KAR3 12:095 does not
support KSU’s argument for coverage and that the CR4 6.055 mailbox rule does
not apply to contract disputes. The Court of Appeals reversed the circuit court.
Thereafter, this Court granted KSU’s petition for discretionary review.
II. Standard of Review
3 Kentucky Administrative Regulations. 4 Kentucky Rules of Civil Procedure. 5 CR 6.05 states: Whenever a party has the right or is required to do some act or take some proceedings within a prescribed period after the service of a notice or other paper upon him and the notice or paper is served upon him by mail or electronic service, 3 days shall be added to the prescribed period. This provision shall not apply to the service of summons by mail under Rule 4.01(1)(a).
4 CR 56.03 authorizes summary judgment “if the pleadings, depositions,
answers to interrogatories, stipulations, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law.” When
reviewing a summary judgment on appeal, an appellate court considers
whether the circuit court correctly found that there are no genuine issues of
material fact and that the moving party is entitled to judgment as a matter of
law. Inter–Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 165 (Ky.
2012). Because we are faced with a question of law, the interpretation and
legal effect of a written contract, we review the opinion of the Court of Appeals
de novo. Kearney v. Univ. of Ky., 638 S.W.3d 385, 397 (Ky. 2022); Morganfield
Nat’l Bank v. Damien Elder & Sons, 836 S.W.2d 893, 895 (Ky. 1992).
III. Analysis
As noted above, the primary issue before this Court is whether the circuit
court properly interpreted the notice provisions within the claims-made-and-
reported insurance policy issued by Allied World to KSU and then, based upon
that interpretation, correctly assessed the role, if any, that the notice-prejudice
rule adopted in Jones v. Bituminous Casualty Corp. plays in this case. Unlike
the circuit court, we conclude that the Policy provisions clearly warned KSU
that noncompliance with the notice requirements would result in forfeiture of
coverage. Given no ambiguity exists in the notice provisions, application of the
notice-prejudice rule is unwarranted.
5 KSU also argues that even if the Policy is unambiguous and the notice-
prejudice rule does not apply, other reasons exist to affirm the circuit court.
However, we conclude that even if 806 KAR 12:095 Section 4(3) were applicable
to a private cause of action, the regulation does not benefit KSU in this case.
Lastly, we disagree with KSU that the Policy’s notice requirement may be
interpreted as analogous to CR 6.05.
A. Construction and Interpretation of Contracts.
“In the absence of ambiguity, a written instrument will be enforced
strictly according to its terms, and a court will interpret the contract’s terms by
assigning language its ordinary meaning and without resort to extrinsic
evidence.” Wehr Constructors, Inc. v. Assurance Co. of Am., 384 S.W.3d 680,
687 (Ky. 2012) (quoting Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 106 (Ky.
2003)); see also KRS 304.14-360. “[W]ords which have no technical meaning
in law, must be interpreted in light of the usage and understanding of the
common man.” Bituminous Cas. Corp. v. Kenway Contracting, Inc., 240 S.W.3d
633, 638 (Ky. 2007) (citation omitted). When “the terms of an insurance policy
are clear and unambiguous, the policy will be enforced as written.” Kemper
Nat’l Ins. Cos. v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 873 (Ky. 2002).
If no ambiguity exists in the contract, a reviewing court must determine
the intention of the parties “from the four corners of that instrument.”
Hoheimer v. Hoheimer, 30 S.W.3d 176, 178 (Ky. 2000). “A contract is
ambiguous if a reasonable person would find it susceptible to different or
inconsistent interpretations.” Hazard Coal Corp. v. Knight, 325 S.W.3d 290,
6 298 (Ky. 2010) (citation omitted). Ambiguity is generally resolved in favor of the
insured. Thomas v. State Farm Fire and Cas. Co., 626 S.W.3d 504, 507 (Ky.
2021). Pertinent to the Policy at bar, “‘[c]ondition precedent’ is a legal term of
art with a clear meaning: ‘An act or event, other than a lapse of time, that must
exist or occur before a duty to perform something promised arises.’” Superior
Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770, 785 (Ky. 2017)
(citations omitted).
B. Jones v. Bituminous Casualty Corp. Does Not Apply in This Case. The Policy Terms Are Unambiguous and Must Be Enforced as Written.
KSU argues that the four principal reasons Bituminous Casualty
expressed for applying the notice-prejudice rule exist in this case and that KSU
is entitled to coverage because Allied World cannot show prejudice when notice
of the claim was just three days late. Allied World, on the other hand,
maintains that the Policy terms are unambiguous and not unreasonable, thus,
the Policy must be enforced as written, otherwise KSU would be extended
insurance coverage beyond the bargained-for terms. Allied World also
advocates that the notice-prejudice rule does not apply to claims-made-and-
reported policies.
Our analysis begins by setting forth the relevant policy language. We
then consider whether Bituminous Casualty supports application of the notice-
prejudice rule to the Policy between Allied World and KSU and conclude it does
not.
7 1. The Policy.
The Policy provisions which explain the insurer’s coverage obligations in
relation to the insured’s reporting obligations and which present the notice
requirements are found in three clauses.6
The Insuring Agreement for Employment Practices Liability Coverage
states:
The Insurer shall pay on behalf of any Insured the Loss arising from a Claim, first made during the Policy Period (or Discovery Period, if applicable) against such Insured for any Wrongful Act, and reported to the Insurer in accordance with Section V. of the General Terms and Conditions and Section IV. of this Coverage Section.7
Detailing the requirements for providing notice of a claim, Section
IV. of the Coverage Section and Section V. of the General Terms and
Conditions, respectively, state:
The Insured(s) shall, as a condition precedent to the obligations of the Insurer under this Policy, give written notice to the Insurer, at the physical or email address indicated in Item 7. of the Declarations, of a Claim made against an Insured as soon as practicable after the Organization’s General Counsel, Director of Human Resources or Risk Manager, or any individual with functionally equivalent responsibilities becomes aware of the Claim.8
Notwithstanding the above, in no event shall such notice of any Claim be provided to the Insurer later than ninety (90) days after the end of the Policy Period or Discovery Period if purchased. If mailed, the date of mailing shall constitute the date
6 The bold typeface used within the Policy to highlight defined terms is removed.
Emphasis within the Policy provisions below is added. 7 Employment Practices Liability Coverage § I.A. (Insuring Agreements). 8 Employment Practices Liability Coverage § IV. (Notice of a Claim). This provision is prefaced: The following provision shall apply in lieu of Section V.A. of the General Terms and Conditions.
8 that such notice was given and proof of mailing shall be sufficient proof of notice.9
Furthermore, with regard to reporting beyond the policy period, the
Policy also provides the right to purchase a Discovery Period after the
expiration of the Policy. The Policy states:
If this Policy, or one or more Coverage Sections of this Policy, is cancelled by either the Named Insured or the Insurer for any reason other than non-payment of premium, or the Insurer refuses to renew this Policy, the Insured(s) shall have the right to purchase a Discovery Period of up to three (3) years following the effective date of such cancellation or non-renewal. . . .
KSU did not purchase Discovery Period coverage.
2. The Notice-Prejudice Rule.
In Bituminous Casualty, the insurance company sought a declaration of
rights that it had no obligation to defend or to indemnify under a liability policy
issued to the insured mining company. 821 S.W.2d at 799. The insurance
policy stated that in the event of an “occurrence,” the duty of the insured was
to “see to it that [the insurer is] notified promptly of an ‘occurrence’ which may
result in a claim.” Id. at 800. The insured notified the insurer of an accident
six and one-half months after it occurred. Id. The circuit court in Bituminous
Casualty decided the prompt notice clause was breached by a delay of that
length. Id. at 800-01.
Upon its review of the contract, the Bituminous Casualty court
reconsidered the rule expressed in Reserve Ins. Co. v. Richards, 577 S.W.2d
9 General Terms and Conditions § V.B. (Notice of Claim).
9 417, 419 (Ky. 1979) – that in a coverage dispute the insurer need not prove
actual prejudice when the insured fails to give timely notice,10 and adopted the
inverse rule that “an insurer cannot withdraw coverage on the ground that a
notice condition has not been met unless the insurer can show that it was
prejudiced by the act of the insured.” Bituminous Cas., 821 S.W.2d at 801. We
explained that while the insurer bears the burden to prove prejudice, the
standard of proof is not actual prejudice but “whether it is reasonably probable
that the insurance carrier suffered substantial prejudice from the delay in
notice.” Id. at 803. We rejected application of the rule expressed in Reserve as
unreasonable for the circumstances presented in Bituminous Casualty based
upon “at least four major features in . . . insurance law.” Id. at 801.
First, we observed that standard form insurance policies, like the one
under consideration, are recognized as contracts of adhesion because they are
not negotiated and as the contract did not clearly define prompt notice or warn
of a forfeiture, the policy had a latent ambiguity to be resolved in favor of the
insured.11 Id. at 801. Second, considering the doctrine of reasonable
10 Reserve states: Compliance with the notice provisions of an insurance policy is a condition precedent to recovery on the policy. The reasonableness and validity of such provisions in an insurance policy have been consistently recognized. It is not necessary for the insurer to prove actual prejudice from failing to give timely notice. We are of the opinion that a period of 13 months from occurrence to notice is not “as soon as practicable” and is not timely notice so as to comply with a condition precedent to recovery. Id. at 419 (internal citations omitted), overruled by Bituminous Casualty, 821 S.W.2d 798. 11 Regarding the contract’s failure to define prompt notice and to warn of
forfeiture, the Bituminous Casualty court stated:
10 expectations, we concluded that while the policy clearly imposed a duty on the
insured to promptly notify the insurer, by failing to define prompt notice or to
warn of a forfeiture, denial of coverage was beyond the reasonable expectation
of the ordinary insurance consumer. Id. Third, considering the insured
purchased the policy of public liability insurance because it was required by
law, as a matter of public policy, “a clause working a strict forfeiture regardless
of prejudice unreasonably interferes with coverage required by mine safety
regulations.” Id. And fourth, we held that the policy’s clause did not impose
upon the insurer unreasonable and unforeseeable risks not accounted for in its
premiums. Id. at 802-03.
3. Reasons For Applying the Notice-Prejudice Rule in Bituminous Casualty Do Not Exist in This Case.
Considering Bituminous Casualty, KSU first argues that the Policy is a
contract of adhesion with no specific forfeiture language. We disagree. As to
forfeiture, reading Sections IV. and V. together, the Policy expressly informed
KSU that a condition of coverage – a condition precedent – was giving written
notice of a claim as soon as practicable, but in no event was such notice of any
claim to be provided to Allied World later than ninety days after the end of the
A strict forfeiture interpretation of the prompt notice requirement excludes from the equation both the reasons why the insured failed to give prompt notice, such as whether a layman would realize that there was a covered occurrence, and the question whether the insurance carrier suffered any substantial prejudice from the delay. Absent language in the contract clearly spelling out the meaning and parameters of prompt notice and automatic forfeiture consequences, the reach of the term and the consequences are vague. The policy has a latent ambiguity which is subject to the rule of construction that applies to a contract of adherence.
11 Policy period. KSU did not purchase Discovery Period coverage, so the
reporting period did not extend beyond the 90-day reporting period. The Policy
clearly defined when notice was due and the consequences if notice is late.
Particularly, the Policy informed KSU that if the notice provisions were not met,
Allied World had no obligation to KSU under the Policy. A “policy must receive
a reasonable interpretation consistent with the parties’ object and intent or
narrowly expressed in the plain meaning and/or language of the contract.” St.
Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226
(Ky. 1994).
Because the Policy unambiguously provided no coverage if KSU failed to
comply with the notice provisions, we must address the remaining part of
KSU’s argument – whether the Policy is a contract of adhesion. The circuit
court did not address this argument.
KSU describes Bituminous Casualty as allowing courts to consider
whether the insurance policy is a “form” policy, known as a contract of
adhesion, when determining whether an insurer can deny a claim based on
late notice. Bituminous Casualty’s adhesion contract analysis reflects that,
generally, standard form insurance policies used in consumer transactions will
be construed as contracts of adhesion. However, “[a]dhesion contracts are not
per se improper.” Schnuerle v. Insight Commc’ns. Co., L.P., 376 S.W.3d 561,
576 (Ky. 2012) (citation omitted); see also Energy Home, Div. of S. Energy
Homes, Inc. v. Peay, 406 S.W.3d 828, 835 (Ky. 2013) (discussing procedural
and substantive unconscionability). Consequently, because we have found the
12 Policy’s notice provisions unambiguous, for KSU to prevail under this
argument, KSU must show that the Policy is an unenforceable contract of
adhesion.
As this Court has explained, and as Bituminous Casualty succinctly
points out, multiple criteria are to be met for a contract of adhesion to be
deemed unfair and unenforceable: (1) the contract is a standardized contract;
(2) the contract is imposed and drafted by the party of superior bargaining
strength;12 and (3) the contract relegates to the subscribing party only the
opportunity to adhere to the contract or reject it. Schnuerle, 376 S.W.3d at 576
(citation omitted). Thus, a standard form agreement between the parties does
not necessarily make the contract an unenforceable contract of adhesion.
KSU would be entitled to summary judgment on the question whether
the Policy is a contract of adhesion if it can point to evidence of record revealing
facts which show it is not possible for the adverse party to prevail. Welch v.
Am. Publ’g Co. of Ky., 3 S.W.3d 724, 730 (Ky. 1999); see also Paintsville Hosp.
Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985) (citing Kaze v. Compton, 283
S.W.2d 204 (Ky. 1955)).
KSU argues that the Policy’s terms, including its notice provisions, were
not negotiated by the parties but instead were drafted by Allied World; the
12 As this Court has noted, “there is a significant difference between an
adhesion contract in which the parties have disparate bargaining power and a contract which voluntarily has been entered into by sophisticated and knowledgeable businessmen concerning a financial transaction of considerable magnitude.” Buck Run Baptist Church, Inc. v. Cumberland Sur. Ins. Co., Inc., 983 S.W.2d 501, 504 (Ky. 1998).
13 Policy provisions that are the subject of this dispute are standard forms; and
no evidence of record shows that the Policy was anything but a contract of
adhesion. Allied World rebuts KSU’s arguments by pointing to the
amendments appended to the Policy, modifying coverage, and to the fact that
KSU was offered an extension of the reporting period but chose not to purchase
that extension.
The evidence KSU cites, and which may be viewed as supporting a claim
that the Policy is an unenforceable contract of adhesion, is limited. While
KSU’s evidence may support its contention that the Policy is a standard form,
KSU does not point to evidence supporting a conclusion that even if Allied
World drafted the Policy, Allied World is the party of superior bargaining
strength or that the contract was offered on a “‘take it or leave it’ basis without
affording [KSU] a realistic opportunity to bargain.” See Bituminous Cas., 821
S.W.2d at 801. Based upon the cited evidence, KSU has not shown that it is
entitled to a judgment as a matter of law that the contract is an abusive and
unenforceable contract of adhesion. See id.; Welch, 3 S.W.3d at 730 (Ky. 1999)
(citing Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 482-83 (Ky.
1991)).
KSU next offers the doctrine of reasonable expectations as a basis under
Bituminous Casualty for application of the notice-prejudice rule. KSU argues
that without clear warning, it was beyond KSU’s reasonable expectations that
Allied World would decline coverage if KSU provided untimely notice. However,
because we find no ambiguity in the notice provisions, that argument is
14 resolved. The Policy provided clear warning of forfeiture if notice of a claim was
not timely given.
Regarding public policy reasons for requiring Allied World to provide
coverage under the Policy, KSU argues that while it is not statutorily required
to purchase a liability insurance policy, KSU is authorized by statute to
purchase the insurance to protect itself, its employees and administrators, and
ultimately, public funds. KSU argues that because it is not a private party with
no public interest, public policy strongly supports applying the notice-prejudice
rule since as the circuit court observed, “[t]o allow the insurer to escape
responsibility to defend this claim would create a windfall for the insurer at the
expense of the public.” However, unlike the circuit court, we have concluded
that the Policy provisions at issue are unambiguous. Given the plain terms of
the contract, their full force and effect does not equate to creating a windfall for
the insurer. In sum, “in the absence of circumstances justifying relief, courts
do not make contracts different from those that the parties make for
themselves, even when forfeiture provisions are harsh.” Miller Dairy Prods. Co.
v. Puryear, 310 S.W.2d 518, 521 (Ky. 1957) (citation omitted).13
4. Application of the Notice-Prejudice Rule to Claims-Made-and- Reported Policies.
While this case is resolved based upon contract law principles, we
consider the well-briefed discussion about application of the notice-prejudice
13 Based upon the foregoing conclusions, the question of whether Allied World’s premium pricing structure would be affected if the notice-prejudice rule applied need not be addressed.
15 rule to claims-made-and-reported insurance policies. As a starting point,
Allied World argued in its summary judgment motion that it should be granted
judgment based upon contract law. However, because no Kentucky Supreme
Court case specifically addresses whether the notice-prejudice rule applies to
claims-made-and-reported policies, Allied World also advocated that claims-
made-and-reported policies are not subject to the notice-prejudice rule. Allied
World maintains that position before this Court.
More particularly, Allied World outlines characteristics of claims-made-
and-reported policies which contrast with occurrence policies, making the
notice-prejudice rule inapplicable. For example, “[g]enerally, a notice
requirement is a material provision in a claims-made-and-reported policy.”
Ashland Hosp. Corp. v. RLI Ins. Co., No. 13-143-DLB EBA, 2015 WL 1223675,
at *9 (E.D. Ky. Mar. 17, 2015), aff’d, 632 Fed App’x 271, 272 (6th Cir. 2016)
(per curiam). As explained in C.A. Jones Mgmt. Grp., LLC v. Scottsdale Indem.
Co.,
A claims-made-and-reported policy provides coverage only for claims made against the insured and reported to the insurer during the life of the policy regardless of when the underlying incident occurred. Timely notice of a claim is the event that not only triggers coverage, but also defines its scope. An occurrence-based policy, by contrast, provides coverage for incidents which occur during the life of the policy without regard to when a claim is brought. While prompt notice allows the insurer to investigate and defend the claim, it has no effect as to the scope of coverage.
No. 5:13-CV-00173-TBR-LLK, 2016 WL 3460445, at *5 (W.D. Ky. June 21,
2016).
16 Allied World emphasizes that Kentucky federal decisions have predicted
that Kentucky will not apply the notice-prejudice doctrine to claims-made-and-
reported policies. But that prediction is not unqualified. For example, in C.A.
Jones Management Group, LLC, the Western District Court of Kentucky stated
it predicts that the “Kentucky Supreme Court [will] not extend the notice-
prejudice rule to claims-made-and-reported policies that clearly and
unambiguously requires timely notice as a condition precedent to coverage.”
Id. Pertinently, the primary basis for the Western District Court’s prediction is
application of Kentucky’s general principles of contract law to unambiguous
insurance policy terms. Id. Like the Western District Court, the Eastern
District Court of Kentucky and the Sixth Circuit Court of Appeals include
within their prediction the point that the notice-prejudice rule will not apply
when the policy unambiguously requires timely notice.
In Ashland Hospital Corp. v. RLI Insurance Co., the Eastern District Court
of Kentucky stated that it “predicts that the Kentucky Supreme Court [will]
adopt the majority position and conclude that requiring an insurer to show
prejudice under a claims-made-and-reported policy rewrites the contract and
eliminates the benefit the reporting requirement provides to both parties.”
2015 WL 1223675, at *10. And the Sixth Circuit Court of Appeals, affirming
the Eastern District Court’s decision, stated that it agrees “with the district
court’s prediction [based upon its analysis of Jones v. Bituminous Casualty
Corp.] that the Supreme Court of Kentucky [will] not extend the notice-
prejudice rule to a claims-made policy like the excess policy here, which
17 contains unambiguous notice requirements as conditions precedent to
collecting under the policy.” 632 Fed. App’x. at 272.
The Court of Appeals’ opinion discusses the differences between
occurrence, the type of policy at issue in Bituminous Casualty, and claims-
made-and-reported insurance policies; the purpose of the policies; the manner
in which other courts tend to construe the policies; contract law generally; and
public policy reasons behind applying the notice-prejudice rule to this claims-
made-and-reported Policy. The Court of Appeals concluded that the notice-
prejudice rule does not apply to the unambiguous Policy. We agree and clarify
that generally, the notice-prejudice rule does not apply to a claims-made-and-
reported policy that contains unambiguous notice requirements as a condition
precedent to coverage. The reason is simple: “Parties are bound by the clear
and unambiguous terms of their contracts.” Versailles Farm Home & Garden,
LLC v. Haynes, 647 S.W.3d 205, 209 (Ky. 2022). As a policy matter, courts are
not to rewrite contracts containing explicit terms. St. Paul Fire & Marine, 870
S.W.2d at 226. Still, consistent with long standing precedent, “every
company’s [claims-made-and-reported] policy must be construed as it is
written and [contract law principles] applied to the developed facts in the
particular case.” Mutual Life Ins. Co. of N.Y. v. Smith, 79 S.W.2d 28, 34 (Ky.
1935).
C. 806 KAR 12:095 Section 4(3) Cannot Be Construed for KSU’s Benefit.
KSU argued in its briefing to the circuit court that Allied World must
comply with 806 KAR 12:095 Section 4(3). Viewing 806 KAR 12:095 Section 18 4(3) as a regulation which goes beyond the notice-prejudice rule, KSU asserted
that Allied World had not and could not demonstrate that KSU’s notice, being
three days outside the 90-day extended reporting period, “is so unreasonable to
constitute a breach of the first-party claimant’s duty to cooperate with the
insurer.” Allied World rebutted, pointing out 806 KAR 12:095 Section 2(3)
plainly states that 806 KAR 12:095 does not create a private cause of action.
In its briefing to this Court, KSU has clarified that it asserts no cause of
action under 806 KAR 12:095; rather it simply points to the regulation as
setting forth minimum standards that insurers are required to follow.
However, as the Court of Appeals noted, a condition within the regulation
makes it inapplicable to the Policy, and the regulation does not support KSU’s
argument for coverage.
806 KAR 12:095 Section 4(3) states:
Section 4. Misrepresentation of Policy Provisions. . . . (3) Insurers shall not deny a claim based upon the failure of a first-party claimant to give written notice of loss within a specified time limit unless written notice of loss is a written condition in the policy, certificate, or contract and the first-party claimant's failure to give written notice after being requested to do so is so unreasonable as to constitute a breach of the first-party claimant's duty to cooperate with the insurer.
(Emphasis added).
Pursuant to 806 KAR 12:095 Section 4(3), an insurer may deny a claim
based upon the failure of a first-party claimant to give written notice of loss
within a specified time limit when the notice of loss is a written condition of the
policy. Although KSU argues otherwise, because providing timely notice is a
condition of Policy coverage, the question whether KSU breached a “duty to 19 cooperate” by failing to give written notice within the extended policy period
does not apply to KSU.14 We agree with the Court of Appeals that based upon
the plain reading of 806 KAR 12:095 Section 4(3), the regulation does not
support KSU’s argument for coverage.
D. Accounting for United States Postal Service Mailing Time Does Not Save KSU’s Late Email.
Lastly, KSU contends that when considering the physical mailing
time, it substantially complied with the notice requirements. KSU
maintains that had the notice been mailed through the United States
Postal Service on September 29, 2015, a date timely under the Policy, the
notice would not have been received until October 2, 2015, the date the
emailed notice was received, or later. KSU asserts that, in line with the
circuit court’s observation that the mailing requirements were not clear,
the Policy contemplates receiving claim notices shortly after the 90-day
extended reporting period expires.
However, Allied World emphasizes that the Policy provided for both
mailed and emailed notices and since KSU provided notice by email, the
Section IV. “[i]f mailed” provision did not apply. Upon review of the Policy, we
conclude that the mail and email provision required mailing or emailing within
the 90-day extended reporting period; under the Policy, allowance for receipt of
timely-deposited physical mail is irrelevant to the emailed notice. By the terms
of the Policy, KSU’s email may not be found timely.
14 See 13 Steven Plitt, Daniel Maldonado, Joshua D. Rogers, and Jordan R.
Plitt, Couch on Insurance § 186:13 (3d ed., Thomson Reuters, November 2022 Update).
20 IV. Conclusion
We affirm the Court of Appeals’ decision reversing the Franklin
Circuit Court. The Policy’s notice provisions are clear and unambiguous.
Allied World was entitled to deny coverage to KSU when KSU did not
comply with the notice requirements. Accordingly, we remand this case
to the Franklin Circuit Court with directions to vacate its grant of
summary judgment in favor of KSU and to enter an order granting
summary judgment in favor of Allied World instead.
All sitting. Conley, Keller and Nickell, JJ., concur. Lambert, J., concurs
in part and dissents in part by separate opinion in which Bisig and Thompson,
JJ., join.
LAMBERT, J., CONCURRING IN PART, DISSENTING IN PART: I concur
with the Majority’s opinion that generally, the notice-prejudice rule does not
apply to an unambiguous claims-made-and-reported policy containing notice
requirements as a condition precedent to coverage. However, I respectfully
dissent with regard to the Majority’s interpretation of the notice provisions of
the Policy regarding forfeiture and its decision that the notice-prejudice rule
does not apply to this Policy. Reasons stated in Bituminous Casualty for
applying the notice-prejudice rule exist here. Consequently, Allied World was
required to show prejudice before it could withdraw coverage of the Policy from
KSU. Without that showing, KSU is entitled to coverage under the Policy and
summary judgment in its favor. Furthermore, I agree with KSU that it
21 substantially complied with the notice requirement and also on that basis, is
entitled to coverage under the Policy.
First, I agree with the Majority that the terms of the Policy are clear in
regard to KSU’s obligation to give written notice. However, unlike the Majority,
I agree with the circuit court that the Policy does not clearly explain or state
that automatic forfeiture of coverage is the consequence of failure to provide
notice within the given timeframe. As stated in Bituminous Casualty,
Absent language in the contract clearly spelling out the meaning and parameters of prompt notice and automatic forfeiture consequences, the reach of the term and the consequences are vague. The policy has a latent ambiguity which is subject to the rule of construction that applies to a contract of adherence.”15
The ambiguity thus weighs in favor of application of the notice-prejudice rule:
without strict forfeiture being a clear consequence of the insured’s failure to
follow a notice provision, the insurer must demonstrate “substantial prejudice
from the delay.”16
Furthermore, I agree with the circuit court’s analysis of the other
Bituminous Casualty factors. Because ambiguity exists in the Policy’s language
in regard to forfeiture consequences, a denial of coverage based upon untimely
notice would be contrary to KSU’s reasonable expectations. While I agree with
Allied World that KSU’s public policy argument is not as forceful as that in
Bituminous Casualty because KSU was not required to purchase the Policy,
because the Policy serves the public interest by protecting the public
15 821 S.W.2d at 802. 16 See id. at 801-02.
22 university, its employees and administrators, and Kentucky taxpayers, I agree
with the circuit court that public policy supports applying the notice-prejudice
rule. Otherwise, as the circuit court observed, allowing the insurer to escape
responsibility to defend this claim would create a windfall for the insurer at the
expense of the public. Lastly, without a showing of prejudice by Allied World,
because KSU’s notice was only three days late and was received within a
timeframe contemplated by the Policy, there obviously was no increase in risk
to Allied World from the late notice and Allied World’s premium pricing would
not be affected. Consequently, I would affirm the circuit court’s application of
the notice-prejudice rule and its grant of summary judgment to KSU.
I also agree with KSU’s alternative argument17 that when taking physical,
three-day mailing time into consideration, KSU substantially complied with the
notice requirements. Had KSU mailed the notice with it arriving on the same
day it arrived in the email box, there would be no windfall to Allied World.
While it is clear that the Policy’s mail and email provision required mailing or
emailing within the 90-day extended reporting period, given that the Policy
would allow Allied World to receive USPS mail outside the 90-day extended
reporting period, without prejudice, KSU’s email may be found as substantially
complying with the notice requirement.18
17 Because KSU has clarified that it asserts no cause of action under 806
KAR12:095, I refrain from expressing an opinion as to whether the regulation supports KSU’s argument for coverage. 18Substantial compliance depends upon the degree to which the insured has complied with the actual policy language. See Hill v. Union Cent. Life Ins. Co., 513 23 In sum, because the Policy did not clearly warn KSU that automatic
forfeiture of coverage was a consequence of not giving notice of a claim within
the 90-day extended reporting period, and because KSU substantially complied
with the notice requirement, I would reverse the Court of Appeals and reinstate
the summary judgment entered by the Franklin Circuit Court.
Bisig and Thompson, JJ., join.
COUNSEL FOR APPELLANT:
Philip Gray Fairbanks M. Austin Mehr Erik D. Peterson Mehr Fairbanks & Peterson Trial Lawyers, PLLC
COUNSEL FOR APPELLEE:
Chad Propst Ian C.B. Davis B. Todd Thompson Thompson Miller & Simpson, PLC
COUNSEL FOR AMICUS CURAE, COMPLEX INSURANCE CLAIMS LITIGATION ASSOCIATION
Aaron D. Griffith Walters Richardson, PLLC
Laura A. Foggan Crowell & Moring, LLP
S.W.2d 808, 808-09 (Ky. 1974); Hart v. Hart, 201 S.W.3d 457, 462 (Ky. 2006); see also Newark Ins. Co. v. Ezell, 520 S.W.2d 318, 319 (Ky. 1975).