Coverage Analysis
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KENTUCKY

  ACCIDENTS OR OCCURRENCES

  Insurer must prove subjective intent under standard set forth by Kentucky Supreme Court in James Graham Brown Foundation v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273 (Ky. 1991). The requisite intention may be proved either by direct evidence of actual intent or it may be inferred by the nature of the act and the accompanying reasonable foreseeability of harm.  Nationwide Mut. Fire Ins. Co. v. May, 860 F.2d 219, 223 (6th Cir. 1988)(Kentucky law), citing, Woods v. Provident Life & Accident Ins. Co., 240 Ky. 398, 42 S.W.2d 499, 501-02 (1931); and Willis v. Hamilton Mut. Ins. Co., 614 S.W.2d 251, 252 (Ky. App. 1981).

  "The general rule is that an effect is not accidental if the consequence of an act can be reasonably anticipated, or if the consequence is not unusual." Kentucky Central Life Ins. Co. v. Willet, 557 S.W.2d 22, 224 (Ky. App. 1977).  Further, "a consequence which is a result of plan, design or intent is commonly understood as not accidental." Fryman v. Pilot Life Ins. Co., 704 S.W.2d 205, 206 (Ky. 1986). Thus, in Continental Ins. Co. v. DAV, No. 91-CA-776-MR (Ky. App. July 17, 1992), the Kentucky Court of Appeals held that an employee's claim that she suffered mental distress as the result of being wrongfully discharged was a reasonably anticipated result of an intentional act and therefore not an "occurrence."

  Intent may be inferred in cases of sexual molestation.  Thompson v. West American Ins. Co., 839 S.W.2d 579 (Ky. App. 1992).  The Court of Appeals has since applied this inferred intent ruled to other types of conduct that is inherently injurious, without regard to whether the insured subjectively intended to cause harm.  In Goldsmith v. Physicians Ins. Co. of Ohio, 890 S.W.2d 644 (Ky. App. 1994)(sodomy against minors), the Court of Appeals rejected the insured's contention that his lack of capacity to form an intent to injure precluded the insurer from refusing to provide a defense.

  The Kentucky Court of Appeals has ruled in Stone v. Kentucky Farm Bureau Mutual Insurance Company, 34 S.W.3d 809 (Ky. App. 2000), review denied  (Ky. January 17, 2001) that a general liability policy did not provide coverage for a murder-suicide notwithstanding the Estateís claims that the perpetrator was mentally ill at the time of the shootings.  The court ruled that an intent to injure could be inferred from certain types of intentional acts.  Furthermore, the court declared that there was sufficient evidence support a finding that the insured was capable of forming an intent to act and comprehended his acts.

  A "caused by accident" policy was interpreted by the Supreme Court of Kentucky as not extending coverage to contamination from a city dump that was a "natural and ordinary consequence" of the insured's deliberate acts. Western Cas. & Sur. Co. v. City of Frankfort, 516 S.W.2d 859 (Ky. 1974).
 

  APPELLATE PROCEDURES

   Kentucky has both an intermediate appellate court and a state Supreme Court.
 

  BAD FAITH

  Unfair or deceptive claims handling practices are prohibited by KRS 446.070 and KRS 304.12-230.  In State Farm Mutual Automobile Ins. Co. v. Reeder, 763 S.W.2d 116 (Ky. 1989), the Kentucky Supreme Court ruled that these statutes created a private right of action for aggrieved insureds.  Since 1988, Kentucky no longer requires proof that the insurer's action be part of a continuing course of bad faith conduct. Simpson v. Travelers Ins. Co., 812 S.E.2d 510 (Ky. App. 1991).

  Unfair or deceptive consumer practices are proscribed by Ky. Rev. Stat. Ann. § 367-110 (Michie/Bobbs-Merrill 1987 & Supp. 1992).

  Under Kentucky law, an insured must prove three elements in order to prevail against an insurance company for a claimed bad faith refusal to pay the insured's claim.  First, the insurer must be obligated to pay the claim under the terms of the policy.  Second, the insured must lack a reasonable basis in law of fact for denying the claim.  Finally, it must be shown that the insurer either knew that there was no reasonable basis for denying the claim or acted with reckless disregard as to whether such a basis existed.  Kemper Ins. Co. v. Hornback, 711 S.W.2d 844, 846 (Ky. 1986)and Currie v. Firemanís Fund Insurance Company, 784 S.W.2d 176, 178 (Ky. 1989). 

  An insurer may be liable for failure to settle within policy limits, notwithstanding the existence of any bona fide coverage dispute.  Eskridge v. Educator and Executive Insurers, Inc., 766 S.W.2d 887, 889 (Ky. 1984).  

  However, an insurer may not be held to have acted in bad faith its denial of coverage was based on a "fairly debatable" coverage position.  Simpsonville Wrecker Service v. Empire Fire & Marine Ins. Co., 880 S.W.2d 886 (Ky. App. 1995); Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993).  A coverage position is "fairly debatable" if it represents an issue of first impression in Kentucky but is supported by authority from other jurisdictions.  Simpsonville, 880 S.W.2d at 890.   The Supreme Court has since ruled that a dispute over facts cannot form the basis for a fairly debatable defense, however.  In Farmland Mutual Insurance Company v. Johnson, 1998-SC-0938 (Ky. February 22, 2001), the court ruled that although the elements of a claim may be ďfairly debatable,Ē an insurer is still required to undertake a fair and reasonable investigation of the insuredís claim.  The fact that the insurer may dispute the amount of the insuredís recovery does not relieve the insurer of its duty to handle the claim fairly.

  These issues were most recently addressed by the Kentucky Supreme Court in Guaranty National Ins. Co. v. George, 1997 WL 613465 (Ky. October 2, 1997).  The Georges had provided a defense to an automobile liability claim under a reservation of rights reflecting a possible error on their policy as to whether the vehicle involved in the accident was insured or not.  The insurer brought a declaratory judgment action to resolve this question and, after the trial court determined that the vehicle was, in fact, insured, the insurer promptly settled the underlying claims.  under these circumstances, the Kentucky Supreme Court reversed the Court of Appeals' ruling that the insurer had not had a "fairly debatable" basis or had acted in bad faith in providing a defense under a reservation of rights but refused to find, however, that an insurer was absolved of any potential bad faith merely by filing an action for declaratory relief.  Incurring opinion suggested that any claim for third-party bad faith was automatically expunged once the insurer had resolved the contractual basis for coverage by settling the underlying tort claims against the insured.  

  Although evidence of the insurerís claim handling conduct after denial was relevant with respect to the insuredís bad faith claim, the insured was not entitled to discover matters pertaining to the insurerís litigation conduct.  Graham v. Gallant Insurance Group, 1999 WL 632106 (D. Ky. August 9, 1999).

  The Kentucky Court of Appeals ruled in George v. Guaranty National Ins. Co., 1996 WL 99439 (Ky. App. March 8, 1996), rev'd on other grounds, 1997 WL 613465 (Ky. October 2, 1997) that a coverage opinion received by a first-party insurer was not discoverable in a bad faith claim by the insured.  The court refused to recognize an exception to the attorney-client privilege for bad faith claims.  A dissenting justice likened this situation to claims in which c ourts have avoided the privilege where the attorney-client communication was for the purpose of perpetrating a crime or fraud.
 

  BREACH OF POLICY CONDITIONS

  Prejudice rule adopted for the first time in Jones v. Bituminous Cas. Corp., 821 S.W.2d 798 (Ky. 1991).  Court ruled that insurer has the burden of proving that it was "reasonably probable that [it] suffered substantial prejudice from the delay in notice" but need not prove actual prejudice.  Previously,  Kentucky courts had barred coverage without regard to prejudice and had placed the burden of proving compliance with policy conditions on the insured.  Reserve Ins. Co. v. Richards, 577 S.W.2d 417, 418 (Ky. 1978) and Travelers Ins. Co. v. Boyd, 312 Ky. 527, 228 S.W.2d 421 (1949).

  A breach of the cooperation clause will only defeat coverage if it results in prejudice to the insurer.  In Western Farm Bur. Mut. Ins. Co. v. Danville Constr. Co., 463 S.W.2d 125 (Ky. 1971), the Kentucky Supreme Court rejected a per se rule that the insuredís failure to appear at trial, even if wilful and even if the insurer has done what it reasonably could do to produce the insured, suffices on its own to establish, or to create a presumption of, prejudice. 
 

  BURDEN OF PROOF

  A federal court has affirmed that a policyholder has the burden of proving the existence and terms of a missing policy but failed to resolve the issue of whether said proof must be by a standard of "clear and convincing" evidence or a lesser "preponderance" standard.  Multi-Craft Litho, Inc. v. Aetna Casualty & Surety Co., No. 93-163 (E.D. Ky. February 21, 1995). 
 
  CHOICE OF LAWS

  In Lewis v. Family Group, 555 S.W.2d 579 (Ky. 1977), the Supreme Court of Kentucky adopted the "most significant relationship test" of the Restatement, §188.  See Breeding v, Massachusetts Indemnity and Life Ins. Co., 633 S.W.2d 717, 719 (1982); Paine v. La Quinta Motor Inns, Inc., 736 S.W.2d 355 (1987).
 

  "DAMAGES"

  Superfund "response costs" were held covered in West American Ins. Co. v. City of Southgate, Kentucky, C.A. No. 91-17 (E.D. Ky. January 22, 1992) and Aetna Casualty & Surety Co. v. Nuclear Engineering Co., Jefferson Circuit Court No. 87CIO3359 (Ky. January 4, 1995). 
 

  DISCOVERY ISSUES

   --Claims Manuals
 

   --Drafting History
 

   --Other Policyholder Claims
 

   --Reinsurance Information
 

   --Reserves
 

  DUTY TO DEFEND

  Kentucky follows a somewhat unusual rule wherein the duty to defend is measured by the actual or adjudicated facts and not by the allegations in the underlying complaint or the possibility that these allegations would give rise to coverage.  Cincinnati Ins. Co. v. Vance, 730 S.W.2d 521 (Ky. 1987).   But see James Graham Brown Foundation v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273 (Ky. 1991)(mere potential for coverage based on allegations may trigger duty).

  An insurer is not required to bring a declaratory action in the wake of a denial of coverage. 

  The duty to defend has been held to extend to an obligation to appeal where reasonable grounds for an appeal exist.  Wilcox v. Board of Education, 779 S.W.2d 221, 223 (Ky. App. 1989) and Ursprung v. Safeco Ins. Co., 497 S.W.2d 726 (Ky. 1973).
 

  ESTOPPEL AND WAIVER

  A party claiming estoppel must establish prejudice.  In such cases, ďgenerally, the courts hold that where an insurance company undertakes the defense of an insured, the loss of the right by the insured to control and manage the case is itself a prejudice.Ē  American Casualty Co.  of Reading, PA v.  Shely, 234 S.W.2s 303 (Ky.  1950)(one year delay held to give rise to estoppel).  In assessing whether a basis for prejudice exists, Kentucky courts have looked to the length of the delay and, in particular, whether it resulted in a loss of control over the defense.  See  Western Cas.  Co.  v.  City of Frankfort, 516 S.W.2d 859 (Ky.  App.  1974)(8 day delay, during which time appointed counsel filed answer, didnít cause prejudice); Davis v.  Home Ind.  Co., 659 S.W.2d 185 (Ky.  App.  1983)(no loss of control where insuredís personal counsel was assisting in defense) and Universal Underwriters Ins.  Co.  v.  Travelers Ins.  Co, 451 S.W.2d 616 (Ky.  App.  1970)(insured had direct role in controlling defense)
 

  NUMBER OF OCCURRENCES

  In Continental Ins. Co. v. Hancock, 507 S.W.2d 146 (Ky. 1973), the Kentucky Supreme Court ruled that claims filed against a bar by several individuals involving a fight that began inside a bar and then continued outside afterwards all involved the same "occurrence." 
 

  POLLUTION EXCLUSION

  Leading case is Sixth Circuit's ruling in USF&G v. Star Fire Coals, Inc., 856 F.2d 31 (6th Cir. 1988), wherein gradual pollution was held not to be "sudden" and deliberate discharges not "accidental" even where the insured did not mean to cause injury.  This ruling was applied to waste generators in USF&G v. George W. Whitesides Co., Inc., 932 F.2d 1169 (6th Cir. 1991).

  Despite a policyholder attempt in 1995 to distinguish Star Fire Coals on the basis of the Kentucky Supreme Court's intervening analysis of the "occurrence" issue in James Graham Brown, federal courts have continued to uphold the pollution exclusion under Kentucky law.  See Transamerica Ins. Co. v. Duro Bag Mfg. Co., C.A. No. 89-161 (E.D. Ky. August 5, 1993), aff'd, 50 F.3d 370 (6th Cir. 1995); West American Ins. Co. v. City of Southgate, Kentucky, C.A. No. 91-17 (E.D. Ky., January 22, 1992) and Multi-Craft Litho, Inc. v. Aetna Cas. & Sur. Co., No. 93-163 (E.D. Ky. November 14, 1994).  In Duro Bag, the Sixth Circuit rejected a waste generator's suggestion that it certify the meaning of the pollution exclusion to the Kentucky Supreme Court.  Further, the court ruled that it was not required to consider the insured's "drafting history" arguments since the exclusion was unambiguous on its face.

  Exclusion was also held to apply to a waste generator in DBK v. Travelers Indemnity Co. of America, 1995 U.S. Dist. LEXIS 21536 (W.D. Ky. January 25, 1995).
The District Court also rejected DBK's argument that allegations of a "threatened" emission or release are outside the scope of the exclusion.

  In Ford Motor Co. v. INA, Bullitt County Circuit Court No. 92-CI-00619 (Ky. September 1, 1994), Judge Waller dismissed an insured's regulatory estoppel claims, holding that they had no  bearing on insurers that were not a party to such representations and that, furthermore, such claims were irrelevant in view of the fact that the Sixth Circuit had already held that this language was clear and unambiguous."  Finally, the court held that Ford's estoppel argument would in any event fail since it had failed to establish detrimental reliance.

  "Absolute" exclusions were also upheld in West American Ins. Co. v. City of Southgate, Kentucky, C.A. No. 91-17 (E.D. Ky. January 22, 1992) and Multi-Craft Litho, supra.  More recently, the federal court has ruled that the exclusion applied to damage to customer's facility caused by the insured contractor's negligent release of ammonia fumes.  Bituminous Cas. Co. v. RPS Co., 915 F.Supp. 882 (W.D. Ky. 1996), appeal pending (6th Cir. 1997).

  More recently, however, the Kentucky Court of Appeals has ruled in Motorist Mutual Ins. Co. v. RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996) that the exclusion did not apply to personal injury claims resulting from indoor exposures to carbon monoxide fumes.  While finding that the policy provisions were not themselves ambiguous, the court found ambiguity in the conflicting interpretations of this language that courts around the country had come to.  Whereas the court seems to have distanced itself from Tufco, it fully embraced the more recent ruling of the Maryland Court of Appeals in Sullins, particularly insofar as the Maryland court had ruled that an ordinary business person would not understand such exclusions to extend to unexpected releases of toxic fumes from a vent pipe, nor should courts give a "blind application of the literal terms" of the exclusion. 

  Exclusion held to apply to radioactive contamination from insuredís scrap metal in Sunny Ridge Enterprises, Inc. v. Firemanís Fund Insurance Company, 2001 U.S. Dist. LEXIS 1981 (E.D. Ky. January 22, 2001) despite insuredís argument that separate nuclear liability exclusion created ambiguity. Judge Hood declared  that the nuclear exclusion served an entirely different purpose.
 

  PROPERTY DAMAGE

  Economic losses arising from an insured builderís inadequate and incomplete performance in constructing a residence was not ďproperty damage.Ē  Assurance Company of America v. Dusel Builders, Inc., 1999 WL 1258896 (W.D. Ky. December 16, 1999).

  The presence of radioactive waste in soil was held to be "property damage" in Aetna Casualty & Surety Co. v. Nuclear Engineering Co., Jefferson Circuit Court No. 87CIO3359 (Ky. January 4, 1995) even though the radionuclide levels did not exceed regulatory standards. 
 

  PUNITIVE DAMAGES

  Coverage permitted if award is based on vicarious liability but not direct wrongdoing.  Continental Ins. Co. v. Hancock, 507 S.W.2d 146 (Ky. 1973). 

  An exclusion for punitive damages was upheld in Hodgin v. Allstate Insurance Company, 935 S.W. 2d 614, 615 (Ky. App. 1996).  Further, the Hodgin court ruled that such exclusions are not against public policy.
 

  STANDARDS FOR POLICY INTERPRETATION

  Doctrine of reasonable expectations adopted in Woodson v. Manhattan Life Ins. Co., 743 S.W.2d 835, 839 (Ky. 1987).  Limitations on coverage must be expressed clearly and conspicuously.  Jones v. Bituminous Cas. Corp., 90-SC-746-DG (Ky. December 19, 1991).

  An insurance binder is not an insurance policy but is merely ďa temporary arrangement to provide immediate coverage until a permanent policy can be obtained.  General Accident Insurance Company of America v. Guess, 933 S.W.2d 97 (Ky. App. 1997).  
 

  THEORIES OF ALTERNATIVE LIABILITY

  No cases.
 

  TRIGGER OF COVERAGE

  In Stillwell v. Brock Brothers, 736 F.Supp. 201 (S.D. Ind. 1990), a federal district court opined that Kentucky would follow the majority rule that coverage is triggered by the "result" of an insured's negligence and not by the negligence itself (the "cause").

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