Court Opinion

ID: 9402172
Source: CourtListenerOpinion
Date Created: 2023-06-15 15:07:37.304799+00
Date Added: 2024-06-11T17:19:58.225374
License: Public Domain

RENDERED: JUNE 15, 2023
                                                          TO BE PUBLISHED

                 Supreme Court of Kentucky
                                 2021-SC-0130-DG

KENTUCKY STATE UNIVERSITY                                           APPELLANT

                     ON REVIEW FROM COURT OF APPEALS
V.                            NO. 2019-CA-1811
                   FRANKLIN CIRCUIT COURT NO. 15-CI-00951

DARWIN NATIONAL ASSURANCE                                            APPELLEE
COMPANY N/K/A ALLIED WORLD
SPECIALTY INSURANCE COMPANY

           OPINION OF THE COURT BY CHIEF JUSTICE VANMETER

                                       AFFIRMING

      The primary issue in this case is whether the Darwin National Assurance

Company, now known as Allied World Specialty Insurance Company (“Allied

World”), claims-made-and-reported management liability policy (“Policy”) issued

to Kentucky State University (“KSU”) provided coverage when KSU did not

comply with the Policy’s notice provisions. The Franklin Circuit Court, finding

ambiguity in the notice provisions, applied the notice-prejudice rule adopted in

Jones v. Bituminous Casualty Corp.1 and granted summary judgment in favor of

KSU. The Court of Appeals, however, reversed the Franklin Circuit Court,

      1   821 S.W.2d 798 (Ky. 1991).
concluding that the notice-prejudice rule does not apply to the Policy and that

summary judgment in favor of Allied World was warranted. Upon discretionary

review, we hold that the rationale for applying the notice-prejudice rule in

Bituminous Casualty does not exist in this case. Thus, we affirm the Court of

Appeals and remand this case to the Franklin Circuit Court to enter a

judgment in favor of Allied World. We further clarify that, generally, the notice-

prejudice rule shall not apply to a claims-made-and-reported policy that

contains unambiguous notice requirements as a condition precedent to

coverage.

                   I.    Facts and Procedural Background

      The Policy KSU purchased from Allied World was for the period from July

1, 2014 to July 1, 2015. The Policy allows claims made against KSU within the

policy period to be reported to Allied World up to ninety days after the end of

the policy period. Thus, the Policy expired July 1, 2015, and the 90-day

extended reporting period ended September 29, 2015.

      During the policy period, Dr. Maifan Silitonga and Dr. Teferi Tsegaye

submitted Notices of Charges of Discrimination to the United States Equal

Employment Opportunity Commission (“EEOC”) and Kentucky Commission on

Human Rights (collectively, “EEOC Charges”) related to their employment at

KSU. KSU received written notice of the EEOC Charges on June 23, 2015. On

September 2, 2015, Dr. Silitonga and Dr. Tsegaye brought employment-related

claims against KSU in Franklin Circuit Court, the substance of which would be

covered under the Policy. On October 2, 2015, three days after the extended

                                        2
reporting period expired, KSU, by email, notified Allied World of the litigation

and sought coverage under the Policy. Allied World denied coverage.

      KSU eventually filed a third-party complaint against Allied World,

requesting a declaration of rights under the Policy and asserting a breach of

contract claim based on the Policy. KSU also claimed that Allied World violated

the Unfair Claims Settlement Practices Act, engaged in bad faith, and violated

KRS2 304.12-235. KSU and Allied World filed cross-motions for summary

judgment on whether the Policy provided coverage to KSU. The circuit court

granted summary judgment in favor of KSU, relying on Bituminous Casualty.

      The circuit court interpreted the Policy as not clearly providing that strict

forfeiture of coverage is a consequence of KSU’s failure to promptly notify Allied

World of a claim. Based upon that interpretation, the circuit court concluded

that the notice-prejudice doctrine applies, requiring coverage under the Policy

unless Allied World showed that the delay in notice caused it prejudice.

Because Allied World could not be said to be prejudiced by KSU being three

days late in providing notice of the claim, the circuit court determined that

Allied World was obligated to indemnify KSU for the underlying claims.

Furthermore, with timely notice being at the heart of this dispute, the circuit

court held that because the Policy is unclear as to how notice is required to be

given, the notice could be considered timely if a three-day mailbox rule were

applied.

      2   Kentucky Revised Statutes.

                                        3
      The Court of Appeals disagreed and held that the terms of the Policy are

clear about the extended reporting period: KSU was required to provide written

notice of a claim against it within ninety days after the Policy ended. The Court

of Appeals further found that the Policy provided a certain procedure for

notifying the insurer of a claim. The Court of Appeals distinguished the instant

Policy from the Bituminous Casualty policy in that the latter, while requiring

“prompt notice” of a claim, failed to specify a reporting timeline. The Court of

Appeals determined that the notice-prejudice rule does not apply to the Policy

in this case.

      The Court of Appeals also concluded that 806 KAR3 12:095 does not

support KSU’s argument for coverage and that the CR4 6.055 mailbox rule does

not apply to contract disputes. The Court of Appeals reversed the circuit court.

Thereafter, this Court granted KSU’s petition for discretionary review.

                              II.   Standard of Review

      3   Kentucky Administrative Regulations.
      4   Kentucky Rules of Civil Procedure.
      5   CR 6.05 states:
             Whenever a party has the right or is required to do some act or
      take some proceedings within a prescribed period after the service of a
      notice or other paper upon him and the notice or paper is served upon
      him by mail or electronic service, 3 days shall be added to the prescribed
      period. This provision shall not apply to the service of summons by mail
      under Rule 4.01(1)(a).

                                               4
      CR 56.03 authorizes summary judgment “if the pleadings, depositions,

answers to interrogatories, stipulations, and admissions on file, together with

the affidavits, if any, show that there is no genuine issue as to any material fact

and that the moving party is entitled to a judgment as a matter of law.” When

reviewing a summary judgment on appeal, an appellate court considers

whether the circuit court correctly found that there are no genuine issues of

material fact and that the moving party is entitled to judgment as a matter of

law. Inter–Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 165 (Ky.

2012). Because we are faced with a question of law, the interpretation and

legal effect of a written contract, we review the opinion of the Court of Appeals

de novo. Kearney v. Univ. of Ky., 638 S.W.3d 385, 397 (Ky. 2022); Morganfield

Nat’l Bank v. Damien Elder & Sons, 836 S.W.2d 893, 895 (Ky. 1992).

                                  III.   Analysis

      As noted above, the primary issue before this Court is whether the circuit

court properly interpreted the notice provisions within the claims-made-and-

reported insurance policy issued by Allied World to KSU and then, based upon

that interpretation, correctly assessed the role, if any, that the notice-prejudice

rule adopted in Jones v. Bituminous Casualty Corp. plays in this case. Unlike

the circuit court, we conclude that the Policy provisions clearly warned KSU

that noncompliance with the notice requirements would result in forfeiture of

coverage. Given no ambiguity exists in the notice provisions, application of the

notice-prejudice rule is unwarranted.

                                         5
      KSU also argues that even if the Policy is unambiguous and the notice-

prejudice rule does not apply, other reasons exist to affirm the circuit court.

However, we conclude that even if 806 KAR 12:095 Section 4(3) were applicable

to a private cause of action, the regulation does not benefit KSU in this case.

Lastly, we disagree with KSU that the Policy’s notice requirement may be

interpreted as analogous to CR 6.05.

      A.   Construction and Interpretation of Contracts.

      “In the absence of ambiguity, a written instrument will be enforced

strictly according to its terms, and a court will interpret the contract’s terms by

assigning language its ordinary meaning and without resort to extrinsic

evidence.” Wehr Constructors, Inc. v. Assurance Co. of Am., 384 S.W.3d 680,

687 (Ky. 2012) (quoting Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 106 (Ky.

2003)); see also KRS 304.14-360. “[W]ords which have no technical meaning

in law, must be interpreted in light of the usage and understanding of the

common man.” Bituminous Cas. Corp. v. Kenway Contracting, Inc., 240 S.W.3d

633, 638 (Ky. 2007) (citation omitted). When “the terms of an insurance policy

are clear and unambiguous, the policy will be enforced as written.” Kemper

Nat’l Ins. Cos. v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 873 (Ky. 2002).

      If no ambiguity exists in the contract, a reviewing court must determine

the intention of the parties “from the four corners of that instrument.”

Hoheimer v. Hoheimer, 30 S.W.3d 176, 178 (Ky. 2000). “A contract is

ambiguous if a reasonable person would find it susceptible to different or

inconsistent interpretations.” Hazard Coal Corp. v. Knight, 325 S.W.3d 290,

                                         6
298 (Ky. 2010) (citation omitted). Ambiguity is generally resolved in favor of the

insured. Thomas v. State Farm Fire and Cas. Co., 626 S.W.3d 504, 507 (Ky.

2021). Pertinent to the Policy at bar, “‘[c]ondition precedent’ is a legal term of

art with a clear meaning: ‘An act or event, other than a lapse of time, that must

exist or occur before a duty to perform something promised arises.’” Superior

Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770, 785 (Ky. 2017)

(citations omitted).

       B. Jones v. Bituminous Casualty Corp. Does Not Apply in This Case.
          The Policy Terms Are Unambiguous and Must Be Enforced as
          Written.

       KSU argues that the four principal reasons Bituminous Casualty

expressed for applying the notice-prejudice rule exist in this case and that KSU

is entitled to coverage because Allied World cannot show prejudice when notice

of the claim was just three days late. Allied World, on the other hand,

maintains that the Policy terms are unambiguous and not unreasonable, thus,

the Policy must be enforced as written, otherwise KSU would be extended

insurance coverage beyond the bargained-for terms. Allied World also

advocates that the notice-prejudice rule does not apply to claims-made-and-

reported policies.

       Our analysis begins by setting forth the relevant policy language. We

then consider whether Bituminous Casualty supports application of the notice-

prejudice rule to the Policy between Allied World and KSU and conclude it does

not.

                                         7
           1. The Policy.

      The Policy provisions which explain the insurer’s coverage obligations in

relation to the insured’s reporting obligations and which present the notice

requirements are found in three clauses.6

      The Insuring Agreement for Employment Practices Liability Coverage

states:

      The Insurer shall pay on behalf of any Insured the Loss arising
      from a Claim, first made during the Policy Period (or Discovery
      Period, if applicable) against such Insured for any Wrongful Act,
      and reported to the Insurer in accordance with Section V. of
      the General Terms and Conditions and Section IV. of this
      Coverage Section.7

      Detailing the requirements for providing notice of a claim, Section

IV. of the Coverage Section and Section V. of the General Terms and

Conditions, respectively, state:

      The Insured(s) shall, as a condition precedent to the
      obligations of the Insurer under this Policy, give written notice
      to the Insurer, at the physical or email address indicated in Item 7.
      of the Declarations, of a Claim made against an Insured as soon
      as practicable after the Organization’s General Counsel, Director
      of Human Resources or Risk Manager, or any individual with
      functionally equivalent responsibilities becomes aware of the
      Claim.8

      Notwithstanding the above, in no event shall such notice of any
      Claim be provided to the Insurer later than ninety (90) days
      after the end of the Policy Period or Discovery Period if
      purchased. If mailed, the date of mailing shall constitute the date

     6 The bold typeface used within the Policy to highlight defined terms is removed.

Emphasis within the Policy provisions below is added.
      7   Employment Practices Liability Coverage § I.A. (Insuring Agreements).
      8 Employment Practices Liability Coverage § IV. (Notice of a Claim). This
provision is prefaced: The following provision shall apply in lieu of Section V.A.
of the General Terms and Conditions.

                                            8
      that such notice was given and proof of mailing shall be sufficient
      proof of notice.9

      Furthermore, with regard to reporting beyond the policy period, the

Policy also provides the right to purchase a Discovery Period after the

expiration of the Policy. The Policy states:

      If this Policy, or one or more Coverage Sections of this Policy, is
      cancelled by either the Named Insured or the Insurer for any
      reason other than non-payment of premium, or the Insurer refuses
      to renew this Policy, the Insured(s) shall have the right to purchase
      a Discovery Period of up to three (3) years following the effective
      date of such cancellation or non-renewal. . . .

KSU did not purchase Discovery Period coverage.

           2. The Notice-Prejudice Rule.

      In Bituminous Casualty, the insurance company sought a declaration of

rights that it had no obligation to defend or to indemnify under a liability policy

issued to the insured mining company. 821 S.W.2d at 799. The insurance

policy stated that in the event of an “occurrence,” the duty of the insured was

to “see to it that [the insurer is] notified promptly of an ‘occurrence’ which may

result in a claim.” Id. at 800. The insured notified the insurer of an accident

six and one-half months after it occurred. Id. The circuit court in Bituminous

Casualty decided the prompt notice clause was breached by a delay of that

length. Id. at 800-01.

      Upon its review of the contract, the Bituminous Casualty court

reconsidered the rule expressed in Reserve Ins. Co. v. Richards, 577 S.W.2d

      9   General Terms and Conditions § V.B. (Notice of Claim).

                                            9
417, 419 (Ky. 1979) – that in a coverage dispute the insurer need not prove

actual prejudice when the insured fails to give timely notice,10 and adopted the

inverse rule that “an insurer cannot withdraw coverage on the ground that a

notice condition has not been met unless the insurer can show that it was

prejudiced by the act of the insured.” Bituminous Cas., 821 S.W.2d at 801. We

explained that while the insurer bears the burden to prove prejudice, the

standard of proof is not actual prejudice but “whether it is reasonably probable

that the insurance carrier suffered substantial prejudice from the delay in

notice.” Id. at 803. We rejected application of the rule expressed in Reserve as

unreasonable for the circumstances presented in Bituminous Casualty based

upon “at least four major features in . . . insurance law.” Id. at 801.

      First, we observed that standard form insurance policies, like the one

under consideration, are recognized as contracts of adhesion because they are

not negotiated and as the contract did not clearly define prompt notice or warn

of a forfeiture, the policy had a latent ambiguity to be resolved in favor of the

insured.11 Id. at 801. Second, considering the doctrine of reasonable

      10   Reserve states:
              Compliance with the notice provisions of an insurance policy is a
      condition precedent to recovery on the policy. The reasonableness and
      validity of such provisions in an insurance policy have been consistently
      recognized. It is not necessary for the insurer to prove actual prejudice
      from failing to give timely notice. We are of the opinion that a period of
      13 months from occurrence to notice is not “as soon as practicable” and
      is not timely notice so as to comply with a condition precedent to
      recovery. Id. at 419 (internal citations omitted), overruled by Bituminous
      Casualty, 821 S.W.2d 798.
        11 Regarding the contract’s failure to define prompt notice and to warn of

forfeiture, the Bituminous Casualty court stated:

                                           10
expectations, we concluded that while the policy clearly imposed a duty on the

insured to promptly notify the insurer, by failing to define prompt notice or to

warn of a forfeiture, denial of coverage was beyond the reasonable expectation

of the ordinary insurance consumer. Id. Third, considering the insured

purchased the policy of public liability insurance because it was required by

law, as a matter of public policy, “a clause working a strict forfeiture regardless

of prejudice unreasonably interferes with coverage required by mine safety

regulations.” Id. And fourth, we held that the policy’s clause did not impose

upon the insurer unreasonable and unforeseeable risks not accounted for in its

premiums. Id. at 802-03.

        3. Reasons For Applying the Notice-Prejudice Rule in Bituminous
           Casualty Do Not Exist in This Case.

      Considering Bituminous Casualty, KSU first argues that the Policy is a

contract of adhesion with no specific forfeiture language. We disagree. As to

forfeiture, reading Sections IV. and V. together, the Policy expressly informed

KSU that a condition of coverage – a condition precedent – was giving written

notice of a claim as soon as practicable, but in no event was such notice of any

claim to be provided to Allied World later than ninety days after the end of the

      A strict forfeiture interpretation of the prompt notice requirement
      excludes from the equation both the reasons why the insured failed to
      give prompt notice, such as whether a layman would realize that there
      was a covered occurrence, and the question whether the insurance
      carrier suffered any substantial prejudice from the delay. Absent
      language in the contract clearly spelling out the meaning and parameters
      of prompt notice and automatic forfeiture consequences, the reach of the
      term and the consequences are vague. The policy has a latent ambiguity
      which is subject to the rule of construction that applies to a contract of
      adherence.

                                         11
Policy period. KSU did not purchase Discovery Period coverage, so the

reporting period did not extend beyond the 90-day reporting period. The Policy

clearly defined when notice was due and the consequences if notice is late.

Particularly, the Policy informed KSU that if the notice provisions were not met,

Allied World had no obligation to KSU under the Policy. A “policy must receive

a reasonable interpretation consistent with the parties’ object and intent or

narrowly expressed in the plain meaning and/or language of the contract.” St.

Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226

(Ky. 1994).

      Because the Policy unambiguously provided no coverage if KSU failed to

comply with the notice provisions, we must address the remaining part of

KSU’s argument – whether the Policy is a contract of adhesion. The circuit

court did not address this argument.

      KSU describes Bituminous Casualty as allowing courts to consider

whether the insurance policy is a “form” policy, known as a contract of

adhesion, when determining whether an insurer can deny a claim based on

late notice. Bituminous Casualty’s adhesion contract analysis reflects that,

generally, standard form insurance policies used in consumer transactions will

be construed as contracts of adhesion. However, “[a]dhesion contracts are not

per se improper.” Schnuerle v. Insight Commc’ns. Co., L.P., 376 S.W.3d 561,

576 (Ky. 2012) (citation omitted); see also Energy Home, Div. of S. Energy

Homes, Inc. v. Peay, 406 S.W.3d 828, 835 (Ky. 2013) (discussing procedural

and substantive unconscionability). Consequently, because we have found the

                                       12
Policy’s notice provisions unambiguous, for KSU to prevail under this

argument, KSU must show that the Policy is an unenforceable contract of

adhesion.

      As this Court has explained, and as Bituminous Casualty succinctly

points out, multiple criteria are to be met for a contract of adhesion to be

deemed unfair and unenforceable: (1) the contract is a standardized contract;

(2) the contract is imposed and drafted by the party of superior bargaining

strength;12 and (3) the contract relegates to the subscribing party only the

opportunity to adhere to the contract or reject it. Schnuerle, 376 S.W.3d at 576

(citation omitted). Thus, a standard form agreement between the parties does

not necessarily make the contract an unenforceable contract of adhesion.

      KSU would be entitled to summary judgment on the question whether

the Policy is a contract of adhesion if it can point to evidence of record revealing

facts which show it is not possible for the adverse party to prevail. Welch v.

Am. Publ’g Co. of Ky., 3 S.W.3d 724, 730 (Ky. 1999); see also Paintsville Hosp.

Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985) (citing Kaze v. Compton, 283

S.W.2d 204 (Ky. 1955)).

      KSU argues that the Policy’s terms, including its notice provisions, were

not negotiated by the parties but instead were drafted by Allied World; the

       12 As this Court has noted, “there is a significant difference between an

adhesion contract in which the parties have disparate bargaining power and a
contract which voluntarily has been entered into by sophisticated and knowledgeable
businessmen concerning a financial transaction of considerable magnitude.” Buck
Run Baptist Church, Inc. v. Cumberland Sur. Ins. Co., Inc., 983 S.W.2d 501, 504 (Ky.
1998).

                                         13
Policy provisions that are the subject of this dispute are standard forms; and

no evidence of record shows that the Policy was anything but a contract of

adhesion. Allied World rebuts KSU’s arguments by pointing to the

amendments appended to the Policy, modifying coverage, and to the fact that

KSU was offered an extension of the reporting period but chose not to purchase

that extension.

      The evidence KSU cites, and which may be viewed as supporting a claim

that the Policy is an unenforceable contract of adhesion, is limited. While

KSU’s evidence may support its contention that the Policy is a standard form,

KSU does not point to evidence supporting a conclusion that even if Allied

World drafted the Policy, Allied World is the party of superior bargaining

strength or that the contract was offered on a “‘take it or leave it’ basis without

affording [KSU] a realistic opportunity to bargain.” See Bituminous Cas., 821

S.W.2d at 801. Based upon the cited evidence, KSU has not shown that it is

entitled to a judgment as a matter of law that the contract is an abusive and

unenforceable contract of adhesion. See id.; Welch, 3 S.W.3d at 730 (Ky. 1999)

(citing Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 482-83 (Ky.

1991)).

      KSU next offers the doctrine of reasonable expectations as a basis under

Bituminous Casualty for application of the notice-prejudice rule. KSU argues

that without clear warning, it was beyond KSU’s reasonable expectations that

Allied World would decline coverage if KSU provided untimely notice. However,

because we find no ambiguity in the notice provisions, that argument is

                                        14
resolved. The Policy provided clear warning of forfeiture if notice of a claim was

not timely given.

      Regarding public policy reasons for requiring Allied World to provide

coverage under the Policy, KSU argues that while it is not statutorily required

to purchase a liability insurance policy, KSU is authorized by statute to

purchase the insurance to protect itself, its employees and administrators, and

ultimately, public funds. KSU argues that because it is not a private party with

no public interest, public policy strongly supports applying the notice-prejudice

rule since as the circuit court observed, “[t]o allow the insurer to escape

responsibility to defend this claim would create a windfall for the insurer at the

expense of the public.” However, unlike the circuit court, we have concluded

that the Policy provisions at issue are unambiguous. Given the plain terms of

the contract, their full force and effect does not equate to creating a windfall for

the insurer. In sum, “in the absence of circumstances justifying relief, courts

do not make contracts different from those that the parties make for

themselves, even when forfeiture provisions are harsh.” Miller Dairy Prods. Co.

v. Puryear, 310 S.W.2d 518, 521 (Ky. 1957) (citation omitted).13

           4. Application of the Notice-Prejudice Rule to Claims-Made-and-
              Reported Policies.

      While this case is resolved based upon contract law principles, we

consider the well-briefed discussion about application of the notice-prejudice

      13 Based upon the foregoing conclusions, the question of whether Allied World’s
premium pricing structure would be affected if the notice-prejudice rule applied need
not be addressed.

                                         15
rule to claims-made-and-reported insurance policies. As a starting point,

Allied World argued in its summary judgment motion that it should be granted

judgment based upon contract law. However, because no Kentucky Supreme

Court case specifically addresses whether the notice-prejudice rule applies to

claims-made-and-reported policies, Allied World also advocated that claims-

made-and-reported policies are not subject to the notice-prejudice rule. Allied

World maintains that position before this Court.

       More particularly, Allied World outlines characteristics of claims-made-

and-reported policies which contrast with occurrence policies, making the

notice-prejudice rule inapplicable. For example, “[g]enerally, a notice

requirement is a material provision in a claims-made-and-reported policy.”

Ashland Hosp. Corp. v. RLI Ins. Co., No. 13-143-DLB EBA, 2015 WL 1223675,

at *9 (E.D. Ky. Mar. 17, 2015), aff’d, 632 Fed App’x 271, 272 (6th Cir. 2016)

(per curiam). As explained in C.A. Jones Mgmt. Grp., LLC v. Scottsdale Indem.

Co.,

       A claims-made-and-reported policy provides coverage only for
       claims made against the insured and reported to the insurer during
       the life of the policy regardless of when the underlying incident
       occurred. Timely notice of a claim is the event that not only
       triggers coverage, but also defines its scope. An occurrence-based
       policy, by contrast, provides coverage for incidents which occur
       during the life of the policy without regard to when a claim is
       brought. While prompt notice allows the insurer to investigate and
       defend the claim, it has no effect as to the scope of coverage.

No. 5:13-CV-00173-TBR-LLK, 2016 WL 3460445, at *5 (W.D. Ky. June 21,

2016).

                                       16
      Allied World emphasizes that Kentucky federal decisions have predicted

that Kentucky will not apply the notice-prejudice doctrine to claims-made-and-

reported policies. But that prediction is not unqualified. For example, in C.A.

Jones Management Group, LLC, the Western District Court of Kentucky stated

it predicts that the “Kentucky Supreme Court [will] not extend the notice-

prejudice rule to claims-made-and-reported policies that clearly and

unambiguously requires timely notice as a condition precedent to coverage.”

Id. Pertinently, the primary basis for the Western District Court’s prediction is

application of Kentucky’s general principles of contract law to unambiguous

insurance policy terms. Id. Like the Western District Court, the Eastern

District Court of Kentucky and the Sixth Circuit Court of Appeals include

within their prediction the point that the notice-prejudice rule will not apply

when the policy unambiguously requires timely notice.

      In Ashland Hospital Corp. v. RLI Insurance Co., the Eastern District Court

of Kentucky stated that it “predicts that the Kentucky Supreme Court [will]

adopt the majority position and conclude that requiring an insurer to show

prejudice under a claims-made-and-reported policy rewrites the contract and

eliminates the benefit the reporting requirement provides to both parties.”

2015 WL 1223675, at *10. And the Sixth Circuit Court of Appeals, affirming

the Eastern District Court’s decision, stated that it agrees “with the district

court’s prediction [based upon its analysis of Jones v. Bituminous Casualty

Corp.] that the Supreme Court of Kentucky [will] not extend the notice-

prejudice rule to a claims-made policy like the excess policy here, which

                                        17
contains unambiguous notice requirements as conditions precedent to

collecting under the policy.” 632 Fed. App’x. at 272.

      The Court of Appeals’ opinion discusses the differences between

occurrence, the type of policy at issue in Bituminous Casualty, and claims-

made-and-reported insurance policies; the purpose of the policies; the manner

in which other courts tend to construe the policies; contract law generally; and

public policy reasons behind applying the notice-prejudice rule to this claims-

made-and-reported Policy. The Court of Appeals concluded that the notice-

prejudice rule does not apply to the unambiguous Policy. We agree and clarify

that generally, the notice-prejudice rule does not apply to a claims-made-and-

reported policy that contains unambiguous notice requirements as a condition

precedent to coverage. The reason is simple: “Parties are bound by the clear

and unambiguous terms of their contracts.” Versailles Farm Home & Garden,

LLC v. Haynes, 647 S.W.3d 205, 209 (Ky. 2022). As a policy matter, courts are

not to rewrite contracts containing explicit terms. St. Paul Fire & Marine, 870

S.W.2d at 226. Still, consistent with long standing precedent, “every

company’s [claims-made-and-reported] policy must be construed as it is

written and [contract law principles] applied to the developed facts in the

particular case.” Mutual Life Ins. Co. of N.Y. v. Smith, 79 S.W.2d 28, 34 (Ky.

1935).

   C. 806 KAR 12:095 Section 4(3) Cannot Be Construed for KSU’s
        Benefit.

      KSU argued in its briefing to the circuit court that Allied World must

comply with 806 KAR 12:095 Section 4(3). Viewing 806 KAR 12:095 Section
                                       18
4(3) as a regulation which goes beyond the notice-prejudice rule, KSU asserted

that Allied World had not and could not demonstrate that KSU’s notice, being

three days outside the 90-day extended reporting period, “is so unreasonable to

constitute a breach of the first-party claimant’s duty to cooperate with the

insurer.” Allied World rebutted, pointing out 806 KAR 12:095 Section 2(3)

plainly states that 806 KAR 12:095 does not create a private cause of action.

      In its briefing to this Court, KSU has clarified that it asserts no cause of

action under 806 KAR 12:095; rather it simply points to the regulation as

setting forth minimum standards that insurers are required to follow.

However, as the Court of Appeals noted, a condition within the regulation

makes it inapplicable to the Policy, and the regulation does not support KSU’s

argument for coverage.

      806 KAR 12:095 Section 4(3) states:

      Section 4. Misrepresentation of Policy Provisions. . . . (3) Insurers
      shall not deny a claim based upon the failure of a first-party
      claimant to give written notice of loss within a specified time limit
      unless written notice of loss is a written condition in the
      policy, certificate, or contract and the first-party claimant's failure
      to give written notice after being requested to do so is so
      unreasonable as to constitute a breach of the first-party claimant's
      duty to cooperate with the insurer.

(Emphasis added).

      Pursuant to 806 KAR 12:095 Section 4(3), an insurer may deny a claim

based upon the failure of a first-party claimant to give written notice of loss

within a specified time limit when the notice of loss is a written condition of the

policy. Although KSU argues otherwise, because providing timely notice is a

condition of Policy coverage, the question whether KSU breached a “duty to
                                        19
cooperate” by failing to give written notice within the extended policy period

does not apply to KSU.14 We agree with the Court of Appeals that based upon

the plain reading of 806 KAR 12:095 Section 4(3), the regulation does not

support KSU’s argument for coverage.

      D. Accounting for United States Postal Service Mailing Time Does
         Not Save KSU’s Late Email.

      Lastly, KSU contends that when considering the physical mailing

time, it substantially complied with the notice requirements. KSU

maintains that had the notice been mailed through the United States

Postal Service on September 29, 2015, a date timely under the Policy, the

notice would not have been received until October 2, 2015, the date the

emailed notice was received, or later. KSU asserts that, in line with the

circuit court’s observation that the mailing requirements were not clear,

the Policy contemplates receiving claim notices shortly after the 90-day

extended reporting period expires.

      However, Allied World emphasizes that the Policy provided for both

mailed and emailed notices and since KSU provided notice by email, the

Section IV. “[i]f mailed” provision did not apply. Upon review of the Policy, we

conclude that the mail and email provision required mailing or emailing within

the 90-day extended reporting period; under the Policy, allowance for receipt of

timely-deposited physical mail is irrelevant to the emailed notice. By the terms

of the Policy, KSU’s email may not be found timely.

        14 See 13 Steven Plitt, Daniel Maldonado, Joshua D. Rogers, and Jordan R.

Plitt, Couch on Insurance § 186:13 (3d ed., Thomson Reuters, November 2022 Update).

                                        20
                                IV.   Conclusion

      We affirm the Court of Appeals’ decision reversing the Franklin

Circuit Court. The Policy’s notice provisions are clear and unambiguous.

Allied World was entitled to deny coverage to KSU when KSU did not

comply with the notice requirements. Accordingly, we remand this case

to the Franklin Circuit Court with directions to vacate its grant of

summary judgment in favor of KSU and to enter an order granting

summary judgment in favor of Allied World instead.

      All sitting. Conley, Keller and Nickell, JJ., concur. Lambert, J., concurs

in part and dissents in part by separate opinion in which Bisig and Thompson,

JJ., join.

      LAMBERT, J., CONCURRING IN PART, DISSENTING IN PART: I concur

with the Majority’s opinion that generally, the notice-prejudice rule does not

apply to an unambiguous claims-made-and-reported policy containing notice

requirements as a condition precedent to coverage. However, I respectfully

dissent with regard to the Majority’s interpretation of the notice provisions of

the Policy regarding forfeiture and its decision that the notice-prejudice rule

does not apply to this Policy. Reasons stated in Bituminous Casualty for

applying the notice-prejudice rule exist here. Consequently, Allied World was

required to show prejudice before it could withdraw coverage of the Policy from

KSU. Without that showing, KSU is entitled to coverage under the Policy and

summary judgment in its favor. Furthermore, I agree with KSU that it

                                        21
substantially complied with the notice requirement and also on that basis, is

entitled to coverage under the Policy.

      First, I agree with the Majority that the terms of the Policy are clear in

regard to KSU’s obligation to give written notice. However, unlike the Majority,

I agree with the circuit court that the Policy does not clearly explain or state

that automatic forfeiture of coverage is the consequence of failure to provide

notice within the given timeframe. As stated in Bituminous Casualty,

      Absent language in the contract clearly spelling out the meaning
      and parameters of prompt notice and automatic forfeiture
      consequences, the reach of the term and the consequences are
      vague. The policy has a latent ambiguity which is subject to the
      rule of construction that applies to a contract of adherence.”15

The ambiguity thus weighs in favor of application of the notice-prejudice rule:

without strict forfeiture being a clear consequence of the insured’s failure to

follow a notice provision, the insurer must demonstrate “substantial prejudice

from the delay.”16

      Furthermore, I agree with the circuit court’s analysis of the other

Bituminous Casualty factors. Because ambiguity exists in the Policy’s language

in regard to forfeiture consequences, a denial of coverage based upon untimely

notice would be contrary to KSU’s reasonable expectations. While I agree with

Allied World that KSU’s public policy argument is not as forceful as that in

Bituminous Casualty because KSU was not required to purchase the Policy,

because the Policy serves the public interest by protecting the public

      15   821 S.W.2d at 802.
      16   See id. at 801-02.

                                         22
university, its employees and administrators, and Kentucky taxpayers, I agree

with the circuit court that public policy supports applying the notice-prejudice

rule. Otherwise, as the circuit court observed, allowing the insurer to escape

responsibility to defend this claim would create a windfall for the insurer at the

expense of the public. Lastly, without a showing of prejudice by Allied World,

because KSU’s notice was only three days late and was received within a

timeframe contemplated by the Policy, there obviously was no increase in risk

to Allied World from the late notice and Allied World’s premium pricing would

not be affected. Consequently, I would affirm the circuit court’s application of

the notice-prejudice rule and its grant of summary judgment to KSU.

      I also agree with KSU’s alternative argument17 that when taking physical,

three-day mailing time into consideration, KSU substantially complied with the

notice requirements. Had KSU mailed the notice with it arriving on the same

day it arrived in the email box, there would be no windfall to Allied World.

While it is clear that the Policy’s mail and email provision required mailing or

emailing within the 90-day extended reporting period, given that the Policy

would allow Allied World to receive USPS mail outside the 90-day extended

reporting period, without prejudice, KSU’s email may be found as substantially

complying with the notice requirement.18

      17 Because KSU has clarified that it asserts no cause of action under 806

KAR12:095, I refrain from expressing an opinion as to whether the regulation supports
KSU’s argument for coverage.
      18Substantial compliance depends upon the degree to which the insured has
complied with the actual policy language. See Hill v. Union Cent. Life Ins. Co., 513
                                          23
      In sum, because the Policy did not clearly warn KSU that automatic

forfeiture of coverage was a consequence of not giving notice of a claim within

the 90-day extended reporting period, and because KSU substantially complied

with the notice requirement, I would reverse the Court of Appeals and reinstate

the summary judgment entered by the Franklin Circuit Court.

Bisig and Thompson, JJ., join.

COUNSEL FOR APPELLANT:

Philip Gray Fairbanks
M. Austin Mehr
Erik D. Peterson
Mehr Fairbanks & Peterson Trial Lawyers, PLLC

COUNSEL FOR APPELLEE:

Chad Propst
Ian C.B. Davis
B. Todd Thompson
Thompson Miller & Simpson, PLC

COUNSEL FOR AMICUS CURAE, COMPLEX INSURANCE CLAIMS LITIGATION
ASSOCIATION

Aaron D. Griffith
Walters Richardson, PLLC

Laura A. Foggan
Crowell & Moring, LLP

S.W.2d 808, 808-09 (Ky. 1974); Hart v. Hart, 201 S.W.3d 457, 462 (Ky. 2006); see also
Newark Ins. Co. v. Ezell, 520 S.W.2d 318, 319 (Ky. 1975).

                                         24