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Two Kentucky Supreme Court rulings handed down last week emphasize how important it can be to have clearly worded insurance policies, including exclusions and excess and escape clauses, particularly in high-dollar commercial coverage.

In Motorists Mutual Å˽ðÁ«´«Ã½Ó³»­ Co. vs. First Specialty Å˽ðÁ«´«Ã½Ó³»­ Corp., the high court split the difference on conflicting policies held by a contractor and an apartment complex – requiring both insurers to pay equally after a child was run over.

The decision overturned a court ruling that had been a guidepost on escape clauses for almost three decades.

“…We reverse the Court of Appeals’ opinion holding that First Specialty’s ‘other insurance’ provision was a nonstandard escape clause, overrule , and hold First Specialty’s and Motorists’ ‘other insurance’ provisions are mutually repugnant excess clauses,” Chief Justice Laurance VanMeter wrote in the Dec. 19 opinion.

The appeal came out of the tragic death of a 5-year-old child in 2016 at a Louisville apartment complex. The child was riding his bicycle when he was hit by a truck driven by an employee of Alltrade, which held the service contract on the Whispering Brook complex, according to the court decision and local news reports at the time.

The apartment service agreement called for Whispering Brook to indemnify Alltrade and hold it harmless for all liability. The apartment company’s commercial general liability policy was written by First Specialty. The policy, however, also noted that its coverage was to be considered excess coverage, “over any other insurance.”

But Alltrade’s commercial liability, written by Motorists Mutual, also provided that, “for any covered ‘auto’ you don’t own, the insurance provided by this coverage form is excess over any other collectible insurance.” First Specialty’s policy had a non-owned auto endorsement that provided $1 million in coverage. Motorists’ policy provided $1 million in business auto coverage.

The family of the child filed a wrongful death lawsuit against the apartment owner and the contractor. Motorists Mutual asked the trial court in Jefferson County to determine which policy should pay first. The circuit court judge found that the excess clauses in both policies were mutually repugnant, so both insurers must contribute equal amounts.

After the wrongful death suit settled, First Specialty appealed the trial court’s split-the-baby decision.

The Kentucky Court of Appeals reversed the trial judge’s ruling, finding that First Specialty’s “other insurance” section was really a “nonstandard escape clause,” as established by the Empire Fire & Marine Å˽ðÁ«´«Ã½Ó³»­ v. Haddix ruling in 1996. The appellate court ordered Motorists to provide primary coverage and the apartments’ First Specialty policy to provide only the excess coverage, the court explained. Motorists Mutual then appealed to the state Supreme Court.

Because Motorists did not file a cross appeal at the appellate court level and did not fully raise the issue of the apartments’ indemnification obligation, the high court justices declined to tackle that aspect of the case. But on other points, the court agreed with Motorists.

The justices explained that excess clauses and escape clauses are different animals. An excess clause notes that the insurer will pay for a loss only after primary coverage from another insurer has been exhausted. An escape clause denies liability altogether if other insurance is available.

A nonstandard escape clause, as the apartments’ First Specialty argued, seeks to nail it down further: It denies liability if other coverage is available – whether the other coverage is considered primary, excess, or other coverage. The clause seeks to avoid confusion when another policy has an excess coverage requirement, the court explained.

Under Kentucky case law, when one policy includes a nonstandard escape and the other has an excess clause, the one with the excess clause bears primary liability for the loss, the justices noted. But when both policies have similar excess clauses, they usually cancel each other out and the insurers must share the responsibility.

Contrary to First Specialty’s and the appellate court’s reasoning, the high court decided that First Specialty’s clause was not a nonstandard escape, after all. It did not deny coverage altogether when other insurance is available. The policy said only that it was excess coverage over “any of the other insurance, whether primary, excess, contingent or any other basis.”

To reach its conclusion, the justices had to shake up years of practice. The 1996 Haddix ruling had held that an “other insurance” provision that included the phrase “whether primary, excess, contingent, or any other basis” was to be deemed a nonstandard escape clause. But that Haddix ruling now appears to conflict with another Kentucky Supreme Court decision, known as Kentucky Farm Bureau vs. Shelter Mutual Å˽ðÁ«´«Ã½Ó³»­. The 2010 Shelter ruling spelled out that conflicting policies are mutually repugnant when they are indistinguishable in meaning, as were the policies in this case.

Three justices concurred in the opinion and three others dissented in part. Attorneys for both insurers could not be reached for comment for this article.

The ‘Non-Collapsed’ Church Roof Case

Meanwhile, in another insurance decision posted the same day, the state high court found that a State Auto Property & Casualty policy was ambiguous, and coverage was due for a 120-year-old church that saw part of its roof collapse in 2019.

State Auto, now part of Liberty Mutual insurance, had denied the church’s claim, arguing that the incident, which came during a re-roofing, did not meet the definition of a collapse under the policy terms. A trial court in Muhlenberg County granted summary judgment for the insurer, agreeing that two previous court rulings had established the limits of a collapsed roof in insurance policies: The church incident had not produced “rubble on the ground.”

Greenville Cumberland Presbyterian Church appealed. An engineer had determined that the trusses were decayed from years of water leaks and insects. As the trusses fell, church workers attempted to brace the structure, but it was not enough. The walls bowed outward and the church later had to be demolished.

The appeals court agreed with the church’s attorneys and found that the court-established definition does not, in fact, require rubble to fall to the ground. The policy wording also was not clear on the meaning of “collapse” and the church’s duty to mitigate damage, so the policy must be read in favor of the insured, the judges said.

The Supreme Court affirmed, declaring that the policy covered the collapse of any part of the building. The opinion can be seen here.

The case was considered to be of some importance to insurers. The Kentucky Defense Counsel, representing insurance interests, had filed an amicus brief to the Supreme Court.

Photo: (For illustration only; not the Greenville Cumberland church.)

Topics Kentucky