Dennis Pennington v. State Farm Mutual Automobile I

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0022p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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DENNIS PENNINGTON and SHARON
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PENNINGTON, Co-Administrators of the
Estate of Stacey Pennington, -
Plaintiffs-Appellants, -
No. 07-6187
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>
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v.
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STATE FARM MUTUAL AUTOMOBILE
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Defendants-Appellees. -
INSURANCE COMPANY et al.,
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N
Appeal from the United States District Court
for the Eastern District of Kentucky at Lexington.
No. 06-00239—Joseph M. Hood, District Judge.
Argued: July 29, 2008
Decided and Filed: January 21, 2009
*
Before: BATCHELDER and GILMAN, Circuit Judges; ZOUHARY, District Judge.
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COUNSEL
ARGUED: Neil E. Duncliffe, DUNCLIFFE LAW OFFICE, Georgetown, Kentucky,
for Appellants. Michael Harris Baker, BAKER, KRIZ, JENKINS & PREWITT,
Lexington, Kentucky, for Appellees. ON BRIEF: Neil E. Duncliffe, DUNCLIFFE
LAW OFFICE, Georgetown, Kentucky, for Appellants. Michael Harris Baker, BAKER,
KRIZ, JENKINS & PREWITT, Lexington, Kentucky, for Appellees.
*
The Honorable Jack Zouhary, United States District Judge for the Northern District of Ohio,
sitting by designation.
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OPINION
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RONALD LEE GILMAN, Circuit Judge. Stacey Pennington, the 17-year-old
daughter of Dennis and Sharon Pennington, was killed in an automobile accident in July
2004. The Penningtons had four drivers in their family, all of whom were insured by
State Farm Mutual Automobile Insurance Company. In addition to insuring their
vehicles, the Penningtons purchased underinsured motorist (UIM) coverage with limits
of $100,000 per person/$300,000 per accident (100/300 UIM coverage). UIM coverage
provides funds to an insured if the liability insurance held by the person responsible for
the accident is insufficient to compensate the insured for injuries incurred. At issue on
appeal is whether, under Kentucky law, an insurance company may charge a greater
UIM premium based on the number of drivers on a policy without being liable for
multiple UIM coverage units (i.e., “stacking”).
The district court determined that the Penningtons purchased only one unit of
100/300 UIM coverage for four drivers and were not entitled to stacking. This appeal
followed. A few weeks prior to oral argument, the Penningtons filed a motion asking
us to certify the legal question at issue to the Kentucky Supreme Court. For the reasons
set forth below, we DENY the motion to certify and AFFIRM the judgment of the
district court.
I. BACKGROUND
The following summary of the facts is drawn primarily from the district court
opinion. See Pennington v. State Farm Mut. Auto. Ins. Co., 2007 WL 2029501, at *1
(E.D. Ky. July 11, 2007). On July 10, 2004, Stacey Pennington was killed in an
automobile accident when Sidney Walker, who was driving his motorcycle while
intoxicated, disregarded a traffic signal and collided with her 1995 Ford Mustang.
Walker was insured by Progressive Insurance Company, which settled the wrongful-
death claim against him for its $50,000 bodily injury limit. Dennis and Sharon
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Pennington then asserted a claim on behalf of Stacey’s estate for UIM payments under
their State Farm policy.
In November 2004, the Penningtons and State Farm agreed to a Release and
Reservation of Rights to Other Claims. In exchange for $100,000, representing the
payment for one unit of UIM coverage, the Penningtons agreed to release State Farm
from all claims arising out of Stacey’s death with the exception of “any and all other
actual or potential claims against State Farm for payment of additional underinsured
motorist coverages under its automobile policies.” The Penningtons subsequently filed
this action in the Scott County, Kentucky, Circuit Court. They sought to recover two
additional units of UIM coverage, full personal injury protection coverage, and damages
for unfair claims practices/bad faith. State Farm removed the case to federal district
court on the basis of diversity of citizenship.
According to the record, the Penningtons’ State Farm policy covered five
automobiles and one motorcycle at the time of the accident. The Penningtons purchased
UIM coverage on only one of the vehicles—a 1999 Oldsmobile van—but the policy
covered the four drivers in the Pennington household at all times (i.e., the coverage was
personal to the drivers, not limited to the particular vehicle). According to the policy’s
declarations page, the Penningtons paid $90.72 for UIM coverage limits of $100,000 per
person/$300,000 per accident (“100/300”). At the time the Penningtons purchased the
policy, the one-driver premium for one unit of 100/300 UIM coverage was $33.60, the
two-driver rate was $60.48, and the three-plus driver rate was $90.72. Jay Hieb, Vice
President in Actuary with State Farm, testified by deposition that State Farm’s premium
was structured to charge more for the increased risk borne by the company as a result of
providing personal coverage to additional drivers. Although the Penningtons received
UIM coverage for four drivers, their premium was not simply a multiplier of coverage
(e.g., multiplying the base premium rate by the number of drivers). Rather, if a
multiplier of coverage had been used, the family would have been charged four times the
base premium for the four drivers in the household. The Penningtons’ UIM premium
was instead determined based on a rating factor of only 2.7. State Farm arrived at the
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2.7 multiplier after an actuary calculated the added risk associated with adding additional
drivers to a single UIM policy. The final price for UIM coverage paid by the
Penningtons was calculated by multiplying the one-driver rate of $33.60 by 2.7, the risk
multiplier that State Farm had determined was appropriate for households with three or
more drivers ($33.60 x 2.7 = $90.72).
Apparently viewing the material facts as undisputed, both parties moved for
summary judgment. State Farm’s motion was granted by the district court. The court
first noted that the “issue of whether an insurance company can charge greater UIM
premiums based on the number of insured [drivers] on a policy without being exposed
to stacking [] is a matter of first impression,” and then held that stacking was
inappropriate because the Penningtons had purchased only one unit of UIM coverage for
four drivers and had received added coverage for the additional cost. Pennington, 2007
WL 2029501, at *2-3. This is the only issue that the Penningtons raise on appeal. In
July 2008, after briefing was completed, the Penningtons filed a motion asking us to
certify to the Kentucky Supreme Court the question of whether, under Kentucky law, an
insurance company is subject to the stacking of UIM coverage if it charges a greater
UIM premium based on the number of insured drivers in a household.
II. ANALYSIS
A. Certification to the Kentucky Supreme Court
“The decision whether or not to utilize a certification procedure lies within the
sound discretion of the district court.” Transam. Ins. Co. v. Duro Bag Mfg. Co., 50 F.3d
370, 372 (6th Cir. 1995) (citing Lehman Bros. v Schein, 416 U.S. 386, 391 (1974)).
Certification “is most appropriate when the question is new and state law is unsettled.”
Id. (citing Lehnam Bros., 416 at 390-91). As the Tenth Circuit has noted, however, the
federal courts generally “will not trouble our sister state courts every time an arguably
unsettled question of state law comes across our desks. When we see a reasonably clear
and principled course, we will seek to follow it ourselves.” Pino v. United States, 507
F.3d 1233, 1236 (10th Cir. 2007).
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We first note that the Penningtons failed to request certification of the legal
question at issue when the case was before the district court. Likewise, on appeal, the
Penningtons failed to request certification until well after the parties had completed
briefing. Both this court and district court have therefore expended considerable time
and resources addressing the question currently before us. And although the legal
question here is one of first impression under Kentucky law, we believe that the relevant
caselaw addressing UIM premiums and stacking provides sufficient guidance to allow
us to make a clear and principled decision. Because we see no reason to trouble the
Kentucky Supreme Court under such circumstances, we deny the Penningtons’ motion
to certify and will address the merits of the case.
B. Standard of review
We review de novo the district court’s grant of summary judgment. Int’l Union
v. Cummins, Inc., 434 F.3d 478, 483 (6th Cir. 2006). Summary judgment is proper
where no genuine issue of material fact exists and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c). In considering a motion for
summary judgment, the district court must construe the evidence and draw all reasonable
inferences in favor of the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986). The central issue is “whether the evidence
presents a sufficient disagreement to require submission to a jury or whether it is so
one-sided that one party must prevail as a matter of law.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 251-52 (1986).
Because this case is before us based on diversity of citizenship, we must apply
the substantive law of the forum state. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78
(1938). The parties agree that the insurance contract at issue here is governed by
Kentucky law. In applying Kentucky law, we “follow the decisions of the state’s highest
court when that court has addressed the relevant issue.” Talley v. State Farm Fire & Cas.
Co., 223 F.3d 323, 326 (6th Cir. 2000). If the issue has not been directly addressed, we
must “anticipate how the relevant state’s highest court would rule in the case and are
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bound by controlling decisions of that court.” In re Dow Corning Corp., 419 F.3d 543,
549 (6th Cir. 2005). “Intermediate state appellate courts’ decisions are also viewed as
persuasive unless it is shown that the state’s highest court would decide the issue
differently.” Id.
C. Kentucky insurance law
When interpreting insurance contracts, the Kentucky Supreme Court has held that
courts are to look at the “reasonable expectations” of the insured. Marcum v. Rice, 987
S.W.2d 789, 791 (Ky. 1999) (citation omitted). “The reasonable expectations of an
insured are generally determined on the basis of an objective analysis of separate policy
items and the premiums charged for each.” Id. When an insured “has bought and paid
for an item of insurance coverage, he may reasonably expect it to be provided.” Id.
In the 1990s, the Kentucky Supreme Court decided a number of cases addressing
UIM coverage and explained the circumstances in which an insured will be deemed to
have purchased multiple units of UIM coverage that may be stacked. The Court first
made clear in Hamilton v. Allstate Insurance Co., 789 S.W.2d 751, 753 (Ky. 1990), that
UIM coverage is different from typical liability insurance because UIM coverage is
“personal to the insured.” This means that UIM coverage follows an insured person as
opposed to any particular vehicle (i.e., the policy covers each insured as a driver, a
passenger, a pedestrian, or a bystander, whether inside or outside a vehicle).
In the related case of Chaffin v. Kentucky Farm Bureau Insurance Co., 789
S.W.2d 754, 756 (Ky. 1990), the Kentucky Supreme Court held that UIM premiums may
sometimes give rise to separate units of UIM coverage that may be “stacked” by the
insured. The Court reasoned that if an insurance company charges “separate premiums”
for multiple items of the “same” personal insurance, then an insured is generally entitled
to stack the policy and collect money for each unit of UIM coverage purchased. Id. In
other words, “the personal nature” of UIM coverage creates a “reasonable expectation
that payment of separate premiums results in separate coverages.” Allstate Ins. Co. v.
Dicke, 862 S.W.2d 327, 328 (Ky. 1993). If an insured has paid additional money
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without receiving additional coverage, stacking is necessary to prevent insurance
companies from depriving an insured of benefits that he or she has paid for. Id.
In Estate of Swartz v. Metropolitan Property & Casualty Co., 949 S.W.2d 72, 75
(Ky. Ct. App. 1997), the Kentucky Court of Appeals explained that when deciding
whether UIM coverage should be stacked, courts should undertake “an objective analysis
of separate policy items and the premiums charged for each.” The court noted that “the
deciding factor is not what the individual insured knew, read, or expected, but what he
or she actually paid for UIM coverage and the manner in which the insurance company
calculated and billed the premium.” Id. It also explained that “the payment of separate
premiums for multiple items of the same ‘personal’ insurance coverage [is what] gives
rise to the concept of stacking.” Id. at 76.
The UIM premium paid by the insureds on their multi-vehicle policy in Swartz
was almost twice that charged on a single-vehicle policy covering the same people. Id.
at 77. Swartz concluded that charging an additional premium for adding a vehicle to a
UIM policy gives rise to an additional unit of UIM coverage that is subject to stacking.
Id. at 76-77. Because UIM coverage is personal, and the Swartzes were covered
regardless of which vehicle they were driving, the couple had paid an additional
premium without receiving any additional coverage. Id. at 77. On that basis, the court
determined that the Swartzes’ policy was subject to stacking. Id. at 77-78.
The Swartz court went on to note that stacking would apply to per-vehicle UIM
policies even if the insurance company ostensibly charged a single premium for all the
vehicles covered. Id. at 77. Swartz therefore suggests that the determinative issue in
stacking cases is whether the insured paid multiple premiums for the same amount of
coverage, regardless of how the payment is characterized.
The Swartz opinion also makes clear that “an insurance company could, through
the calculation and adoption of an actuarially appropriate premium [i.e., based on its
estimate of risk], charge an insured a single UIM fee regardless of the number of
vehicles covered under the policy, entitling that insured to only one unit of UIM
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protection.” Id. (original emphasis omitted, new emphasis added). But the insurer there
(Metropolitan) did not base its premium on an actuarial calculation of risk. Instead, it
simply multiplied its base (single-vehicle) premium rate by the number of insured
vehicles. Swartz therefore stands for the proposition that this “simple multiplication”
approach necessitates stacking.
The state appellate court’s conclusion in Swartz that insurance companies may
account for risk when setting UIM premium rates was affirmed by the Kentucky
Supreme Court in Marcum, 987 S.W.2d at 790-91. There, the Court had before it an
insurance policy that charged a per-person premium of $14 for UIM coverage. Id. at
791. The price of $14 was “based upon the average number of vehicles (between two
and three) owned by all . . . policyholders in Kentucky.” Id. Later, the company
adjusted its premium structure on the basis of “an actuarial projection of future losses
that was based upon data from [the insurance company’s] loss experience for the
previous three years.” Id.
Although the insurance company in Marcum did not charge its insureds multiple
premiums for UIM coverage on different vehicles, it did allow them to purchase UIM
coverage for any one individual in an amount up to $1 million. Id. The Court found that
because the UIM premium was based on an assessment of the risk of loss incurred by
the insurance company and did not “vary according to the number of vehicles covered
by the policy,” stacking was inappropriate. Id.
D. The Penningtons’ UIM coverage
Against this background, the district court in the present case determined that the
Penningtons’ per-driver UIM premium did not give rise to stacking. The court first
found that “[t]he insurance company obviously charged ‘separate’ premiums in the guise
of one lump sum because it multiplied the premium based on the number of insured.”
Pennington, 2007 WL 2029501, at *3. Nonetheless, the court determined that stacking
was inappropriate in light of State Farm’s per-driver pricing structure. The court noted
that “[p]remiums calculated based on the number of insured differ from premiums
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calculated based on the number of vehicles because UIM coverage is personal to the
insured.” Id. In other words, the court reasoned that stacking is appropriate only where
an insured has paid additional money without receiving additional coverage. It therefore
determined that stacking was inappropriate in the present case because the Penningtons
received additional coverage for each driver in their household in exchange for the
higher premium.
As the Penningtons point out, however, the district court erred in describing how
the UIM coverage was allocated in a single accident. In its opinion, the district wrote
that
a $300,000 per accident coverage limit is meaningless if an individual is
insured up to only $100,000 per person. See infra n.1. Therefore, the
Penningtons (and other similarly-situated insureds) effectively received
greater per accident coverage in return for the increased premiums. If the
Penningtons were entitled to three separate units of 100/300 UIM
coverage, they would receive a windfall. To wit, if the entire family was
involved in one accident and was entitled to three separate units of
coverage, they would be entitled to recover up to $900,000, nine times
more than one individual with one unit of coverage could receive under
the $100,000 per person limitation. This would be a windfall because the
Pennington’s premium was only 2.7 times greater than what the
individual would have paid.
Pennington, 2007 WL 2029501, at *3 (emphasis added). In an earlier footnote,
referenced in the text above, the court stated that “the $300,000 per accident limit is
meaningless unless there are at least three drivers on the policy, since the coverage limits
are $100,000 per person.” Id. at *1 n.1.
Both sides agree that the district court was mistaken in its observation that the
$300,000 per accident limit is meaningless unless there are three insured drivers on the
policy. That observation was inaccurate because uninsured motorist coverage can
extend to individual insureds who are not covered as drivers. See, e.g., Midwestern
Indem. Co. v. Craig, 665 N.E.2d 712, 714 (Ohio Ct. App. 1995) (describing an uninsured
motorist policy that, by its terms, extended to “a person living in your household, related
to you by blood.” (emphasis in original)). So if, for example, an insured parent and his
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or her three nondriving minor children were all injured in one accident, the parent’s UIM
policy might define the children as “insureds” and cover all four people in the accident.
See id. In that situation, the $300,000 cap would be meaningful because the four injured
individuals could cumulatively collect no more than that amount from the UIM insurer.
The error in the district court’s understanding of how the per-accident limits applied to
the Penningtons, however, does not diminish the correctness of its ultimate
determination that the Penningtons received additional UIM coverage for their higher
premium.
To determine whether the Penningtons’ UIM policy is one that is subject to
stacking, as in Swartz, or one that is not subject to stacking, such as in Marcum, it is
necessary to understand the distinction between the two pricing methods that underlie
the determination of the premiums. And, to do that, one needs to first understand how
State Farm formerly priced its policies per vehicle (as in Swartz) and currently prices its
policies based on risk (as in Marcum). As explained in the deposition of Jay Hieb, Vice
President in Actuary with State Farm, the price for covering each vehicle under a per-
vehicle UIM policy was first determined based on the number of drivers in a household.
While a single driver paid $33.60 for one unit of UIM coverage for one vehicle, a
household of three or more drivers paid $90.72 for that one unit of coverage. To add an
additional vehicle to a UIM policy, the insurance company would then multiply the per-
vehicle rate by a set predetermined factor. That resulting additional charge was added
to the price of the insureds’ UIM coverage on a per-vehicle basis. This pricing structure
gave rise to stacking because the additional premiums that the insurance companies
charged on a per-vehicle basis provided no additional UIM coverage to the insured.
No Kentucky court that has addressed stacking under a per-vehicle policy,
however, has ever suggested that anything is wrong with an insurance company’s per-
vehicle pricing practice of charging a higher premium to households with multiple
drivers when setting the original rate for covering one vehicle (i.e. charging a family
with three or more drivers $90.72 for UIM coverage versus $33.60 for a single driver).
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What gave rise to stacking under the per-vehicle pricing structure was the practice of
effectively double-charging the insured for covering both drivers and vehicles.
Under the per-driver policy at issue here, however, the $90.72 paid by the
Penningtons as a higher premium extended UIM coverage to additional drivers. The
Penningtons therefore got what they paid for: namely, one unit of UIM coverage for four
drivers. Per-driver policies are therefore distinguishable from per-vehicle policies and
stacking is inappropriate.
Further evidence that the UIM policy in question does not expose the insurance
company to stacking can be found in State Farm’s pricing structure. As explained
earlier, the record demonstrates that State Farm’s premium was structured to charge
more for the increased risk borne by the company as a result of providing personal
coverage to additional drivers. Although the Penningtons received UIM coverage for
four drivers, their premium was not simply a multiplier of coverage (e.g., multiplying
the base premium rate by the number of drivers). Rather, if a multiplier of coverage had
been used, the family would have been charged four times the base premium for the four
drivers in the household. Instead, the Penningtons’ UIM premium was determined based
on a rating factor of only 2.7. State Farm arrived at the 2.7 multiplier after an actuary
calculated the increased risk associated with adding more drivers to a single UIM policy.
The practice of setting premiums based on an assessment of risk was expressly
approved by the Kentucky Supreme Court in Marcum v. Rice, 987 S.W.2d 789 (Ky.
1999). There the Court held that an insurance company may permissibly alter its
premium structure based on “an actuarial projection” of the company’s risk and potential
loss. Id. at 791. The Marcum decision made clear that insurance companies could use
risk-rating factors without being exposed to stacking because such factors are not a
multiplier of units of coverage, but rather allow insurance companies to calculate and
price the additional risk incurred by extending coverage to additional insureds. Id. In
the present case, the 2.7 multiplier used by State Farm to account for the additional risk
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presented by insuring a three-plus driver household for UIM coverage is akin to the kind
of rating factors explicitly approved of in Marcum.
The Penningtons make much of the Court’s statement in Marcum that the
premium in that case stayed the “same regardless of the number of vehicles or insureds
on a particular policy.” Id. (emphasis added). They argue that Marcum clearly
establishes that per-driver UIM policies require stacking. But as the Penningtons
conceded in their motion to certify the legal question in this case to the Kentucky
Supreme Court, the issue of whether UIM units of coverage may be stacked based on the
increased risk of additional drivers is a question of first impression under Kentucky law.
Marcum addressed only the question of whether stacking was appropriate under a per-
vehicle premium; any reference to a per-driver premium was nothing more than dicta.
The argument that the question before this court is foreclosed by Marcum therefore has
no merit.
Furthermore, the Marcum decision provides tacit approval of price increases for
UIM coverage based on the number of drivers. There, the insurance company charged
a single premium of $14 for one unit of UIM coverage on a per-person basis. Id. at 790.
The Court took no issue with the fact that the price for a unit of UIM coverage changed
based on the number of individuals added to the policy. Rather, it approved the pricing
structure on the basis that it “did not vary according to the number of vehicles covered
by the policy.” Id. at 791. Insurance companies are therefore permitted to account for
additional risk incurred by providing UIM coverage to additional drivers.
In the present case, by attesting to the fact that it had determined the price of the
UIM premium based on actuarial calculations of risk, State Farm established that it was
entitled to extra compensation for the risk it incurred by covering additional drivers on
the Penningtons’ UIM policy. The policy thereby satisfied Kentucky law, as declared
in Swartz and Marcum, and was not subject to stacking. These circumstances obviate
the merit of the Penningtons’ stacking argument.
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III. CONCLUSION
For all of the reasons set forth above, we DENY the Penningtons’ motion to
certify the question of law in this case to the Kentucky Supreme Court and AFFIRM the
judgment of the district court.