Opinion ID: 1506273
Heading Depth: 2
Heading Rank: 2

Heading: Costs in excess of policy limits.

Text: As noted earlier, the limit of liability of the ANI policies is measured by both damages and costs of defense cumulatively incurred by any or all potential insureds. The majority opinion holds that because ANI breached its contractual obligation to defend Appellees in the CERCLA proceedings, it must pay the full amount of defense costs and fees even if payment of those sums, in addition to the so-called CERCLA damages, would exceed the policy limits, citing Eskridge v. Educator and Executive Insurers, Inc., 677 S.W.2d 887 (Ky.1984), and Grimes v. Nationwide Mutual Insurance Co., 705 S.W.2d 926 (Ky.App.1985). The issue in those cases, however, was whether a liability insurance company that wrongly denied coverage and declined to defend a suit against the insured is liable for a judgment against the insured in excess of the policy limits. The theory behind that principle is that the judgment might not have exceeded the policy limits if the insurer had provided a defense. Eskridge, 677 S.W.2d at 890; Grimes, 705 S.W.2d at 932. That is not the issue here. The only damages sustained by Appellees as a result of ANI's refusal to provide a defense are the defense costs themselves, not an excess judgment that might have been avoided if a defense had been provided. As held by the Court of Appeals, the measure of damages for a breach of contract is that sum which will put the injured party into the same position he would have been in had the contract been performed. Perkins Motors, Inc. v. Autotruck Fed. Credit Union, 607 S.W.2d 429, 429-30 (Ky.App.1980). See also State Prop. and Bldgs Comm'n of Dep't of Fin. v. H.W. Miller Constr. Co., 385 S.W.2d 211, 214 (Ky.1964) ([D]amages should not exceed the sum that is reasonably required in order to put the owner in the same position in which he would have been had the contract been performed.); Robinson v. W. Union Tel. Co., 68 S.W. 656, 658 (Ky.1902) ([T]he declared object of awarding damages is to give compensation for pecuniary loss; that is, to put the plaintiff in the same position, so far as money can do it, as he would have been if the contract had been performed....) (internal citation and quotation omitted). The purpose of damage awards in breach-of-contract cases is to compensate the injured party for loss occasioned by the conduct of the breaching party, not to penalize the wrongdoer or to award the plaintiff a windfall. Farmers & Bankers Life Ins. Co. v. St. Regis Paper Co., 456 F.2d 347, 351 (5th Cir.1972); see also Safeco Ins. Co. of Am. v. City of White House, 191 F.3d 675, 693 (6th Cir.1999). The same principle applies when an insurer breaches its contractual obligation to defend the insured against a suit falling within the coverage of the policy. [W]hen an insurer wrongfully refuses to defend on the ground that the claim against its insured is not within the coverage of the policy, the insurer is guilty of a breach of contract which renders it liable to the insured for all the damages that naturally flow from the breach. Such a breach of contract renders the insurer liable to pay such damages as will place the insured in a position equally as good as the insured would have occupied had the insurance contract been fully and properly performed from the beginning, including, in a proper case, the amount of the judgment against the insured. 44 Am.Jur.2d Insurance § 1406 (footnotes omitted). See also, e.g., Primrose Operating Co. v. Nat'l Am. Ins. Co., 382 F.3d 546, 559 (5th Cir.2004) (holding in action for breach of insurer's duty to defend suit brought for pollution damage that [a] breach of the duty to defend entitles the insured to the expenses it incurred in defending the suit, including reasonable attorney's fees and court costs.). Had ANI provided Appellees a defense in the CERCLA proceedings, they would not have incurred the expense of retaining their own counsel or other costs and fees required for the defense, subject to the limit of liability condition of their policies. Requiring ANI to reimburse those costs dollar-for-dollar, plus interest, up to the limit of liability would place Appellees in the same position they would have been in had the breach not occurred. By holding that the breach of the duty to defend defaults the policy's limit of liability condition, the majority has either arbitrarily rewritten the parties' contracts, thus impairing the obligations of contract, or arbitrarily imposed, sua sponte, punitive damages in violation of KRS 411.184(4) (In no case shall punitive damages be awarded for breach of contract.). Section 2 of our Constitution prohibits the exercise of arbitrary power by any public body, including this Court. Ky. Milk Mktg. and Antimonopoly Comm'n v. Kroger Co., 691 S.W.2d 893, 899 (Ky.1985) (No board or officer vested with governmental authority may exercise it arbitrarily.). Section 2 applies not only to fundamental human rights, but to economic and business rights as well. Cf. Stephens v. State Farm Mut. Auto. Ins. Co., 894 S.W.2d 624, 627 (Ky.1995). Accordingly, I dissent. ROACH, J., joins this opinion except for its reliance on Section 2 of the Constitution of Kentucky.