Opinion ID: 4644034
Heading Depth: 1
Heading Rank: 1

Heading: analysis

Text: Merritt asked the trial court for a declaratory judgment that Catholic Health and First Initiatives are subject to the UCSPA. KRS 418.040 provides 7 [i]n any action in a court of record of this Commonwealth having general jurisdiction wherein it is made to appear that an actual controversy exists, the plaintiff may ask for a declaration of rights, either alone or with other relief; and the court may make a binding declaration of rights, whether or not consequential relief is or could be asked. Merritt sought a declaration that First Initiatives must comply with the duties and obligations of an insurer under the UCSPA and is thus subject to civil liability for any violations. Determining whether First Initiatives fits in the statutory definition of a captive insurer, and accordingly is exempt from the UCSPA, entails interpreting the statute adopted by the legislature. Statutory interpretation is a question of law, which we review de novo. St. Joseph Hosp. v. Frye, 415 S.W.3d 631, 632 (Ky. 2013). Here, after Merritt’s unsuccessful declaratory judgment motion, the trial court granted First Initiatives and Catholic Health’s summary judgment motion. Because appellate review of a summary judgment “involves only legal questions and a determination of whether a disputed material issue of fact exists,” we also engage in a de novo review in those circumstances as well. Shelton v. Kentucky Easter Seals Soc’y, Inc., 413 S.W.3d 901, 905 (Ky. 2013). I. First Initiatives is a foreign captive insurer. Subtitle 49 of the Kentucky Insurance Code, codified in KRS Chapter 304, specifically governs captive insurers and defines various types of insurance entities, including the following: (3) “Captive insurer” means any pure captive insurer, consortium captive insurer, sponsored captive insurer, special purpose captive insurer, agency captive insurer, or industrial insured captive insurer formed or issued a certificate of authority under the provisions of KRS 304.49-010 to 304.49230. For purposes of KRS 304.49-010 to 304.49-230, a branch captive insurer shall be a pure captive insurer with respect to 8 operations in Kentucky, unless otherwise permitted by the commissioner; . . . (12) “Pure captive insurer” means any company that insures risks of its parent and affiliated companies or controlled unaffiliated business; . . . (14) “Foreign captive insurer” means any insurer formed to write insurance business for its parents and affiliates and licensed pursuant to the laws of any state other than Kentucky which imposes statutory or regulatory standards in a form acceptable to the commissioner on companies transacting the business of insurance in that jurisdiction. Under KRS 304.49010 to 304.49-230, captive insurers formed under the laws of any jurisdiction other than a state of the United States shall be treated as a foreign captive insurer unless the context requires otherwise; . . . . KRS 304.49-010 (3); (12); and (14). Generally, a captive insurance company is “[a] company that insures the liabilities of its owner. The insured is usually the sole shareholder and the only customer of the captive insurer.” Black’s Law Dictionary, (11th ed. 2019). A subsidiary provides captive insurance to its parent company, typically “so that the parent company can deduct the premiums set aside as loss reserves.” Id. “The creation of a captive insurance company can bring tax, economic, and commercial benefits . . . [and] can serve as a way to insure risks that are otherwise difficult to insure on the traditional insurance market.” Steven Plitt, et al., 3 Couch on Insurance, § 39:2 (June 2020 Update). Catholic Health is a non-profit healthcare entity and First Initiatives is its wholly owned, pure captive subsidiary. Under the Kentucky Insurance Code, First Initiatives is a pure and foreign captive insurer because it “insures risks of its parent and affiliated companies . . .” KRS 304.49-010(12), and is “formed under the laws of any jurisdiction other than a state of the United States . . . .” 9 KRS 304.49-010(14). Notably, the Kentucky Department of Insurance defines a pure captive insurer as “an insurer that only insures the risk of its parent and affiliated companies or controlled unaffiliated businesses and can include a branch captive insurer.”2 That is precisely the relationship between First Initiatives and Catholic Health. According to Catholic Health, First Initiatives was organized to create the most efficient risk-financing program available in order to maximize Catholic Health’s nonprofit resources in the furtherance of its mission to provide healthcare services to the public, with emphasis on poor and underserved communities. First Initiatives is not registered in Kentucky, nor does it conduct business anywhere in the United States. First Initiatives does not pay premium taxes in Kentucky. Its principal place of business is in the Cayman Islands, where it is subject to that country’s captive insurance laws. With none of these facts in dispute, First Initiatives is a foreign captive insurer pursuant to KRS 304.49-010(14).3 II. The UCSPA does not apply to captive insurers. Kentucky’s UCSPA outlines various conduct which constitutes unfair claims settlement practice, including misrepresenting pertinent facts, failing to act reasonably promptly upon communications with respect to insurance claims, and not attempting, in good faith, to effectuate prompt and equitable settlements. KRS 304.12-230. “The gravamen of the UCSPA is that an Kentucky Public Protection Cabinet, Types of Captives http://captive. 2 insurance.ky.gov/newstatic_info.aspx?static_id=387&menuid=89 (last visited Nov. 2, 2020). 3 As noted above, Merritt conceded this point in his motion to reconsider the trial court’s denial of his motion for declaratory judgment. 10 insurance company is required to deal in good faith with a claimant, whether an insured or a third-party, with respect to a claim which the insurance company is contractually obligated to pay.” Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 100 (Ky. 2000). The statute is “intended to protect the public from unfair trade practices and fraud. It should be liberally construed so as to effectuate its purpose.” State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky. 1988). KRS 304.49-150(1) specifically exempts captive insurers from the UCSPA: “No provisions of this chapter, other than those contained in KRS 304.49-010 to 304.49-230 or contained in specific references contained in KRS 304.49-010 to 304.49-230, shall apply to captive insurance companies.” Because courts “are not at liberty to add or subtract from the legislative enactment nor discover meaning not reasonably ascertainable from the language used,” we are bound by the clear language in the statute. Dept. of Revenue, Fin. and Admin. Cabinet v. Wyrick, 323 S.W.3d 710, 713 (Ky. 2010). When interpreting a statute, a court should “give effect to the intent of the General Assembly.” Beckham v. Bd. of Educ., 873 S.W.2d 575, 577 (Ky. 1994). [W]e must look first to the plain language of a statute and, if the language is clear, our inquiry ends. We hold fast to the rule of construction that the plain meaning of the statutory language is presumed to be what the legislature intended, and if the meaning is plain, then the court cannot base its interpretation on any other method or source. In other words, we assume that the Legislature meant exactly what it said, and said exactly what it meant. 11 University of Louisville v. Rothstein, 532 S.W.3d 644, 648 (Ky. 2017) (citations and quotations omitted). Turning to the plain language of KRS 304.49-150, our inquiry is brief. The language in KRS 304.49-150(1) is unequivocal. No provisions of the insurance code apply to captive insurers except for the statutes contained in the captive insurer subchapter, KRS 304 subchapter 49. This clearly means the UCSPA, which is codified in subchapter 12 at KRS 304.12-230, does not apply to a captive insurer. Because First Initiatives is a captive insurer, it is not bound by the UCSPA and not subject to liability for any violations thereof. The Legislature specifically chose to exempt captive insurers from the UCSPA and this Court cannot override that legislative intent. “There is no reason for us . . . to impose a constraint unintended or unexpressed by the General Assembly.” Rothstein, 532 S.W.3d at 651. Given that the language and intent of the Legislature are clear, the trial court properly concluded that First Initiatives is a captive insurer exempt from the provisions of the UCSPA. Therefore, the trial court did not err in denying Merritt’s motion for declaratory judgment. III. First Initiatives is not engaged in the “business of insurance” so Merritt’s KRS 304.49-230 argument fails. In his motion to reconsider the denial of the requested declaratory judgment, Merritt raised an argument based on KRS 304.49-230. As noted above, KRS 304.49-150(1) limits the applicability of the Kentucky Insurance Code where a captive insurer is involved: “No provisions of this chapter, other than those contained in KRS 304.49-010 to 304.49-230 or contained in specific references contained in KRS 304.49-010 to 304.49-230, shall apply to captive 12 insurance companies.” In essence, captive insurers are only subject to subtitle 49 or to particular provisions referenced in subtitle 49. But Merritt insists that First Initiatives does not qualify for the exclusion outlined in KRS 304.49150(1), i.e., does not get to claim exclusion from all other parts of the insurance code, because KRS 304.49-230 applies. That statute states: “This subtitle shall not apply to any foreign captive insurer lawfully transacting the business of insurance in Kentucky prior to July 14, 2000, unless the foreign captive insurer petitions the commissioner requesting that this subtitle be applicable to the foreign captive insurer.” (Emphasis added.) Merritt reasons that First Initiatives, a foreign captive insurer, was transacting the business of insurance in Kentucky when it began insuring Catholic Health entities in 1998, well prior to July 14, 2000; First Initiatives never petitioned the commissioner with a request that subtitle 49 apply to it; consequently, subtitle 49 does not apply, leaving First Initiatives without the benefit of the language in KRS 304.49-150(1) that would have otherwise exempted it from all other parts of the insurance code including the UCSPA. This argument is flawed because, as both the trial court and the Court of Appeals correctly determined, First Initiatives was never “transacting the business of insurance in Kentucky.” KRS 309.49-230. KRS 304.1-030 defines insurance as “a contract whereby one undertakes to pay or indemnify another as to loss from certain specified contingencies or perils called ‘risks,’ or to pay or grant a specified amount or determinable benefit or annuity in connection with ascertainable risk contingencies, or to act as surety.” An insurance contract “is a contract of indemnity whereby the insurer agrees to indemnify the insured for any loss resulting from a specific 13 event. The insurer undertakes the obligation based on an evaluation of the market’s wide risks and losses.” Buck Run Baptist Church, Inc. v. Cumberland Sur. Ins. Co., 983 S.W.2d 501, 504 (Ky. 1998). An insurer expects losses, and they are spread through the market by means of a premium. Id. at 504-05. An entity is transacting the business of insurance when it enters into insurance contracts. In Davidson, 25 S.W.3d at 102, this Court held that the Legislature did not intend to subject self-insured entities to the requirements of the Kentucky Insurance Code and stated specifically that “the UCSPA . . . appl[ies] only to those persons or entities (and their agents) who are ‘engaged . . . in the business of entering into contracts of insurance.’” (quoting KRS 304.1-040). Self-insurers are not in the business of entering into contracts of insurance but rather have a self-insurance agreement with covered entities, in this case Catholic Health and its affiliates. As often noted, insurance “involves (1) risk shifting and (2) risk distribution.” Humana, Inc. v. Comm’r, 881 F.2d 247, 251 (6th Cir. 1989). In Commonwealth v. Reinhold, 325 S.W.3d 272 (Ky. 2010), this Court held that “the shifting of risk from one party to another [is] a necessary component of an insurance contract. The United States Supreme Court agrees with this principle, describing insurance as ‘an arrangement for transferring and distributing risk.’” (quoting Grp. Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 211 (1979)). Self-insurance does not have the necessary characteristics of risk shifting and risk distribution. “A self-insurer and an insurer are not the same” because a self-insurer “does not engage in risk shifting.” Haney v. Yates, 40 S.W.3d 352, 355 (Ky. 2000). The parent of a captive insurer, like Catholic 14 Health in this case, “retains an economic stake in whether a covered loss occurs.” Clougherty Packing Co. v. Comm’r, 811 F.2d 1297, 1307 (9th Cir. 1987). Therefore, an agreement between a parent and a captive insurer does not shift the risk of loss. Id.4 In short, First Initiatives is not in the business of insurance, but rather provides captive self-insurance for Catholic Health. There is no risk shifting and risk distribution. Catholic Health retains the entire financial stake in the self-insured, professional liability claims paid to claimants. Thus, in this case, any liability for the deaths of Kimberly and Harold Merritt, III, remained with Catholic Health. A self-insurance arrangement such as the one involved here is not a contract of insurance. Neither KentuckyOne nor Dr. Smith paid premiums to Catholic Health or First Initiatives, nor did they purchase insurance policies from same. One self-insurance agreement covers all of Catholic Health’s subsidiaries and their employees for employment-related conduct. With these facts, under Kentucky law and general principles of insurance law, First Initiatives indisputably is not in the business of insurance. Because First Initiatives was never “transacting the business of insurance in 4 Many federal courts have similarly held that captive insurance agreements do not shift or distribute the risk of loss. See Gulf Oil Co. v. Comm’r, 914 F.2d 396, 412 (3d Cir. 1990) (holding that a parent’s captive insurance arrangement was not an insurance agreement when “the captive was wholly owned by its parent, and the captive insured risks only within the affiliated group, the risk is not truly distributed.”); Humana, 881 F.2d at 251 (holding that Humana did not shift the risk to Health Care Indemnity, its wholly owned subsidiary, in its captive insurance arrangement.); Beech Aircraft Corp. v. U.S., 797 F.2d 920, 922 (10th Cir. 1986) (“Selfinsurance is not the equivalent of insurance. If one having an insurable risk retains the risk of his own loss, there is no risk transfer, and the arrangement is selfinsurance.”); Stearns-Roger Corp. v. U.S., 774 F.2d 414, 415 (10th Cir. 1985) (explaining that where the ultimate burden for losses was always on the parent, there is no risk shifting). 15 Kentucky”, KRS 304.49-230 does not apply and First Initiatives had no obligation to petition the insurance commissioner in order to qualify for exemption from the UCSPA. IV. Any additional discovery should have been requested prior to the motion for declaratory judgment. Finally, Merritt argues that the trial court should have allowed additional discovery relevant to First Initiatives’ status as an insurer. In his view, if the trial court disagreed that Merritt had presented sufficient evidence to establish that First Initiatives is in the business of insurance, the court should have allowed Merritt time for additional discovery before granting summary judgment to First Initiatives and Catholic Health. Merritt notes that he relied on publicly-sourced information, the statements of opposing counsel, and the affidavit of Phillip L. Foster in presenting an argument that he believes adequately demonstrates that First Initiatives was and is engaged in the business of insurance. Obviously, the trial court disagreed. Only after that court denied the requested declaratory judgment did Merritt claim the need for additional discovery. An appellate court reviews a trial court’s determination regarding discovery issues under an abuse of discretion standard. S. Fin. Life Ins. Co. v. Combs, 413 S.W.3d 921, 932 (Ky. 2013). “The test for abuse of discretion is whether the trial judge's decision was arbitrary, unreasonable, unfair, or unsupported by sound legal principles.” Commonwealth v. English, 993 S.W.2d 941, 945 (Ky. 1999). Approximately five weeks after filing the complaint, Merritt sought a judicial declaration of the applicability of the UCSPA to First Initiatives. That 16 was a procedural decision he made in the conduct of the litigation. If Merritt believed the information he possessed up to that point was insufficient to determine First Initiatives’ status or relationship with Catholic Health then he could have proceeded with discovery and delayed his request for declaratory judgment. By moving for declaratory judgment early in the litigation, Merritt represented that a justiciable issue, “an actual controversy,” existed and that it was time for the trial court to “make a binding declaration of rights . . . .” KRS 418.040. He repeatedly insisted that this particular issue was ripe for decision, expressing no need for additional time to conduct discovery. Allowing discovery after the trial court’s denial of declaratory judgment would be contrary to these numerous representations that the UCSPA issue was ripe for a ruling. More pointedly, no amount of additional discovery will change the fact that the UCSPA does not apply to captive insurers like First Initiatives. Accordingly, the trial court did not err in denying Merritt’s post-ruling request to conduct additional discovery.