Opinion ID: 1253894
Heading Depth: 3
Heading Rank: 3

Heading: Kentucky insurance law

Text: When interpreting insurance contracts, the Kentucky Supreme Court has held that courts are to look at the reasonable expectations of the insured. Marcum v. Rice, 987 S.W.2d 789, 791 (Ky.1999) (citation omitted). The reasonable expectations of an insured are generally determined on the basis of an objective analysis of separate policy items and the premiums charged for each. Id. When an insured has bought and paid for an item of insurance coverage, he may reasonably expect it to be provided. Id. In the 1990s, the Kentucky Supreme Court decided a number of cases addressing UIM coverage and explained the circumstances in which an insured will be deemed to have purchased multiple units of UIM coverage that may be stacked. The Court first made clear in Hamilton v. Allstate Insurance Co., 789 S.W.2d 751, 753 (Ky.1990), that UIM coverage is different from typical liability insurance because UIM coverage is personal to the insured. This means that UIM coverage follows an insured person as opposed to any particular vehicle (i.e., the policy covers each insured as a driver, a passenger, a pedestrian, or a bystander, whether inside or outside a vehicle). In the related case of Chaffin v. Kentucky Farm Bureau Insurance Cos., 789 S.W.2d 754, 756 (Ky.1990), the Kentucky Supreme Court held that UIM premiums may sometimes give rise to separate units of UIM coverage that may be stacked by the insured. The Court reasoned that if an insurance company charges separate premiums for multiple items of the same personal insurance, then an insured is generally entitled to stack the policy and collect money for each unit of UIM coverage purchased. Id. In other words, the personal nature of UIM coverage creates a reasonable expectation that payment of separate premiums results in separate coverages. Allstate Ins. Co. v. Dicke, 862 S.W.2d 327, 328 (Ky.1993). If an insured has paid additional money without receiving additional coverage, stacking is necessary to prevent insurance companies from depriving an insured of benefits that he or she has paid for. Id. In Estate of Swartz v. Metropolitan Property & Casualty Co., 949 S.W.2d 72, 75 (Ky.Ct.App. 1997), the Kentucky Court of Appeals explained that when deciding whether UIM coverage should be stacked, courts should undertake an objective analysis of separate policy items and the premiums charged for each. The court noted that the deciding factor is not what the individual insured knew, read, or expected, but what he or she actually paid for UIM coverage and the manner in which the insurance company calculated and billed the premium. Id. It also explained that the payment of separate premiums for multiple items of the same `personal' insurance coverage [is what] gives rise to the concept of stacking. Id. at 76. The UIM premium paid by the insureds on their multi-vehicle policy in Swartz was almost twice that charged on a single-vehicle policy covering the same people. Id. at 77. Swartz concluded that charging an additional premium for adding a vehicle to a UIM policy gives rise to an additional unit of UIM coverage that is subject to stacking. Id. at 76-77. Because UIM coverage is personal, and the Swartzes were covered regardless of which vehicle they were driving, the couple had paid an additional premium without receiving any additional coverage. Id. at 77. On that basis, the court determined that the Swartzes' policy was subject to stacking. Id. at 77-78. The Swartz court went on to note that stacking would apply to per-vehicle UIM policies even if the insurance company ostensibly charged a single premium for all the vehicles covered. Id. at 77. Swartz therefore suggests that the determinative issue in stacking cases is whether the insured paid multiple premiums for the same amount of coverage, regardless of how the payment is characterized. The Swartz opinion also makes clear that an insurance company could, through the calculation and adoption of an actuarially appropriate premium [i.e., based on its estimate of risk], charge an insured a single UIM fee regardless of the number of vehicles covered under the policy, entitling that insured to only one unit of UIM protection. Id. (original emphasis omitted, new emphasis added). But the insurer there (Metropolitan) did not base its premium on an actuarial calculation of risk. Instead, it simply multiplied its base (single-vehicle) premium rate by the number of insured vehicles. Swartz therefore stands for the proposition that this simple multiplication approach necessitates stacking. The state appellate court's conclusion in Swartz that insurance companies may account for risk when setting UIM premium rates was affirmed by the Kentucky Supreme Court in Marcum, 987 S.W.2d at 790-91. There, the Court had before it an insurance policy that charged a per-person premium of $14 for UIM coverage. Id. at 791. The price of $14 was based upon the average number of vehicles (between two and three) owned by all ... policyholders in Kentucky. Id. Later, the company adjusted its premium structure on the basis of an actuarial projection of future losses that was based upon data from [the insurance company's] loss experience for the previous three years. Id. Although the insurance company in Marcum did not charge its insureds multiple premiums for UIM coverage on different vehicles, it did allow them to purchase UIM coverage for any one individual in an amount up to $1 million. Id. The Court found that because the UIM premium was based on an assessment of the risk of loss incurred by the insurance company and did not vary according to the number of vehicles covered by the policy, stacking was inappropriate. Id.