Court Opinion

ID: 9729368
Source: CourtListenerOpinion
Date Created: 2023-08-26 14:33:04.285605+00
Date Added: 2024-06-11T18:25:57.293657
License: Public Domain

WINTERSHEIMER, Justice,
dissenting.
I must respectfully dissent from the majority opinion because the Unfair Claims Settlement Practices Act and the tort of bad faith apply to persons and entities who are self-insured or uninsured.
The principal issue here is whether a self-insured company that engages in claims adjusting and settlement is liable for a statutory bad faith claim under the Unfair Claims Settlement Practices Act, codified by KRS 304.12-230.
The constitutional analysis of the majority opinion is unnecessary and begs the question. The simple reason the legislature enacted the Unfair Claims Settlement Practices Act was to prevent fraud and deception in settlement by any person or entity. The majority opinion turns a blind eye to the reality that trucking, insurance and fair settlement practices are inexorably intertwined. The law should recognize the conditions of modern society.
When the lawsuit was originally filed, American Freightways, an Arkansas based interstate trucking company, took the position that it was only 60 percent liable even though its own driver admitted liability. The circuit court award was substantially more than the settlement amount offered by American Freightways prior to trial. The Davidsons then filed a bad faith action against American Freightways claiming that they acted as a self-insured. The Davidsons argued that American Freight-ways, as a self-insured, was prohibited from engaging in any unfair settlement practice pursuant to KRS 304.12-230, the Unfair Claims Settlement Practices Act, and under KRS 304.48-240(2), entitled Prohibited Activity for Liability Self Insurance Groups. The trial judge concluded that American Freightways was not a self-insurer and granted it summary judgment on the question of bad faith. The Court of Appeals affirmed, but for different reasons, and held that American Freightways was self-insured but that the Act did not apply to self-insureds when there was no contract of insurance on which to base a claim of bad faith. This Court accepted discretionary review.
The Davidsons argue that the General Assembly has declared the public policy of Kentucky to be that the Unfair Claims Settlement Practices Act applies to self-insureds. They contend that applying the *103Act to self-insureds is consistent with the strong constitutional and judicial traditions recognizing the right of individual redress.
American Freightways responds that a bad faith action is untenable in the absence of an insurance contract. They maintain that they owe no fiduciary duty to the Davidsons and that the principles of statutory construction preclude the application of the Unfair Claims Settlement Practices Act to bad faith actions brought against self-insureds such as themselves.
American Freightways conceded that with respect to this claim it acts as a self-insured and that it was without insurance coverage applicable to the claim. American Freightways did have a policy of commercial insurance with Protective Insurance Company which had a $250,000 per occurrence deductible. American Freight-ways states that at no time during the trial or appeal was it ever even suggested that they were not in full compliance with federal statutes which specifically regulate the issue here: Federal motor carriers ability to address claims arising out of their involvement in interstate commerce. It contends that 49 U.S.C. 31139(b) and (e), which require Federal motor carriers such as American Freightways to provide evidence of financial responsibility to withstand claims up to $750,000, addresses precisely that issue.
As the Court of Appeals correctly notes in its majority opinion, self-insurance is defined as “the practice of setting aside a fund to meet losses instead of insuring against such through insurance. A common practice of business is to self-insure up to a certain amount and then cover any excess with insurance. This common business practice is clearly the manner in which American Freightways operates and was admitted by the company in its affidavits and legal pleadings. The Court of Appeals found that American Freightways was self-insured and that it failed to comply with the Motor Vehicle Reparations Act so as to be a “secured” person. There was no cross-motion for discretionary review challenging this finding.
American Freightways is a self-insured even though it did not file the proper papers in Kentucky to be a self-insured. Simply by failing to file and ignoring the proper procedure, American Freightways cannot ignore the MVRA laws and reheve itself of the responsibility of complying with unfair claims settlement practices. The affidavit of the Director of Property and Casualty Claims of American Freight-ways states that “American Freightways acted as a self-insured in that it was without insurance coverage applicable to the claims of the Davidson” An additional affidavit of the manager of the property and casualty claims of American Freightways stated that all claims below the amount of $250,000 were handled by the company who investigates, adjusts and makes settlement decisions with respect to any claims within the self-retention amount.
American Freightways is not part of a self-insurance group, within the statutory meaning of MVRA. KRS 304.48-240 has no application in this matter. However, KRS 304.39-080 of the MVRA provides that every owner of a motor vehicle shall continuously provide security for the payment of basic reparations benefits and security for payment of tort liabilities. “The owner of a motor vehicle who fails to maintain security on a motor vehicle pursuant to this subsection of the statute shall have his or her operator’s license suspended. The statute further provides that security may be provided by a contract of insurance or by qualifying as a “self-insurer”
In order to qualify as a self-insurer, the owner must file in satisfactory form with the Commissioner of Insurance: 1) a continuing undertaking to pay tort liabilities or basic reparations benefits; 2) evidence of prompt and efficient administration of all claims, benefits and obligations; and 3) evidence of reliable financial arrangements substantially equivalent to an insurance policy.
*104American Freightways did not obtain an insurance policy for the first $250,000 of any claims and did not comply with the laws governing the method of becoming a self-insured for purposes of the MVRA. Accordingly, American Freightways has failed to maintain security on its motor vehicle pursuant to the statutory requirements of MVRA.
This Court recognized the right of a private individual to maintain an action for a violation of the Unfair Claims Settlement Practices Act codified in KRS 304.12-230 in State Farm Mutual Automobile Insurance Co. v. Reeder, Ky., 763 S.W.2d 116 (1989). Reeder, supra, stated that the Unfair Claims Settlement Practices Act was intended to protect the public from unfair trade practices and fraud, and that the Act should be liberally construed so as to effectuate its purpose. See KRS 446.080 and DeHart v. Gray, Ky., 245 S.W.2d 434 (1952). The case presented here relies on the statutory authority found in KRS 446.080.
KRS 304.12-230 makes no distinction between insurance companies and self-insureds. Person is defined in KRS 304.1-020 as
[A]n individual, insurer, company, association, organization, Lloyd’s insurer, society, reciprocal insurer or inter-insurance exchange, partnership, syndicate, business trust or corporation, and every other related entity.
Obviously, this is very broad language and unless an entity is specifically excluded, it is included. In this situation, American Freightways cannot cite such a statutory exclusion that would protect it from liability under the Unfair Claims Settlement Practices Act. The legislature has determined that the Act applies to all persons, not just insurance companies.
Reeves v. Wright & Taylor, 310 Ky. 470, 220 S.W.2d 1007 (1949), does not support the position of American Freightways, Inc. Reeves, supra, was determined long before the Commonwealth adopted the Unfair Claims Settlement Practices Act and it is distinguishable and it must be placed within the context of the facts in that case. The issue in Reeves was whether an automobile leasing company was involved in the business of insurance when it elected to become self-insured. Specific provisions for that option had been provided for within the then new statute. The leasing company maintained that it was not able to find insurance coverage as required by the statute, thus it became self-insured as a result of absolute necessity. The leasing company was not a large business and did not have an entire department dedicated to investigating, negotiating or settling claims. The opinion in Reeves indicated that the issue had been abandoned in the briefing stage. Nevertheless, the court elected to speak to the point without the benefit of briefs or oral argument on the subject. It is obvious that the business of automobile insurance and the statutes relating to negotiating claims have undergone drastic revisions in the 50 years since the Reeves opinion was rendered in 1949. The comments of the Court made in Reeves are not valid precedent on which the majority can rely.
The majority opinion notes Richardson v. GAB Business Services, Inc., 161 Cal. App.3d 519, 207 Cal.Rptr. 519 (5th Dist. 1984). An analysis of that case indicates that in California, the only entity that can bring or maintain a bad faith action is the insurance commissioner. In Kentucky, an individual is allowed to pursue a bad faith claim. We find the California case inappropriate when we compare the California approach to the Kentucky approach. The act in question is a creature of Kentucky statutory law. We find the other foreign citation equally unconvincing.
The panel of the Court of Appeals which considered this case was concerned about imposing liability for bad faith claims absent an insurance contract. However, Reeder specifically states that statutory bad faith is a creature of statute and there is no similar cause of action found at com*105mon law. KRS 304.12-220 specifically excludes an insured from the term person as it applies to KRS 304.12-230. Consequently, individual policyholders are specifically exempted from liability under the Unfair Claims Settlement Practices Act.
American Freightways has its own Property and Casualty Claims Department, with a director, adjusters and investigators. It conducts negotiations with claimants. Decisions on settlements are made within the department as long as the claims are within the deductible/self-retention sum of less than $250,000. The claims department took the position that American Freightways was not totally responsible for the accident but only 60 percent liable. It is obvious that these activities are those which an insurance company regularly performs. The company acknowledges that it acted as a self-insured, however, it argues that this is not the same as being self-insured. The company maintains that the Davidsons simply cannot get around the absence of an insurance contract. We must strongly disagree.
The term self-insured is somewhat misleading. American Freightways is more accurately a self-insurer. It has chosen to act as its own insurance company, insuring itself. Consequently, it must have the same obligations as those of an insurer. One cannot avoid compliance with the same laws which apply to insurance companies when, in a legitimate move to save money, it acts as its own insurer. The MVRA in KRS 304.39-080 speaks of the mandatory vehicular insurance laws and recognizes that self-insurers must handle claims like insurers. This is not a “Mom and Pop” operation.
The legislature has expressed a clear intent that motor vehicle operators who do not purchase contracts of insurance must provide for prompt and efficient administration of claims and obligations. The purchase of an insurance policy by an ordinary motorist does not automatically create an obligation to comply with the Unfair Claims Practices Act. It delegates such responsibility to the insurance company. A self-insurer, such as American Freight-ways is not an insured. They have not obtained a legally recognized insurance policy and thus have not shifted the obligation in the Unfair Claims Practices Act to an insurance company. Clearly, they have chosen to create a self-insurance program by establishing the necessary financial reserves to pay losses and to hire employees to handle the administration of such claims. Consequently, they are liable under the Act because they fit the definition of person. KRS 304.1-020.
The General Assembly intended for the Act to apply to everyone with one specific exception. It does not apply to insureds. KRS 304.12-220 provides this very narrow exception to the words any person. As expressed in this statute, person shall not mean an insured.
If the legislature had desired that the Act was to apply only to insurance companies, then it surely would have used the word insurer, which by definition includes “every person engaged as principal and as indemnitor, surety or contractor in the business of entering into contracts of insurance.” KRS 304.1-040. It did not.
As stated in Reeder this Act is a statutory cause of action and not founded in common law. The Act contains no insurance policy requirement. The authorities presented by American Freightways do not relate to statutory bad faith in the context of an enabling statute such as KRS 446.070 or the broadly worded definition of person found in KRS 304.1-020. Although there may be some cases from other states which have individual applications and interpretations based on the statutes of those other states, we reassert the policy-expressed in Reeder that, “Our decision must be based on the language of Kentucky law.”
The argument that the Act applies only to entities engaged in “the business of insurance” is totally without merit. This phrase contained in KRS 304.12-010 is an *106additional prohibition and not a restriction on the application of KRS 304.12-230. The Unfair Claims Settlement Practices Act does not contain the phrase “in the business of insurance.” If the legislature had intended a restriction on the Act, it would have included such language. It did not. The word person stands alone.
There is a significant difference between a single individual and an interstate business. American Freightways, by handling its own claims and insuring itself for the first $250,000 of any loss, is in the business of insurance. Any company that has its own claims department to handle risks up to $250,000 cannot deny that it is in the business of insurance within the meaning of the Kentucky Insurance Code and subtitle 12. Although American Freightway’s principal business is trucking, it is clear that it has a significant subsidiary component to its activities which is the business of insuring itself. Again, this is not a “Mom and Pop” operation.
I would reverse the decision of the Court of Appeals and reinstate the claim of bad faith.
LAMBERT, C.J., and STUMBO, J., join this dissent.