RENDERED: DECEMBER 6, 2024; 10:00 A.M. NOT TO BE PUBLISHED
Commonwealth of Kentucky Court of Appeals NO. 2023-CA-0111-MR
OLD REPUBLIC AEROSPACE INC. APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE A. C. MCKAY CHAUVIN, JUDGE ACTION NO. 18-CI-000018 & 19-CI-003742
LOUISVILLE AVIATION, LLC AND MICHAEL PRATT APPELLEES
AND
NO. 2023-CA-0187-MR
LOUISVILLE AVIATION, LLC AND MICHAEL PRATT CROSS-APPELLANTS
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE A. C. MCKAY CHAUVIN, JUDGE ACTION NO. 18-CI-000018 & 19-CI-003742
OLD REPUBLIC AEROSPACE INSURANCE COMPANY CROSS-APPELLEE OPINION AFFIRMING IN PART AND REVERSING AND REMANDING IN PART IN BOTH APPEALS
** ** ** ** **
BEFORE: THOMPSON, CHIEF JUDGE; A. JONES AND LAMBERT, JUDGES.
LAMBERT, JUDGE: Old Republic Aerospace, Inc. (hereinafter “Old Republic”)
appeals from orders of the Jefferson Circuit Court granting judgment in its breach
of contract action in favor of Louisville Aviation, LLC and summarily dismissing
its claims for fraud/misrepresentation and punitive damages against the LLC as
well as all claims against Michael Pratt, its sole member, individually. Louisville
Aviation and Pratt cross-appeal from orders summarily dismissing their
counterclaims for wrongful use of civil proceedings, breach of contract, and bad
faith. After careful review of the record, briefs, and law, we affirm in part, and
reverse in part and remand in both appeals.
BACKGROUND FACTS
These appeals stem from a dispute regarding insurance benefits paid
after an aircraft leased by Louisville Aviation and insured by Old Republic was
damaged. The underlying facts are largely undisputed.
Louisville Aviation is a limited liability company that rents aircrafts to
the public, and Michael Pratt is the sole member of the company. Old Republic
-2- insured Louisville Aviation’s fleet. The insurance policy included the right of
subrogation1 as a condition of coverage:
16. SUBROGATION. [I]n the event of any payment under this policy, [Old Republic] shall be subrogated to all the Insured’s rights of recovery therefor against any person or organization and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing after the loss to prejudice such rights.
(Second emphasis added.)
On November 4, 2016, Phillip Heiskell (the pilot) rented a plane from
Louisville Aviation, and the aircraft was damaged during a hard landing. Heiskell
was covered under a liability insurance policy issued by AIG Aerospace Insurance
Services (hereinafter “AIG”). Within a week of the incident, the representatives
from both insurance companies and Pratt had communicated about repairs.
On November 14, 2016, Pratt submitted to Kaleb Gilmore, a claims
adjuster for AIG, an invoice for $13,505.50 per month for Louisville Aviation’s
lost revenue pursuant to a clause in the rental agreement signed by the pilot.
1 Subrogation, also known as the rule of substitution, “is the rule of law which allows a party under a legal obligation to satisfy the debt of another and acquire the rights of the creditor against the debtor.” Wine v. Globe American Cas. Co., 917 S.W.2d 558, 561 (Ky. 1996) (citing Nat’l Surety Corp. v. First Nat’l Bank, 278 Ky. 273, 128 S.W.2d 766 (1939)). “All subrogation rights are derivative and the insurer only acquires the rights of its insured.” Id. (citing Fireman’s Fund Ins. v. Gov’t Employees Ins., 635 S.W.2d 475 (Ky. 1982)).
-3- Gilmore counteroffered $10,055.80 per month for his loss of use,2 and Pratt
accepted. In a separate email, Gilmore told Pratt that Old Republic would “handle
the hull [damage claim] and subrogate against [the AIG] policy once everything
[wa]s sorted[,]” and AIG would pay up to the limit, and if that was not sufficient to
pay the entire demand, “the balance w[ould] be shown on [Pratt’s] loss run.”
Meanwhile, at the end of November, Old Republic reminded Pratt that
any benefits paid out “would be included in any future subrogation claim made . . .
against [the pilot] and or [the pilot’s] insurance company[,]” and it asked that he
“not take any action or sign any release document provided by [the pilot] or his
insurance company that would prevent Old Republic’s potential subrogation
claim.” Pratt responded that, “[w]hile [he] would never sign anything with AIG
releasing them from a claim or prohibiting [Old Republic] from going after them or
[the pilot],” he believed the rental agreement entitled Louisville Aviation to recoup
its lost revenue from the pilot or AIG. Pratt disclosed that he had already sent an
invoice to the pilot, and he asserted that whether the pilot or AIG paid was between
them and himself.
2 Although Pratt sought lost revenue, AIG actually compensated him for the loss of use of the plane, the difference being that lost revenue does not account for expenses that are not incurred. For this reason, and the fact it conforms to the parties’ brief, we refer to the sums AIG paid as loss of use damages, and we only use the term lost revenue when referencing Pratt’s statements.
-4- In January 2017, consistent with Pratt’s Sworn Statement in Proof of
Loss, Old Republic advanced $25,150.40 for the plane’s repairs. The proof of loss
contains a subrogation clause that reads:
To the extent of the amount paid under the Policy, the undersigned hereby assigns to [Old Republic] any and all claims and causes of action the undersigned may have against any third party arising out of the loss for which this Proof of Loss is submitted. [Old Republic] is hereby subrogated to such claims and causes of action and is empowered to sue, compromise or settle in the name of the undersigned, and the undersigned hereby pledges cooperation in any such action.
The plane was still being repaired in February 2017. At that time,
Aaron Hatch, who had taken over from Gilmore as the claims adjuster for AIG,
informed Pratt that AIG would no longer make the “good faith” monthly payments
for his loss of use damages. Instead, Hatch offered Pratt the remaining balance of
the policy limit if he signed a “full and final release” for the pilot.
On March 7, 2017, Pratt signed the following document:
PROPERTY DAMAGE RELEASE
Louisville Aviation and [the plane’s owner] for and in consideration of the sum total of $80,000 of which $40,223.20 has already been paid, leaving $39,776.80 to be further paid by [the pilot and AIG], the receipt of which is hereby acknowledged; do hereby fully and forever release, acquit and discharge [the pilot and AIG] and their heirs, administrators, executors and assigns from any and all actions and causes of action, for damage to [the plane] incurred on or about the 4th day of November 2016 . . . for which damages the said are
-5- claimed to be legally liable, and which liability is expressly denied; it being further understood and agreed that the acceptance of said sum is in full accord and satisfaction of a disputed claim and that the payment of said sum is not an admission of liability.
The undersigned hereby declares that the terms of this settlement have been completely read and are fully understood and voluntarily accepted for the purpose of making a full, complete and final compromise settlement of any and all claims, disputed or otherwise, liquidated or unliquidated, on account of the damages mentioned above, and for the express purpose of precluding forever any further or additional claims arising out of the aforesaid accident.
Thereafter, in April and May 2017, Pratt signed two more sworn
statements in proof of loss, which each contained identical subrogation clauses as
the earlier document. Based on these, Old Republic paid out an additional
$28,638.96 for repairs (resulting in a total of $53,789.36) and $13,836.54 for the
plane’s owner’s fixed costs. The plane returned to Louisville Aviation’s fleet in
May 2017.3
On May 25, 2017, Old Republic sent a letter to the pilot advising him
of its subrogated interest and the $67,625.90 in benefits it had paid out as a result
of his hard landing. Old Republic asserted that it was only after this that it learned
3 Old Republic’s brief claims that the plane returned to service on April 17, 2017, but this is refuted by its subrogation demand letter and emails entered into evidence.
-6- of Pratt’s self-directed claim against the AIG policy, the depletion of that policy,
and Pratt’s execution of the release against the pilot and AIG.
On January 2, 2018, Old Republic filed the underlying complaint
raising claims of breach of contract, misrepresentation, and a fraudulent insurance
act pursuant to Kentucky Revised Statutes (KRS) 304.47-020 against both
Louisville Aviation and Pratt individually and seeking compensatory and punitive
damages. Louisville Aviation and Pratt answered denying wrongdoing and
countersued Old Republic, alleging that its action to recover properly paid
insurance proceeds constituted a breach of contract, and asserting claims of
common law bad faith, violations of Kentucky’s Unfair Claims Settlement
Practices Act (UCSPA), KRS 304.12-230, and the wrongful use of civil
proceedings.4
By a September 4, 2018, order, the court granted a motion for partial
judgment on the pleadings. It dismissed all claims against Pratt in his individual
capacity, Old Republic’s claims for punitive damages and insurance fraud, and
Louisville Aviation’s counterclaim for wrongful use of civil proceedings.
Louisville Aviation’s remaining counterclaims for breach of contract and bad faith
were subsequently dismissed on January 6, 2020.
4 The appellees also asserted that Old Republic violated the Kentucky Consumer Protection Act (KRS 367.170 and KRS 367.220), but they did not appeal the court’s September 4, 2018, dismissal of this claim.
-7- Thereafter, the sole remaining issue, whether Louisville Aviation had
breached the insurance contract by prejudicing Old Republic’s right of
subrogation, came before the court for a three-day bench trial, and the parties
introduced testimony from a supervising claims adjuster for Old Republic, an
expert with decades of experience in aviation insurance, and Pratt.
A recounting of the specific testimony is not necessary. Old Republic
took the position that Pratt had breached the subrogation condition of the policy by
negotiating his loss of use claim directly with AIG, signing the release,
exaggerating his loss of use damages, and erroneously depleting the AIG policy
limits. The insurance expert testified that subrogation clauses are standard in the
industry and that the term “prejudice” is afforded its common, ordinary meaning.
Accordingly, he asserted that an insured need not extinguish the subrogation right
to breach the condition, but rather the insured only needed to increase the difficulty
or time necessary to exercise the right or strip the right of its value.
In its January 4, 2023, judgment in favor of the appellees, the court
concluded that, “while Louisville Aviation’s actions definitely adversely impacted
[Old Republic’s] ability to collect or recoup money from AIG and at least arguably
from [the pilot], it did not destroy its right to pursue the collection of the funds
from either source[,]” and thus, as a matter of law, Louisville Aviation was not in
breach. Old Republic and the appellees now appeal.
-8- ANALYSIS
No. 2023-CA-0111-MR
In its direct appeal, Old Republic seeks review of the circuit court’s
determination that the appellees did not breach the insurance contract. To recover
for a breach of contract a plaintiff must prove the existence of a contract, a breach
of that contract, and that the breach caused damages. EQT Prod. Co. v. Big Sandy
Co., L.P., 590 S.W.3d 275, 293 (Ky. App. 2019). Only the latter two elements are
disputed in these appeals. Central to whether a breach occurred is the meaning of
“prejudice” in the subrogation clause of the contract, which, as stated hereinabove,
provides “[t]he Insured shall do nothing after the loss to prejudice such rights.”
“The interpretation of a contract, including determining whether a
contract is ambiguous, is a question of law to be determined de novo on appellate
review.” Kentucky Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 695
(Ky. 2016) (citing Abney v. Nationwide Mut. Ins. Co., 215 S.W.3d 699, 703 (Ky.
2006)). An unambiguous contract “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. A contract is ambiguous if a
reasonable person would find it susceptible to different or inconsistent
interpretations.” Id. at 694-95 (internal quotation marks and citations omitted).
-9- Without explicitly finding that the contract was ambiguous, the court
nevertheless concluded that the “term [prejudice] must be interpreted more
narrowly [than its common meaning of ‘to interfere with or to adversely impact’]
to mean actual prejudice. In this context . . . ‘prejudice’ is the functional
equivalent of ‘destroyed.’” Accordingly, the court reasoned that while Louisville
Aviation’s actions adversely impacted Old Republic’s ability to collect or recoup
money from AIG and, arguably, from the pilot, its right to pursue collection of
funds from either source was not destroyed.
Old Republic argues that the policy was clear on its face and that the
court erred by not utilizing the plain meaning of the term “prejudice,” which
Merriam Webster Dictionary defines as “injury or damage resulting from some
judgment or action of another in disregard of one’s rights.”5 Without directly
addressing this argument, Louisville Aviation acknowledges that the policy only
required that the “right” of subrogation not be “prejudiced,” and that prejudice is
simply defined as “injury or harm.” Having reviewed the language of the clause,
as quoted above, we cannot say that it gives rise to more than one reasonable
interpretation, thus, we agree that the court should have used the common meaning
of its terms. Therefore, the judgment must be reversed and remanded.
5 Prejudice, MERRIAM WEBSTER ONLINE DICTIONARY, https://www.merriam- webster.com/dictionary/prejudice (last visited Nov. 25, 2024).
-10- In making this determination we recognize that both parties have cited
cases6 from other jurisdictions that discuss the role of prejudice in similar breach of
subrogation clause actions. However, a review of those cases reveals that they do
not involve the interpretation of the contract language. Rather, the cases address
the proof requirements for such actions and hold that if, any only if, a breach is
established, resulting prejudice, unrelated to the contract language, is an additional
element necessary for an insurer to prevail and either avoid liability or recoup
benefits previously paid. The cited authority is divided on who bears the burden of
proof, with some courts taking the position that prejudice is presumed and the
burden is on the insured to show otherwise, and what constitutes prejudice,
destruction of the right alone or that recovery was not possible regardless of the
insured’s actions.7 These cases simply have no bearing on determining whether
the condition at issue herein was breached.
6 Allied Mu. Ins. Co. v. Heiken, 675 N.W.2d 820 (Iowa 2004); State Farm Mut. Auto. Ins. Co. v. Green, 89 P.3d 97 (Utah 2003); and Clark v. Chubb Group of Ins. Cos., 337 F.3d 687 (6th Cir. 2003). 7 Although Kentucky has not directly addressed this issue, in Jones v. Bituminous Casualty Co., 821 S.W.2d 798 (Ky. 1991), the Supreme Court addressed a breach of contract on the insured’s alleged violation of a condition of the policy to provide prompt notice of an occurrence. Therein, the Court held that the insurer was required to prove probable prejudice resulted from the delay. Id. at 803.
-11- Although we have determined that a reversible error occurred, our
review continues because questions as to the effect of the release and proof of loss
statements will arise again on remand.
Regarding the former, the court’s conclusion that, as a matter of law,
Old Republic was not precluded from pursuing compensation from either AIG or
the pilot would require that the release Louisville Aviation executed was
ineffective, although this was not discussed specifically by the court. On this
point, Old Republic cites the all-encompassing language of the release and asserts,
inconsistently, that it was either certainly or arguably prevented from recovery
from both AIG and the pilot.8
Although the broad language of the release appears to be conclusive
on Old Republic’s inability to seek recovery, case law has recognized that, under
certain conditions, a release is ineffective. In Sharp v. Bannon, 258 S.W.2d 713,
714 (Ky. 1953), the Court stated that:
Where the wrongdoer chargeable with notice of insurer’s rights as subrogee of insured makes a settlement with insured to which insurer is not a party, the settlement will be regarded as having been made subject to the rights of insurer, and without destruction thereof; but a general release by insured to a third person responsible for the loss and without notice or knowledge of the insurance
8 Old Republic also repeatedly asserts that Louisville Aviation signed the release on the insurer’s behalf without its permission or authority. However, because this claim is refuted by the plain language of the release, which makes no reference or allusion to Old Republic, we will not address it further.
-12- company’s rights is a bar to the company’s claim to subrogation.
Here, emails sent months before the release was tendered or signed
establish that AIG anticipated that Old Republic would handle the repair costs and
then subrogate against the pilot’s policy. Old Republic acknowledges the holding
in Bannon and does not dispute the existence of the email. Given AIG’s notice of
Old Republic’s subrogation rights, applying Bannon, the release was made subject
to those rights.
To the extent Old Republic argues the release is valid regarding the
pilot, Louisville Aviation asserts that AIG’s notice of its subrogation rights should
be imputed to the pilot and cites two cases holding that an employee’s knowledge
is imputed to the employer, Bowlin Group, LLC v. Secretary of Labor, 437 S.W.3d
738, 746 (Ky. App. 2014), and Martin v. Provident Life & Accident. Insurance
Co., 47 S.W.2d 524 (Ky. 1932), in support. Because we cannot discern if this
issue was addressed by the court, we remand it for further consideration.
As for the proof of loss statements, frankly the Court fails to grasp the
significance of these documents on the issues at hand or why Old Republic makes
repeated reference thereto. We agree with the circuit court that, as a matter of law
and despite the references therein to an assignment of rights, the proof of loss
statements “had no impact” on Old Republic’s subrogation rights and “did not
subordinate Louisville Aviation’s inherent right to pursue a full recovery for its
-13- losses to those rights.” In Wine, the Court noted that “[a]lthough in abstract terms
an assignment differs from subrogation, in the field of insurance subrogation the
distinction is academic and not a substantive matter.” 917 S.W.2d at 564. The
Wine Court did hold that “subrogation rights[, such as who has the superior right to
compensation,] may be modified by contract, provided violence is not done to
established equitable principles” upon clear and explicit contractual language, but
Old Republic has made no such claim. Id. at 565. To the extent Old Republic
relies on Louisville Aviation’s signing of the proof of loss statements as evidence
that the policy was breached, we leave that matter to the circuit court.
Next we turn to Old Republic’s arguments that the circuit court erred
in summarily dismissing its claim of fraudulent misrepresentation, its claim for
punitive damages, and all claims against Pratt individually.
Summary judgment should be cautiously applied and not used as a
substitute for trial. Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476,
483 (Ky. 1991). Only when “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[,]” should summary judgment be
granted. Kentucky Rule of Civil Procedure (CR) 56.03. In considering a motion
for summary judgment, a court is required to construe the record “in a light most
-14- favorable to the party opposing the motion . . . and all doubts are to be resolved in
his favor.” Steelvest, 807 S.W.2d at 480. Because summary judgment involves
only questions of law, we give no deference to the circuit court’s assessment of the
record its legal conclusions. Foreman v. Auto Club Prop.-Cas. Ins. Co., 617
S.W.3d 345, 349 (Ky. 2021).
Regarding its fraud and misrepresentation claim, Old Republic asserts
in its briefs that it was induced to make payments not warranted under the policy
by Pratt’s false or reckless statements that Louisville Aviation would not prejudice
its subrogation rights and that these actions satisfy the criteria for a claim of
common law fraudulent misrepresentation.9 As Louisville Aviation notes, this
argument differs significantly from the claim of negligence per se for committing a
9 [A] claim of fraudulent misrepresentation must satisfy six elements:
(1) that the declarant made a material representation to the plaintiff; (2) that this representation was false; (3) that the declarant knew the representation was false or made it recklessly; (4) that the declarant induced the plaintiff to act upon the misrepresentation; (5) that the plaintiff relied upon the misrepresentation; and (6) that the misrepresentation caused injury to the plaintiff.
A claim of negligent misrepresentation requires proof by clear and convincing evidence of a material representation that a defendant knew, or should have known, to be false.
Collins v. Kentucky Lottery Corp., 399 S.W.3d 449, 453-54 (Ky. App. 2012) (internal quotation marks and citations omitted).
-15- fraudulent insurance act in violation of KRS 304.47-020 that Old Republic raised
in the circuit court and was summarily dismissed by the court’s September 4, 2018,
order.10 Only issues properly brought to the attention of the circuit court are
adequately preserved for appellate review. Elery v. Commonwealth, 368 S.W.3d
78, 97 (Ky. 2012) (citing Richardson v. Commonwealth, 483 S.W.2d 105, 106 (Ky.
1972)). Because Old Republic failed to bring its current legal argument to the
circuit court’s attention, we are not permitted to review it for the first time on
appeal, and thus the court’s dismissal stands.
In consequence, Old Republic’s related challenge to the court’s
dismissal of its claim for punitive damages, which would only be available if it
prevailed on the issue of fraudulent misrepresentation, is moot.11
Finally, Old Republic asserts that the court erred in dismissing its
claim against Pratt individually for breaching the subrogation conditions contained
in the policy as well as in three separate proof of loss statements that he signed.
Citing KRS 275.150 and Pannell v. Shannon, 425 S.W.3d 58 (Ky. 2014), the court
held that Pratt’s actions were by law the acts of Louisville Aviation and that Pratt
10 Old Republic also claimed preservation by its CR 60.02 motion to vacate the order dismissing its claims against Pratt or alternatively to amend the complaint, which was filed four years after the judgment at issue was entered. Although the motion did raise Old Republic’s present legal theory, the court concluded that the requested relief was not warranted and never reached the merits of claim, and so it is not preserved. 11 KRS 411.184(4) provides that “[i]n no case shall punitive damages be awarded for breach of contract.”
-16- could not be held personally liable. In its briefs, Old Republic refers this Court to
various cases reiterating that the statutory immunity granted to LLCs does not
shield its members from personal liability for their own fraudulent and tortious
conduct, and it asserts that Pratt’s conduct qualifies as such. Indeed, KRS
275.150(3) expressly provides that the immunity that shields members of an LLC
from being held personally responsible for the debts, obligations, or liabilities of
the entity does not extend to protect those members from liability for their own
personal “negligence, wrongful acts, or misconduct.” However, because the only
remaining viable claim is for breach of contract, and there is no dispute that the
policy and the proof of losses were signed by Pratt in his representative capacity,
the court did not err in concluding that Pratt could not be personally liable. See
Young v. Vista Homes, Inc., 243 S.W.3d 352, 363-64 (Ky. App. 2007).
In summary, the January 4, 2023, judgment in favor of Louisville
Aviation on Old Republic’s breach of contract claim is reversed and remanded for
proceedings consistent with this Opinion, and the portions of the September 4,
2018, judgment dismissing Old Republic’s claims against Pratt individually, its
claim of fraud, and claim for punitive damages are affirmed.
-17- No. 2023-CA-0187-MR
In its cross-appeal, Louisville Aviation asserts that the court
wrongfully granted summary judgment and improperly dismissed its claims of
wrongful use of civil proceedings and bad faith.
On the former, Louisville Aviation asserts its wrongful use of civil
proceeding claim was erroneously dismissed on procedural grounds just because,
at that point, there had not yet been a final adjudication of Old Republic’s breach
of contract suit. Louisville Aviation argues that the court should have bifurcated
the claim and held it in abeyance instead as, it asserts, is the custom in Kentucky
courts and as was requested in its response to Old Republic’s motion to dismiss.
The order on appeal states as follows:
To prevail on a claim for wrongful use of civil proceedings in Kentucky, the Defendants must prove the following elements: (1) [Old Republic] initiated, continued, or procured a criminal or civil judicial proceeding, (2) [Old Republic] acted without probable cause, (3) [Old Republic] acted with malice, which, in the civil context, means seeking to achieve a purpose other than proper adjudication of the claim, (4) the proceeding terminated in favor of the Defendants, (5) the Defendants suffered damages as a result of the proceeding. Raine v. Drasin, 621 S.W.2d 895, 899 (Ky. 1981) [abrogated by Martin v. O’Daniel, 507 S.W.3d 1 (Ky. 2016)]. Even when viewing the evidence of record in the light most favorable to Defendants there is insufficient evidence of record which would make it possible as a practical matter for the Defendants to prevail at trial.
-18- Although the record up to that point unquestionably could not support
a finding that Old Republic’s breach of contract action terminated in Louisville
Aviation’s favor, we cannot agree that the court plainly dismissed the claim on this
basis alone. Regardless, because we conclude dismissal on this ground was proper,
we affirm.
While Louisville Aviation argues that it is standard practice for courts
of the Commonwealth to bifurcate and abate, the authorities cited in support are
either irrelevant12 or distinguishable. In Wittmer v. Jones, the Supreme Court of
Kentucky did hold that the trial court erred in denying the insurer’s motion to
bifurcate the issue of bad faith from the insured’s negligence action against an
alleged tortfeasor. 864 S.W.2d 885, 891 (Ky. 1993). However, as the Court
explained, bifurcation in that case was to prevent unnecessary and possibly
prejudicial evidence regarding liability insurance from being interjected into the
trial of a negligence case. Id. Here, the concern is not prejudice but rather more
fundamentally that the cause of action has not accrued. Central Acceptance Corp.
v. Rachal, 95 S.W.2d 777 (Ky. 1936). Because Louisville Aviation could not
12 Louisville Aviation cites to Nationwide Mutual Insurance Co. v. State Farm Automobile Insurance Co., 973 S.W.2d 56, 58 (Ky. 1998), and Mattingly v. Stinson, 281 S.W.3d 796 (Ky. 2009), but we fail to see their relevance since the issue of bifurcation was not addressed in either case. Similarly, in Farmland Mutual Insurance Co. v. Johnson, 36 S.W.3d 368 (Ky. 2000), the Court does not address bifurcation beyond noting that the trial court severed the insured’s bad faith claim from their breach of contract claim and tried the latter first without any analysis of whether this was necessary or proper.
-19- plead an essential element (that Old Republic’s civil proceedings against it have
been favorably resolved) the court properly dismissed the claim.
Finally, Louisville Aviation argues that the court erred when it
dismissed its claims that Old Republic had acted in bad faith by:
allegedly conspir[ing] with another insurance company against the interests of its own insured, pursu[ing] its insured through lengthy interrogation sessions that exceed reasonable justification, fail[ing] to assert its claims against the actual tortfeasor while pursuing its own insured out of personal animus, assert[ing] its right to all insurance proceeds over any recovery of its insured (albeit after paying the claim), and attempt[ing] to attain personal retribution against its insured through the filing of a suit that it knew or should have known to be legally baseless.
We agree.
Louisville Aviation has asserted bad faith claims under both the
common law, flowing from Old Republic’s alleged breach of the covenant of good
faith and fair dealing inherent in an insurance contract, and based on Kentucky’s
UCSPA, KRS 304.12-230. See Ind. Ins. Co. v. Demetre, 527 S.W.3d 12, 26 (Ky.
2017). The test applicable to all bad faith actions is:
(1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed.
Wittmer, 864 S.W.2d at 890.
-20- In granting summary dismissal, the court accepted the argument that
the claims failed as a matter of law because Old Republic timely paid for the
plane’s repair and the requested fixed costs in full. The court noted that bad faith
actions generally involve an outright denial or the unreasonable delay in the
payment of a claim. The court asserted that “[t]here is no precedent for holding an
insurance agency liable under the UCSPA for a paying a claim to its insured, and
subsequently bringing a breach of contract claim against its insured for allegedly
prejudicing its subrogation rights.” The court reasoned that “to the extent that the
claims raised concern[s about] conduct subsequent to and outside of the claims
settlement process, those claims are not redressable under the UCSPA[,]” pursuant
to Knotts v. Zurich Insurance Co., 197 S.W.3d 512 (Ky. 2006).
On cross-appeal, Louisville Aviation renews its argument that Old
Republic’s litigation to void coverage and recover paid damages is, in essence, an
aggressive claim denial after the fact and that Kentucky’s bad faith law is broad
enough to encompass this conduct. In support, Louisville Aviation cites primarily
to Guaranty National Insurance Co. v. George, 953 S.W.2d 946 (Ky. 1997),
arguing that the Court’s review on the merits despite noting the insured paid
demonstrates the validity of its claim.
In George, the insured contracted for commercial insurance coverage
on a mail truck; however, through some mistake, the policy listed a vehicle
-21- identification number for a different truck owned by the insured’s family. Id. at
947. The mail truck was then involved in a fatal accident, and the insured was
sued for wrongful death. Id. The insurer defended the action but reserved the right
to deny coverage if the facts indicated the mail truck was not covered by the
policy. Id. The insured, in response, filed a bad faith action and simultaneously
sought a declaration of rights to resolve whether coverage existed. Id. Ultimately,
the circuit court determined that the policy should be reformed due to the parties’
mutual mistake and that coverage existed. Id. Thereafter, the insurer promptly
settled the wrongful death action within its policy limits. Id. at 948. The circuit
court then summarily dismissed the insured’s bad faith action concluding that the
issue of coverage had been fairly debatable. Id.
The insured appealed, arguing that the insurer’s “decision to defend
under a reservation of rights amounted to outrageous conduct in that the
undisputed facts indicated a mere clerical error on the face of the policy.” Id. at
948. On discretionary review, the Supreme Court stated that, though in retrospect
the issue of coverage may appear clear, it was not bad faith for a party to seek a
declaration of rights when an ambiguity or a suspected material error on the fact of
the policy would exclude coverage. Id. at 949. While the Court concluded the
insurer’s conduct did not satisfy the threshold for bad faith, citing the fact the
insurer provided a defense and promptly settled once the issue of coverage was
-22- resolved, it expressly rejected that defending under a reservation of rights and
seeking declaratory judgment would automatically absolve an insurer of bad faith.
Id. “Clearly, one can envision . . . situations where an insurer could abuse its legal
prerogative in requesting a court to determine coverage issues. Those may well be
addressed through a motion under Civil Rule 11 or, in certain circumstances, an
action for bad faith.” Id.
We conclude that Louisville Aviation’s bad faith claims do not fail as
a matter of law. Although not directly on point, George and its progeny, Demetre,
527 S.W.3d 12, demonstrate that the insurer’s fulfillment of its contractual
obligations, in those cases to defend their insured and settle tort actions filed
against them, is only a factor to be considered in determining overall whether the
insurer has breached the covenant of good faith and fair dealing inherent in any
insurance contract or in violation of the UCSPA.
Additionally, we conclude that the court’s reliance on Knotts is
misplaced. In Knotts, an injured employee initiated a claim with his employer’s
insurer and later filed a personal injury suit against the employer. 197 S.W.3d at
513-14. Subsequently, the employee filed a bad faith suit against the insurer
alleging violations of the UCSPA that occurred after the personal injury action was
filed. Id. at 514. On discretionary review, the Supreme Court of Kentucky
reversed the lower courts’ determination that such conduct was not covered by the
-23- UCSPA and held that the statute continues to apply during litigation. Id. The
Court explained that:
The commencement of litigation by the filing of a complaint, even when the claim adjustment process is underway, however, does not change the fundamental nature of what the claimant seeks. The “claim” – for compensatory payment under the insurance policy – is the same as before the litigation began. The claimant has simply opted to seek satisfaction of the claim through a different procedure. Nothing in [the UCSPA] limits its applicability to pre-litigation conduct, and since the statute applies to “claims,” it continues to apply to an insurer so long as a claim is in play. As such, we hold that [the UCSPA] applies both before and during litigation.
Id. at 517.
Here, Louisville Aviation’s bad faith claims were brought pursuant to
the common law in addition to the UCSPA. Regardless, we do not read Knotts to
require dismissal in this matter, and we agree with Louisville Aviation that its
claim is still “in play” where, despite initially receiving its contracted for
compensatory benefits, it has been forced to defend this entitlement since Old
Republic commenced the underlying action in 2018.
Finally, we reject as specious Old Republic’s related argument that
Louisville Aviation cannot satisfy the Wittmer standard because its claim was not
denied and was instead paid in full. As the Knotts Court has explained, the word
“claim” has multiple definitions, “[b]ut at its most basic, the word means an
-24- assertion of a right, with the contours and specific nature of the right depending on
context[,]” and in the context of insurance, this means an assertion of a right to
compensatory payment under the policy.13 Id. at 516. We believe that Old
Republic’s litigation challenging Louisville Aviation’s rights to proceeds under the
policy, regardless of the fact that the proceeds were initially paid out, could satisfy
the Wittmer test if all other elements were shown.
Accordingly, the court erred in concluding that Old Republic’s prompt
and full payment for repairs and fixed costs precluded as a matter of law Louisville
Aviation’s bad faith claims.
In summation of the cross-appeal, the court’s January 6, 2020,
judgment dismissing Louisville Aviation’s bad faith and breach of contract
counterclaims is reversed and remanded for further proceedings, and the portion of
the September 4, 2018, judgment dismissing the wrongful use of civil proceedings
claim is affirmed.
CONCLUSION
For the foregoing reasons, the court’s January 4, 2023, and January 6,
2020, judgments are reversed and remanded for proceedings consistent with this
Opinion, and the court’s September 4, 2018, judgment is affirmed.
13 Although the Court was discussing the meaning of the term as used in the UCSPA, we find this reasoning to be equally applicable to analyzing the test for bad faith.
-25- ALL CONCUR.
BRIEFS FOR APPELLANT/ BRIEFS FOR APPELLEES/ CROSS-APPELLEE: CROSS-APPELLANTS:
Brandon C. R. Sword Brian D. Stempien Alexandra C. Whittington Louisville, Kentucky Louisville, Kentucky
-26-