Case Name: NATIONWIDE MUTUAL INSURANCE COMPANY, Appellant, v. Timothy G. HATFIELD, Executor of the Estate of Charles Gay Hatfield, Appellee
Court: Supreme Court of Kentucky
Jurisdiction: Kentucky
Decision Date: 2003-12-18
Citations: 122 S.W.3d 36
Docket Number: No. 2001-SC-0969-DG
Parties: NATIONWIDE MUTUAL INSURANCE COMPANY, Appellant, v. Timothy G. HATFIELD, Executor of the Estate of Charles Gay Hatfield, Appellee.
Judges: LAMBERT, C.J., and STUMBO, J., concur.
Reporter: South Western Reporter Third Series
Volume: 122
Pages: 36–61

Head Matter:
NATIONWIDE MUTUAL INSURANCE COMPANY, Appellant, v. Timothy G. HATFIELD, Executor of the Estate of Charles Gay Hatfield, Appellee.
No. 2001-SC-0969-DG.
Supreme Court of Kentucky.
Dec. 18, 2003.
Gregory L. Smith, Kristie Babbitt Walker, Smith & Hoskins, Louisville, Counsel for Appellant.
Lee E. Sitlinger, Louisville, Counsel for Appellees.

Opinion:
WINTERSHEIMER, Justice.
This appeal is from a decision of the Court of Appeals which reversed a summary judgment entered by the circuit court which had dismissed the claim of the Hatfields and upheld the exclusion for un-derinsured coverage as found in the Nationwide policy of insurance.
This case involves a question of insurance coverage arising from an automobile collision. The key question relates to the validity of excluding government-owned vehicles from underinsured coverage.
Nationwide frames the issues as follows: 1) that the Court of Appeals erred in voiding the plain language of the policy excluding government-owned vehicles; 2) that the Supreme Court has specifically upheld the exclusion of coverage for damages caused by governmental agencies; 3) that U.S. Fidelity & Guaranty Co. v. Preston, Ky., 26 S.W.3d 145 (2000), does not overrule the principles of Commercial Union Insurance Co. v. Delaney, Ky., 550 S.W.2d 499 (1977); 4) that the Court of Appeals erred in applying the doctrine of "reasonable expectations" to the contract language; and 5) that long-standing public policy may not be amended without legislative authority.
Hatfield states that the questions presented are as follows: 1) that the policy language "due by law" does not preclude recovery of underinsured motorist coverage benefits under the facts of this case; 2) that the policy language contained in the "recovery" provision of the underinsured motorist endorsement does not preclude recovery in this case; 3) that the underin-sured motorist coverage exclusion for government vehicles is void and unenforceable; and 4) that the doctrine of reasonable expectations compels the extension of un-derinsured motorist coverage benefits under the facts of this case.
Facts
In 1997, Charles and Elouise Hatfield of Louisville, were traveling in Missouri when they were involved in a collision with a fire truck owned by the City of Montgomery. The driver of the fire truck was found responsible. Elouise Hatfield died from the injuries sustained in the crash, and Charles Hatfield survived the accident but is now deceased. This action is prosecuted by the executor of the estate of Charles Hatfield.
Under Missouri law, the municipality enjoys sovereign immunity except to the extent that the governmental body purchased liability insurance for tort claims. See Mo.Rev.Stat. § 537.610(1)(2003). Charles Hatfield and the estate of Elouise Hatfield each recovered $100,000 in damages following the collision, the maximum amount allowed by Missouri law. Those amounts did not cover the aggregate damages caused by the accident. Consequently, the Hatfields filed a claim with Nationwide to collect additional damages under their insurance policy provision providing underinsured motorist coverage. The Hatfields had purchased this optional coverage for two vehicles in exchange for an additional premium. Nationwide rejected the claim because of the exclusion of government-owned vehicles from the definition of what would be covered by underin-sured protection. Nationwide reasoned that the policy language excluding accidents involving government-owned vehicles and the language requiring damages to be "due by law" before payment is required under the policy to be controlling. The policy of insurance was purchased in Kentucky and contained the underinsured motorist coverage benefits provision payable in accordance with the underinsured motorist statute, KRS 304.39-320.
The circuit judge granted summary judgment in favor of Nationwide and the Court of Appeals reversed and remanded, finding that the exclusion was against public policy. This Court accepted review.
I. Policy Language "Due by Law"
In rejecting the claim by the Hat-fields, Nationwide relied on the following language in the policy:
We will pay compensatory damages, including derivative claims, because of bodily injury suffered by you or a relative and dm by law from the owner or driver of . an underinsured motor vehicle.... (emphasis ours)
Nationwide argues that because the City of Montgomery is protected from monetary liability by the doctrine of sovereign immunity, the language above prevents the Hatfields from recovering under their un-derinsured motorist coverage. We do not agree.
In Kentucky, the exclusionary or limiting language in policies of automobile insurance must be clear and unequivocal and such policy language is to be strictly construed against the insurance company and in favor of the extension of coverage. See Louisville Gas & Electric v. American Ins. Co., 412 F.2d 908 (6th Cir.1969); Eyler v. Nationwide Mutual Fire Ins. Co., Ky., 824 S.W.2d 855 (1992); Wolford v. Wolford, Ky., 662 S.W.2d 835 (1984); B. Perini & Sons, Inc. v. Southern Ry. Co., Ky., 239 S.W.2d 964 (1951).
In Preston, supra, the insured filed a lawsuit in the State of Georgia where his automobile accident had occurred. The jury found that he was 60 percent at fault. Because Georgia has a modified comparative fault statute, the insured was precluded from recovering against the tortfeasor and his Georgia lawsuit was dismissed. Thereafter, the insured filed suit in Kentucky seeking uninsured motorist coverage benefits from his own carrier, USF & G. The carrier rejected the claim relying on the following language in the policy:
We will pay all sums the insured is legally entitled to recover as compensatory damage from the owner or driver of an uninsured motor vehicle.
Ultimately, we held that an insured was legally entitled to recover damages from an uninsured motorist even though the insured was 60 percent at fault and Georgia law of modified comparative fault precluded recovery. Further, we held that the liability of USF & G is not vicarious or purely derivative, but is based on an independent contract that could be enforced even if the tortfeasor had been unidentified. This Court adopted the "essential facts" approach in interpreting such policy language even though the insured was not capable of obtaining a judgment against the tortfeasor. This approach requires an insured to prove 1) the fault of the uninsured motorist, and 2) the extent of damages caused by the uninsured motorist. Preston, cited with approval Puckett v. Liberty Mutual Ins. Co., Ky., 477 S.W.2d 811 (1971), where it was held that a requirement of a judgment was not essential to a claim for uninsured motorist coverage even though the inability to obtain a judgment effectively abolished the subrogation rights of the carrier.
We recognize that the trial judge did not have the benefit of the Preston decision when she considered the summary judgment motions in this case. There is no material distinction between the policy language "due by law" used by Nationwide and "legally entitled to recover" used by USF & G.
In Preston, this Court cited with approval cases from various foreign jurisdictions which support the essential facts approach. In summary, they are as follows: Harvey v. Mitchell, 522 So.2d 771 (Ala.1988); Hettel v. Rye, 251 Ark. 868, 475 S.W.2d 536 (1972); Allstate Ins. Co. v. Elkins, 63 Ill.App.3d 62, 21 Ill.Dec. 66, 381 N.E.2d 1 (1978); Allied Fidelity Ins. Co. v. Lamb, 361 N.E.2d 174 (Ind.Ct.App.1977); Patrons Mutual Ins. Ass'n v. Norwood, 231 Kan. 709, 647 P.2d 1335 (1982); Reese v. Preferred Risk Mutual Ins. Co., 457 S.W.2d 205 (Mo.Ct.App.1970); Pemberton v. Farmers Ins. Exchange, 109 Nev. 789, 858 P.2d 380 (1993); Satzinger v. Satzinger, 156 N.J.Super. 215, 383 A.2d 753 (Ch.Div.1978); In the Matter of the Arbitration between De Luca and MVAI Corp., 17 N.Y.2d 76, 268 N.Y.S.2d 289, 215 N.E.2d 482 (1966); Torres v. Kansas City Fire & Marine Ins. Co., 849 P.2d 407 (Okla.1993); Sahloff v. Western Casualty & Surety Co., 45 Wis.2d 60, 171 N.W.2d 914 (1969).
Under the facts here, the policy language in question was not intended to exclude the application of underinsured motorist coverage. It simply requires that the insured establish fault on the part of the underinsured motorist and uncompensated damages sustained as a result of that fault. The policy language is not to be interpreted so as to deny coverage when both essential elements are clearly established.
We are persuaded by the analysis provided by Professor Alan Widiss in his treatise, Widiss, Uninsured, and Underinsured Motorist Coverage, § 35:10 (1992). He concludes that such phrases should not be interpreted to preclude the right of an insured to recover underinsured motorist insurance when tort immunity either precludes securing or restricts the indemnification from a tortfeasor. A majority of courts in the United States have accepted this interpretation. See Jay M. Zitter, Validity, Construction & Application of Exclusion of Government Vehicles from Uninsured-Motorist Provision, 58 A.L.R. 5th 511, 1998 WL 210783 (1998). Seventeen states have held that such clauses are void as against public policy while five states are listed as upholding such exclusions. Kentucky is listed among the latter category by reason of the Delaney, supra, decision. Most of the cases in the A.L.R. article deal with uninsured coverage as contrasted with underinsured coverage. As noted by the Court of Appeals, this distinction is of critical importance. Uninsured coverage is required by statute and consequently it is not separately bargained for. However, underinsurance coverage must be requested by the insured and a separate additional premium is required.
Such an interpretation of policy language is consistent with other Kentucky case law. In Philadelphia Indemnity Insurance Co. v. Morris, Ky., 990 S.W.2d 621 (1999), the issue was whether the exclusive remedy provision of the Workers' Compensation Act barred an employee from recovering underinsured motorist benefits from his employer's motor vehicle insurance policy. This Court observed that a suit to recover underinsured motorist coverage is a direct action against the carrier who alone is the real party in interest. As noted in that case, the purpose of the 1988 revisions to the underinsured motorist statute are to provide full recovery for the insured.
The clear intent of the underin-sured motorist statute is to allow an insured to purchase additional coverage so as to be fully compensated for damages when injured by the fault of another individual. The inability of a tortfeasor to respond in damages for whatever reason is of no consequence. We cannot interpret the language of the policy to prevent the extension of underinsured motorist benefits to an insured that specifically purchases the coverage for his or her protection. This would be clearly contrary to the expectation of the insured and the intent of the legislature in requiring that such coverage be provided to its citizens upon request.
The language used by Nationwide does not compel the interpretation which the company promotes. Another interpretation of this policy language could require the establishment of fault on the underin-sured motorist rather than the ability to pay money damages. Cf Puckett, supra. Where a policy of insurance is susceptible to two interpretations, the insured is entitled to the interpretation most favorable to the extension of coverage. American Ins. Co., supra; Eyler, supra; Wolford, supra, and B. Perini & Sons, Inc., supra.
II. Legal Right to Recover Damages
The policy language contained in the "recovery" provision of the underin-sured motorist endorsement in the Nationwide policy does not preclude the recovery of underinsured motorist benefits in this case.
Nationwide contends that the language "a legal right to recover damages" from the "recovery" portion of its underinsurance endorsement, prevents the applicability of its underinsured motorist coverage in this case. The policy language in question states as follows:
RECOVERY
1. Before recovery, we and the insured must agree on two points:
a) whether there is a legal right to recover damages from the owner or driver of an uninsured motor vehicle or an underinsured motor vehicle; and if so,
b) the amount of such damages.
2. Any judgment against the uninsured or underinsured will be binding on us only if it has our written consent.
Under paragraph 1(a), the insured and the company must first agree on whether there is a legal right to recover damages from the underinsured driver. If there is an available legal right to recover damages from the other driver, then Nationwide could and would require that its insured recover those available damages as an offset and a precondition to any recovery of underinsured motorist coverage benefits. If Nationwide and its insured agree that no such legal right to recover exists, then the only remaining question to be agreed upon is the amount of damages under paragraph 1(b). This policy language clearly recognizes the fact that it is not always necessary for an insured to be able to obtain a judgment or recover indemnification from an underinsured motorist as a
precondition for recovery of underinsured coverage benefits.
The policy language urged by the company was not intended to require that the Hatfields be able to obtain a judgment for the full amount of their damages against an underinsured motorist before obtaining a recovery from the underin-sured coverage benefits. As this Court reasoned in Preston, all that was intended is to require that the insured prove the fault of the underinsured motorist and the extent of damages caused by that driver.
III. Government Vehicle Exclusion
Nationwide argues that the language of the policy excludes underinsured motorist coverage for matters involving government-owned vehicles. The policy states:
3.We will not consider as an uninsured motor vehicle or underinsured motor vehicle:
b) any motor vehicle owned by a government unit or agency.
The purpose of this language is to avoid responsibility of underinsured claims where the company would not be able to recover subrogation from the tortfeasor who might be protected by sovereign immunity. The unfortunate inability of the company to recover subrogation claims from the wrongdoer is of no consequence to the person covered by an underinsured policy in Kentucky. All that is required is that the insured be able to establish fault and damages before obtaining underin-sured motorist coverage. See KRS 304.39-320; Preston; Puckett.
The language urged by the company as applied to underinsured claims would violate the public policy and purpose of the Motor Vehicle Reparations Act and the underinsured motorist statute, KRS 304.39-320. Kentucky requires that automobile insurance companies make underin-sured coverage available upon request. Once a request is made, it is mandatory that the insurance company provide the coverage for an additional premium. Any attempt to limit or exclude the extension of coverage is clearly contrary to the expressed intent of the underinsured motorist statute and is void and unenforceable.
Reliance by Nationwide on Delaney, is misplaced. That case was not decided under the underinsured motorist statute and is not supportive of the position of the company here. There are significantly different policy considerations in cases involving underinsured motorist benefits which are materially different from the uninsured motorist laws. The intent of the Motor Vehicle Reparations Act in general and the underinsured motorist statute, KRS 304.39-320, in particular, is to ensure as much as possible that the victim of a motor vehicle accident is fully compensated. The policy exclusion which is the subject of this opinion is clearly contradictory to such a statutory purpose. Cf. Saxe v. State Farm Auto. Mut. Ins. Co., Ky.App., 955 S.W.2d 188 (1997). As stated in Preston, the public policy underlying the Kentucky statutes is the compensation of people who are injured by the negligence of uninsured motorists. The public policy regarding underinsured situations is even more compelling.
Morris, supra, also supports the position of the insureds. As noted earlier, in Morris, this Court observed that a suit to recover underinsured motorist coverage is a direct action against the insurance earner who alone is the real party in interest. Consequently, claims for underinsured motorist benefits would still exist against the underinsured motorist carrier even though the claim against the worker's compensation carrier itself might be barred by the exclusive remedy provisions of the Workers' Compensation Act. By comparison, claims against the insurance company here for underinsured coverage would not be barred even though the plaintiffs could be barred from any direct recovery against a municipality protected by sovereign immunity.
Courts in other jurisdictions have consistently held that the government-owned vehicle exclusion is void even in policies of uninsured motorist coverage. Vaught v. State Farm Fire & Casualty Co., 413 F.2d 539 (8th Cir.1969); Higgins v. Nationwide Mut. Ins. Co., 291 Ala. 462, 282 So.2d 301 (1973); Transportation Ins. Co. v. Martinez, 183 Ariz. 33, 899 P.2d 194 (Ct.App.1995); McClellan v. Sentry Indemnity Co., 140 Ariz. 558, 683 P.2d 757 (Ct.App.1984); Cropper v. State Farm Mut. Auto. Ins. Co., 671 A.2d 423 (Del.Super.Ct.1995); Johns v. Liberty Mut. Fire Ins. Co., 337 So.2d 830 (Fla.Dist.Ct.App.1976); State Farm Mut. Auto. Ins. Co. v. Carlson, 130 Ga.App. 27, 202 S.E.2d 213 (1973); Franey v. State Farm Mut. Auto. Ins. Co., 5 Ill.App.3d 1040, 285 N.E.2d 151 (1972); Hillhouse v. Farmers Ins. Co., Inc., 226 Kan. 68, 595 P.2d 1102 (1979); Powell v. Allstate Ins. Co., 233 So.2d 38 (La.Ct.App.1970); Young v. Greater Portland Transit Dist., 535 A.2d 417 (Me.1987); Jennings v. City of Dayton, 114 Ohio App.3d 144, 682 N.E.2d 1070 (1996); Parrish v. Mid-American Fire & Casualty Co., 63 Ohio App.3d 1, 577 N.E.2d 1109 (1989); Watters v. Dairyland Ins. Co., 50 Ohio App.2d 106, 361 N.E.2d 1068 (1976); State Farm Auto. Ins. Co. v. Greer, 777 P.2d 941 (Okla.1989); Rueschemeyer v. Liberty Mut. Ins. Co., 673 A.2d 448 (R.I.1996). See also, Widiss, Uninsured and Underinsured Motorist Ins., § 8.8 (1992) and additional cases cited therein.
Cases in other jurisdictions which have addressed the validity of the government-owned vehicle exclusion under policies of underinsured motorist coverage have also consistently held such exclusionary language void and unenforceable. Ronning v. Citizens Security Mut Ins. Co., 557 N.W.2d 368 (Minn.Ct.App.1996); Parrish, swpra; Greer, supra; Karlson v. City of Oklahoma City, 711 P.2d 72 (Okla.1985); Kyrkos v. State Fam Mut. Auto. Ins. Co., 121 Wash.2d 669, 852 P.2d 1078 (1993).
It is of some interest to observe that in Missouri, the government-owned vehicle exclusion is void as against public policy. See Martin v. State Fam Mut. Auto. Ins. Co., 755 S.W.2d 638 (1988). See also Welch v. Automobile Club Inter-Insurance Exchange, 948 S.W.2d 718 (Mo.Ct.App.1997); Gibbs v. National General Ins. Co., 938 S.W.2d 600 (Mo.Ct.App.1997).
The policy provision seeking to exclude government-owned vehicles is contrary to the express intent of KMVRA and the Underinsured Motorist Statute. The Kentucky Underinsured Motorist Statute is part of KMVRA and must be construed with the Act.
IV. Reasonable Expectations
Nationwide argues that the Court of Appeals erred in applying the doctrine of "reasonable expectations" to unambiguous contract language. It contends that the contract language is clear and does not violate public policy.
Allstate Ins. Co. v. Dicke, Ky., 862 S.W.2d 327 (1993), holds that it is contrary to public policy to deny items of personal insurance including underinsured motorist coverage when such coverage has been bought and paid for since there is a reasonable expectation that the coverage will be provided. Here, the Hatfields had a reasonable expectation that the additional premiums they paid for underinsured motorist insurance coverage would compensate them if they were injured by a vehicle with insufficient insurance coverage. By virtue of the sovereign immunity cap limitation, the fire truck which struck the Hat-fields had insufficient coverage. Accordingly, the Hatfields were entitled to the full benefit of the undermsured coverage that they had purchased.
We realize that both parties to this appeal have cited numerous cases in support of their respective positions. This Court has also recited a variety of cases from foreign jurisdictions in the hope that they might be of benefit to the members of the legal profession and the people of Kentucky. We must also state that the authorities cited by the insurance company have not been persuasive.
It is the decision of this Court that an insurance policy provision that excludes government-owned vehicles from underin-sured coverage is against public policy and therefore is void and unenforceable.
The decision of the Court of Appeals is affirmed.
LAMBERT, C.J., and STUMBO, J., concur.
GRAVES, J., concurs by separate opinion.
COOPER, J., dissents by separate opinion and is joined by JOHNSTONE, J.
KELLER, J., dissents by separate opinion.