Court Opinion

ID: 4686903
Source: CourtListenerOpinion
Date Created: 2021-05-14 14:08:26.425316+00
Date Added: 2024-06-11T08:04:37.070007
License: Public Domain

RENDERED: MAY 7, 2021; 10:00 A.M.
                 NOT TO BE PUBLISHED

          Commonwealth of Kentucky
                 Court of Appeals

                   NO. 2019-CA-1675-MR

KENNETH ALVIN O’NEIL AND                         APPELLANTS
KENTUCKY PLANNING PARTNERS

          APPEAL FROM JEFFERSON CIRCUIT COURT
v.         HONORABLE ANN BAILEY SMITH, JUDGE
                  ACTION NO. 19-CI-000214

DALE RAE HUTCHENS,                                APPELLEES
PERSONALLY AND AS GUARDIAN
FOR ADAM HAHN HUTCHENS;
AND JOHN HANCOCK LIFE
INSURANCE COMPANY (U.S.A.)

AND
                   NO. 2019-CA-1683-MR

JOHN HANCOCK LIFE INSURANCE                      APPELLANT
COMPANY (U.S.A.)

          APPEAL FROM JEFFERSON CIRCUIT COURT
v.         HONORABLE ANN BAILEY SMITH, JUDGE
                  ACTION NO. 19-CI-000214
DALE RAE HUTCHENS,                                                   APPELLEES
PERSONALLY AND AS GUARDIAN
FOR ADAM HAHN HUTCHENS

                                   OPINION
                                  AFFIRMING

                                  ** ** ** ** **

BEFORE: CLAYTON, CHIEF JUDGE; ACREE AND TAYLOR, JUDGES.

TAYLOR, JUDGE: Kenneth Alvin O’Neil and Kentucky Planning Partners

(Planning Partners) bring Appeal No. 2019-CA-1675-MR and John Hancock Life

Insurance Company (John Hancock) brings Appeal No. 2019-CA-1683-MR from

an Opinion and Order of the Jefferson Circuit Court denying O’Neil’s, Planning

Partners’, and John Hancock’s motions to dismiss and compel arbitration. We

affirm Appeal Nos. 2019-CA-1675-MR and 2019-CA-1683-MR.

                                BACKGROUND

            On October 18, 2017, James Hutchens applied for term life insurance

in the amount of two million dollars and temporary life insurance in the amount of

one million dollars with John Hancock. James executed several documents related

to his application for life insurance with John Hancock, including a document

entitled Account Holder Acknowledgement. The Account Holder

Acknowledgment was signed by James and by O’Neil, who served as John

Hancock’s agent throughout the application process. Importantly herein, the

                                        -2-
Account Holder Acknowledgement included an arbitration provision. James also

tendered two months of premium payments at the time.

              On November 28, 2017, James suddenly passed away from a cardio-

vascular event. James had designated Dale Rae Hutchens and Adam Hahn

Hutchens (collectively referred to as the Hutchens) as beneficiaries of the life

insurance with John Hancock. Upon James’ death, the Hutchens filed a claim with

John Hancock for the proceeds of the two-million-dollar term life insurance policy.

John Hancock, however, only paid one million dollars to the Hutchens under the

temporary life insurance issued to James. John Hancock maintained that it had

neither approved the application for nor issued the term life insurance policy of

two million dollars to James. Rather, at the time of James’ death, John Hancock

asserted that James was only covered by the temporary life insurance in the amount

of one million dollars.

              As a result, the Hutchens filed a complaint in the Jefferson Circuit

Court against John Hancock, O’Neil, and Kentucky Planning Partners.1 In the

Complaint, the Hutchens alleged breach of contract, common law bad faith, unjust

enrichment, negligence and violation of Kentucky Revised Statutes (KRS) 304.12-

230, KRS 304.12-235, and KRS 304.12-010. In particular, the Hutchens claimed:

1
 Kentucky Planning Partners, LLC, is an insurance agency, and one of its two members is
Kenneth Alvin O’Neil.

                                             -3-
                    Claims for Relief

A. John Hancock.

                 i. Breach of Contract.

35. Mr. Hutchens and John Hancock had an enforceable
agreement for the payment of $2 million in life insurance
benefits to Plaintiffs as his Beneficiaries.

36. Plaintiffs were the named, intended, and contractual
third-party beneficiaries of the $2 million life insurance
coverage.

37. John Hancock breached its contractual obligations.
By way of example, and without limitation, John
Hancock:

      a. failed to timely issue payment of the life
      insurance coverage.

      b. failed to issue full-payment of the life
      insurance coverage.

      c. failed to pay the Acc. Benefit.

      d. failed to comply with applicable
      Kentucky insurance laws and regulations
      incorporated as contractual terms.

38. As a direct and proximate result, Plaintiffs have been
damaged by John Hancock’s breach, thereby entitling
them to seek and to receive all available and appropriate
relief.

      ....

  ii. Violation of KRS 304.12-230 (“UCSPA”).

                            -4-
40. John Hancock is subject to Kentucky’s insurance
laws and regulations, including KRS 304.12-230 –
Kentucky’s Unfair Claims Settlement Practices Act
(“UCSPA”).

41. With respect to Mr. Hutchens’ Application and to
Plaintiffs’ claim for insurance benefits, John Hancock
failed to comply with the UCSPA. John Hancock’s
violation has continued unabated. By way of example
and without limitation, John Hancock:

      a. misrepresented that the life insurance
      coverage had not been approved and issued.

      b. misrepresented that only half of the life
      insurance coverage was payable.

      c. misrepresented by omission the Acc.
      Benefits due and payable.

      d. failed to acknowledge and act with
      reasonable promptness with respect to the
      Plaintiffs’ claims.

      e. failed to conduct a reasonable
      investigation of Plaintiffs’ claims, including
      not investigating the Acc. Benefit.

      f. failed to attempt in good faith to resolve
      Plaintiffs’ claims where liability was
      reasonably clear – instead, refusing to
      release documents.

      g. compelled Plaintiffs to file a lawsuit in
      order to recover the unpaid life insurance
      coverage and the Acc. Benefit coverage,
      including referring Plaintiffs’ claims to its
      in-house legal department and then to
      outside legal counsel.

                            -5-
42. John Hancock’s actions were and continue to be
without a reasonable basis and are indicative of a reckless
disregard for Plaintiffs rights as Beneficiaries.

43. As a direct and proximate result, Plaintiffs have been
damaged by John Hancock’s violations of KRS 304.12-
230, thereby entitling them to seek and to receive all
appropriate relief.

  ....

      iii. Common Law Bad Faith.

45. As a party to the Application, including the life
insurance coverage and Acc. Benefit, John Hancock
owed a common law duty of good faith
to Plaintiffs as the Beneficiaries.

46. John Hancock breached its duty of good faith.
John Hancock’s breach has continued unabated. By way
of example and without limitation, John Hancock:

      a. misrepresented that the life insurance
      coverage had not been approved and
      issued.

      b. misrepresented that only half of the
      life insurance coverage was payable.

      c. misrepresented by omission the Acc.
      Benefits due and payable.

      d. failed to acknowledge and act with
      reasonable promptness with respect to
      the Plaintiffs’ claims.

      e. failed to conduct a reasonable
      investigation of Plaintiffs’ claims,
      including not investigating the Acc.
      Benefit.

                            -6-
      f. failed to attempt in good faith to
      resolve Plaintiffs’ claims where liability
      was reasonably clear – instead, refusing
      to release documents.

      g. compelled Plaintiffs to file a lawsuit
      in order to recover the unpaid life
      insurance coverage and the Acc. Benefit
      coverage, including referring Plaintiffs’
      claims to its in-house legal department
      and then to outside legal counsel.

47. John Hancock did not have a reasonable, legitimate,
or arguable reason for its actions. John Hancock had
actual knowledge that it lacked a legitimate or arguable
reason for its actions.

48. John Hancock’s actions were willful and with
reckless disregard to Plaintiffs’ rights as Beneficiaries
and under applicable Kentucky insurance laws and
regulations.

          ....

      iv. Violation of KRS 304.12-235.

51. Pursuant to KRS 304.12-235(1), John Hancock was
obligated to remit the insurance proceeds within 30-days
of notice and proof of Plaintiffs’ claim.

52. Pursuant to KRS 304.12-235(2), for any claims paid
after the 30-day deadline, the statute requires John
Hancock to remit interest calculated at 12% per annum.

53. Pursuant to KRS 304.12-235(3), John Hancock is
further obligated to reimburse Plaintiffs for their
attorneys’ fees incurred in collecting the unpaid interest
and insurance proceeds.

                            -7-
54. John Hancock was on notice and in receipt of proof
of Plaintiffs’ claim, for the life insurance coverage and
Acc. Benefit, no later than November 2017 – making the
proceeds due and payable within 30 days thereafter.

55. John Hancock did not comply with the statutory
requirement to timely remit the insurance proceeds. By
way of example, and without limitation, John Hancock:

      a. delayed payment of ½ the insurance
      proceeds – $1 million – until the following
      June 2018 but failed to remit the statutory
      12% interest.

      b. failed to remit the balance of the
      insurance proceeds – $1 million, with the
      corresponding statutory 12% continuing
      to accrue.

      c. caused Plaintiffs to incur attorneys’
      fees and expenses to recover the unpaid
      insurance proceeds and the unpaid
      interest.

      ....

      v. Unjust Enrichment.

57. Mr. Hutchens conferred a benefit on John
Hancock when he remitted premiums, and that
John Hancock accepted, for the $2 million in life
insurance coverage.

58. Upon Mr. Hutchens’ death, John Hancock
failed to remit the full $2 million, remitting only
half of the coverage while retaining the full
premium paid by Mr. Hutchens.

59. The $1 million in unpaid coverage is a benefit
that was conferred on John Hancock at Mr.

                            -8-
Hutchens’, and by extension the Plaintiffs as his
named Beneficiaries, expense.

60. John Hancock’s retention of the $1 million in
promised life insurance coverage is inequitable as
it deprives the Plaintiffs of the benefit conferred by
John Hancock’s acceptance and retention of the
insurance premiums.

      ....

      vi. Negligence.

62. As the insurance company involved in Mr.
Hutchens’ application for insurance coverage, John
Hancock owed Mr. Hutchens a duty to ensure its agents:
(i) complied with Kentucky’s insurance laws and
regulations; and (ii) did not make any misrepresentations.

63. John Hancock breached its duties. The breach
continues unabated. By way of example, without
limitations, John Hancock:

      a. failed to ensure its agents – specifically
      KPP – were licensed and appointed in
      Kentucky to act on its behalf.

      b. allowed its agents to represent to Mr.
      Hutchens that the $2 million in life
      insurance had been approved and issued.

64. As a direct and proximate result, Plaintiffs have been
damaged by John Hancock’s negligence, thereby
entitling them to seek and to receive all appropriate
relief.

         ....

                            -9-
      vii. Punitive.

66. John Hancock’s actions were committed with the
requisite mind set so as to entitle Plaintiffs to an award of
punitive damages under Kentucky statutory and common
law.

B.    O’Neil and KPP.

      i. Negligence.

67. O’Neil and [Kentucky Planning Partners (KPP)]
owed Mr. Hutchens a statutory and common law duty in
the solicitation and sale of the $2 million life insurance
coverage with John Hancock.

68. O’Neil and KPP breached their respective duty to
Mr. Hutchens, and by extension the Plaintiffs as his
named Beneficiaries. The breach has continued unabated.
By way of example, and without limitation, O’Neil and
KPP:

      a. failed to timely deliver the life insurance
      policy to Mr. Hutchens.

      b. failed to timely process the Application
      and corresponding forms.

      c. failed to accurately advise Mr. Hutchens
      concerning the status of the Application.

69. As a direct and proximate result, Plaintiffs have been
damaged by O’Neil’s and KPP’s negligence, thereby
entitling them to seek and to receive all appropriate
relief.

      ....

      ii. Misrepresentation.

                            -10-
71. O’Neil and KPP made material representations to
Mr. Hutchens concerning the status of his Application
that, based on John Hancock’s subsequent refusal to pay
the Plaintiffs’ claims, were false.

72. O’Neil and KPP recklessly informed Mr. Hutchens
the insurance coverage had been approved and issued as
applied.

73. O’Neil’s and KPP’s representations were made with
the intent of obtaining Mr. Hutchens’ reliance.

74. Mr. Hutchens relied on O’Neil’s and KPP’s
representations, and as a result was damaged by John
Hancock’s subsequent refusal to pay Plaintiffs the entire
$2 million in life insurance coverage.

      ....

C.    John Hancock, O’Neil and KPP.

      i. Violation of KRS 304.12-010.

77. Kentucky’s insurance code prohibits unfair and
deceptive insurance practices based on the following
statutory language.

         No person shall engage in this state in
      any practice which is prohibited in this
      subtitle, or which is defined therein as, or
      determined pursuant thereto to be, an unfair
      method of competition or any unfair or
      deceptive act or practice in the business of
      insurance.

KRS 304.12-010.

78. John Hancock’s, O’Neil’s, and KPP’s
(“Defendants”) individual and collective actions in the
solicitation and issuance of the life insurance coverage

                           -11-
             were unfair and deceptive. By way of example,
             Defendants:

                     a. misrepresented that the Application
                     would be processed timely and with an
                     intended effective date of October 12,
                     2017.

                     b. misrepresented that the insurance
                     coverage had been approved and issued
                     as applied.

             79. As a direct and proximate result, Plaintiffs have been
             damaged by Defendants’ individual and collective
             actions, thereby entitling them to seek and to receive all
             appropriate relief.

Complaint at 6-14.

             John Hancock, O’Neil, and Planning Partners filed answers and

motions to dismiss and compel arbitration. In the motions, it was argued that the

Hutchens’ claims were subject to arbitration under the arbitration provision

contained in the Account Holder Acknowledgement executed by James. In their

response, the Hutchens maintain that KRS 417.050(2) prohibited such a mandatory

arbitration provision as to insurance contracts. The Hutchens pointed out that this

statutory prohibition (KRS 417.050(2)) against arbitration was not preempted by

the Federal Arbitration Act (FAA) by operation of the McCarran-Ferguson Act.

             In an October 8, 2019, opinion and order, the circuit court denied the

motions to dismiss and compel arbitration. The circuit court reasoned:

                                        -12-
                 This is an action on an application for an insurance
              policy on the life of James Hutchens which [Hutchens]
              claims ripened into an insurance contract that the
              Defendant John Hancock breached by failing to pay the
              face amount plus an accelerated benefit rider after Mr.
              Hutchens died. All defendants have filed motions to
              dismiss pursuant to CR [Kentucky Rules of Civil
              Procedure] 12.02(f), claiming that an arbitration
              agreement James Hutchens signed at the time of
              application requires that the dispute by submitted to
              binding arbitration pursuant to The Federal Arbitration
              Act (“FAA”), 9 [United States Code (U.S.C.)] § 1 et seq.
              The parties have filed briefs, the Court has carefully
              considered the facts and law contained therein and
              resolved the instant motion by applying Kentucky’s well-
              known standard for motions to dismiss. Being
              sufficiently advised, the Court DENIES the defendants’
              motion to compel arbitration, finding, first, that
              construing the allegations in the complaint in a light most
              favorable to the plaintiff, the alleged arbitration
              agreement is unenforceable pursuant to KRS 417.050(2)
              because the agreement pertains to an insurance contract.
              Second, the Court finds that a factual issue exists
              concerning whether the form upon which the purported
              agreement is contained was ever filed with and approved
              by the insurance commissioner. If the commissioner did
              not approve the form, the agreement is void.

October 8, 2019, opinion and order at 1-2 (citations and footnotes omitted). These

interlocutory appeals follow.2

2
 An interlocutory appeal is permitted from an order denying a motion to compel arbitration.
Kentucky Revised Statutes (KRS) 417.220(1)(a); JP Morgan Chase Bank, N.A. v. Bluegrass
Powerboats, 424 S.W.3d 902, 908 (Ky. 2014).

                                             -13-
                                      ISSUES PRESENTED

                 In both appeals (Appeal Nos. 2019-CA-1683-MR and 2019-CA-1675-

MR), John Hancock, O’Neil and Planning Partners (collectively referred to as

appellants) contend that the circuit court erred by determining that arbitration was

barred by operation of KRS 417.050(2). In particular, appellants argue that the

arbitration provision in the Account Holder Acknowledgement is enforceable

under the FAA and not barred by KRS 417.050(2). In support thereof, appellants

maintain that KRS 417.050(2) only bars an arbitration provision in an insurance

contract and that no insurance contract existed between John Hancock and James.

John Hancock points out that it had not issued the term life insurance of two

million dollars at the time of James’ death. In fact, John Hancock states that it was

still in the process of reviewing James’ application for the term life insurance when

James died. Thus, according to appellants, no insurance contract or policy existed,

thus rendering KRS 417.050(2) inapplicable. Alternatively, appellants argue that

the arbitration provision is governed by the FAA, and the FAA preempts state law

to the contrary, including KRS 417.050(2).3

                                   STANDARD OF REVIEW

                 It is well-established that a person seeking to compel arbitration must

demonstrate that a valid arbitration agreement exists between the parties. Ping v.

3
    The Federal Arbitration Act is codified in 9 U.S.C. § 1, et seq.

                                                  -14-
Beverly Enters., Inc., 376 S.W.3d 581, 590 (Ky. 2012); Golden Gate Nat’l Senior

Care, LLC. v. Rucker, 588 S.W.3d 868, 871 (Ky. App. 2019). The existence of an

agreement looks to state law rules for contract formation. Ping, 376 S.W.3d at

590. And, as an appellate court, the review of a trial court’s interpretation and

construction of a contract is a matter of law, and we thus apply a de novo standard

of review. Lynch v. Claims Mgmt. Corp., 306 S.W.3d 93, 96 (Ky. App. 2010).

Finally, we review the circuit court’s findings of fact, if any, under the clearly

erroneous standard. N. Fork Collieries, LLC v. Hall, 322 S.W.3d 98, 102 (Ky.

2010); CR 52.01.

                                     ANALYSIS

             In this case, the arbitration provision found in the Account Holder

Acknowledgement provides:

             ARBITRATION AGREEMENT: With respect to any
             disputes that might arise out of this transaction, LPL
             Insurance Associates, Inc. and its affiliates, its appointed
             insurance agents, and the individual whose signature
             appears below are giving up the right to sue each other in
             court, including the right to a trial by jury, except as
             provided by the rules of arbitration forum in which a
             claim is filed; such rules being incorporated herein by
             reference.

Account Holder Acknowledgement at 1. To determine whether the above

arbitration provision is valid and enforceable, we must initially determine whether

                                         -15-
KRS 417.050(2) is applicable, and if so, whether the FAA preempts its application

herein. Our analysis shall proceed accordingly.

             KRS 417.050 reads, in relevant part:

             A written agreement to submit any existing controversy
             to arbitration or a provision in written contract to submit
             to arbitration any controversy thereafter arising between
             the parties is valid, enforceable, and irrevocable, save
             upon such grounds as exist at law for the revocation of
             any contract. This chapter does not apply to:

             ....

              (2) Insurance contracts. Nothing in this subsection shall
             be deemed to invalidate or render unenforceable
             contractual arbitration provisions between two (2) or
             more insurers, including reinsurers[.]

Under KRS 417.050(2), an arbitration agreement or arbitration provision in an

insurance contract is invalid and unenforceable unless such arbitration provision

is between insurers. Scott v. Louisville Bedding Co., 404 S.W.3d 870, 877-78 (Ky.

App. 2013). And, the term “insurance” is defined as a “contract whereby one

undertakes to pay or indemnify another as to loss 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.”

KRS 304.1-030. Herein, we are concerned with the term “insurance contracts” as

used in KRS 417.050(2) and whether an application for insurance comes within its

ambit.

                                         -16-
             Appellants advance a narrow interpretation of the term “insurance

contracts” and believe it encompasses only issued insurance policies. Hence,

appellants argue that KRS 417.050(2) does not apply to an application for

insurance. We reject such overly narrow and technical interpretation.

              When interpreting a statute, the Court is primarily guided by

legislative intent or purpose of such statute. See Livingood v. Transfreight, LLC,

467 S.W.3d 249, 256 (Ky. 2015). A legislative purpose of KRS 417.050(2) has

been recognized as regulating the business of insurance. Scott, 404 S.W.3d at 880.

This legislative purpose would be undoubtedly frustrated by appellants’ proposed

narrow interpretation of KRS 417.050(2), as an insurance company would be free

to impose strict arbitration as to any issue related to the insurance application.

Also, we think an application for insurance can be viewed as being akin to an offer

under contract law; thus, such an application is inextricably interwoven with every

insurance contract. For these reasons, applications for insurance certainly come

within the purview of the term “insurance contracts” as utilized in KRS

417.050(2). Accordingly, we interpret KRS 417.050(2) as being equally

applicable to insurance applications as it is to issued insurance policies or

insurance contracts.

             In this case, the arbitration provision was contained in the Account

Holder Acknowledgement. The Account Holder Acknowledgement was executed

                                         -17-
with other insurance application forms and specifically stated that it applied to

“any disputes that might arise out of this transaction.” As the arbitration provision

was contained in an insurance application form, we are of the opinion that the

arbitration provision comes within the scope of KRS 417.050(2) and is rendered

unenforceable thereby. And, although the term life insurance policy may not have

been issued to James at the time of his death, it is uncontroverted that James was

covered by temporary life insurance issued by John Hancock and in full force at

the time of James’ death.

                 As to the purported preemption of KRS 417.050(2) by the FAA, our

Court has specifically held that the McCarran-Ferguson Act precludes the FAA

from preempting KRS 417.050(2).4 Scott, 404 S.W.3d at 877-80. Thus, the FAA

does not preempt KRS 417.050(2).

                 Our decision that KRS 417.050(2) renders the arbitration provision

contained in the Account Holder Acknowledgement unenforceable is one of law

and based upon undisputed facts. Consequently, any alleged error committed by

the circuit court upon reviewing this matter under CR 12.02(f) is merely harmless.

                 We view any remaining contentions of error to be without error or

moot.

4
    15 U.S.C. § 1012(a) and (b).

                                           -18-
               To summarize, we conclude that the arbitration provision found in the

Account Holder Acknowledgement is invalid and unenforceable per KRS

417.050(2); hence, the circuit court properly denied appellants’ motions to compel

arbitration.

               For the foregoing reasons, the Opinion and Order of the Jefferson

Circuit Court is affirmed.

               ALL CONCUR.

                                         -19-
BRIEFS FOR APPELLANTS          BRIEFS FOR APPELLEE DALE
KENNETH ALVIN O’NEIL AND       RAE HUTCHENS, PERSONALLY
KENTUCKY PLANNING              AND AS GUARDIAN FOR ADAM
PARTNERS:                      HAHN HUTCHENS:

Andrew J. Dorman               Michael D. Grabhorn
Cleveland, Ohio                Andrew M. Grabhorn
                               Louisville, Kentucky
Danielle J. Lewis
Andrew Pettijohn               ORAL ARGUMENT FOR
Louisville, Kentucky           APPELLEE DALE RAE
                               HUTCHENS, PERSONALLY AND
BRIEFS FOR APPELLANTS JOHN     AS GUARDIAN FOR ADAM HAHN
HANCOCK LIFE INSURANCE         HUTCHENS:
COMPANY (U.S.A.):
                               Michael D. Grabhorn
Steven P. DelMauro             Louisville, Kentucky
Colleen M. Duffy
Tinton Falls, New Jersey

Jill F. Endicott
Jeremy S. Rogers
Louisville, Kentucky

ORAL ARGUMENT FOR
APPELLANTS KENNETH ALVIN
O’NEIL AND KENTUCKY
PLANNING PARTNERS:

Danielle J. Lewis
Louisville, Kentucky

ORAL ARGUMENT FOR
APPELLANTS JOHN HANCOCK
LIFE INSURANCE COMPANY
(U.S.A.):

Colleen M. Duffy
Tinton Falls, New Jersey

                             -20-
Jill F. Endicott
Jeremy S. Rogers
Louisville, Kentucky

                       -21-