Clem v. Western Heritage Ins

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 06a0575n.06
Filed: August 10, 2006
No. 05-6160
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
THE ESTATE OF LESLIE HARRISON CLEM, JR., )
DECEASED, et al. )
)
Plaintiffs-Appellants, )
)
v. ) On Appeal from the United States
) District Court for the Eastern
WESTERN HERITAGE INSURANCE COMPANY, ) District of Kentucky
)
Defendant-Appellee. )
Before: BOGGS, Chief Judge; and GIBBONS and GRIFFIN, Circuit Judges.
PER CURIAM. This is a diversity insurance coverage lawsuit under Kentucky law
arising from the October 2001 death of a teenage boy from injuries that he suffered while riding on
a float that had just completed a town parade route in Nicholasville, Kentucky. The decedent’s
family (“Estate”) filed suit in state court against a variety of defendants, including the local Chamber
of Commerce (“Chamber”) that had organized the parade. The Chamber’s insurance company,
Defendant-Appellee Western Heritage Insurance Co. (“Western”), refused to cover the loss because,
it claimed, the loss fell within one of the policy’s exclusion clauses. The Chamber thereafter
reached a settlement with the Estate in which it (theoretically) agreed to pay the Estate $6 million
and assigned to them its rights against Western, although in exchange the Estate agreed not to collect
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the $6 million from the Chamber itself; in consequence, the state court dismissed the suit against the
Chamber with prejudice. Thereafter, the Estate filed suit against Western, and that case was
removed to the United States District Court for the Eastern District of Kentucky. Both parties filed
for summary judgment, which the district court granted to Western. For the reasons stated below,
we affirm.
I
The Jessamine County, Kentucky, Chamber of Commerce sponsored a series of local events
called the “Jessamine Jamboree” during the week of October 1-7, 2001. Among the week’s events
was the “Parade on Main,” a procession of floats that assembled in the Winn-Dixie parking lot and
then marched about 2.5 miles south along Main Street in Nicholasville, Kentucky on October 6. The
local high school football team and cheerleading squad participated in the parade and arranged a
“float,” as they had apparently done in the past. The “float” consisted of a commercial tractor
(owned and operated by Glenn Hensley) and a “lowboy” trailer (owned by CMC, Inc.). Hay bales
were placed on the trailer, but a portion of the trailer’s wheels remained open from above.
Several adults, including the decedent’s mother Janet Clem, rode on the float as chaperones.
The students were required to sign an entry form that included a “release of responsibility” clause.
Leslie “Bubba” Clem, a 15-year old freshman quarterback, rode near the trailer’s edge, and
apparently he sat near the exposed tires. The float entered the parade staging area in the Winn-Dixie
parking lot and pulled onto Main Street after the students and adult chaperones had boarded the
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trailer. According to one of the adult participants, Sherry Utley, the ride was very “jerky” along the
whole route, and the float periodically stopped; it jerked when it started again, causing some
children to fall. The float made no turns until it reached Kimberley Drive, at the southern terminus
of the designated parade route, where it turned right. It traveled about 150 feet along Kimberley
Drive before the truck stopped again, causing another jerk, whereupon some of the children fell
again.
At that time, young Clem’s foot became entangled between the rear wheel and the wheel
well, and he was pulled under the trailer as the truck lurched a few feet forward. Clem was pinned
beneath the wheels when the truck finally stopped. As the police statement recounted,
the victim had his foot on the trailer tire and as the vehicle moved the trailer gave a
sudden jerk causing the victims [sic] foot to fall between the trailer wheel well and
the tire pulling the victim thru [sic] the tire and trailer wheel well. Witnesses stated
[he] tried to pull his foot and leg free but could not.
Clem died about six hours later.
The decedent’s estate filed a wrongful death suit in state court against the truck driver, the
trailer’s owner, the football coach, and the Chamber of Commerce. Inter alia, the complaint alleged
that the Chamber had duties to promulgate safety standards, to reject noncompliant floats, to monitor
floats during the parade for safety, and to expel from the parade those that were operated otherwise.
The Chamber of Commerce was insured under a $1 million per-occurrence General Commercial
Liability policy by defendant-appellant Western Heritage Insurance Company, with an aggregate
limit of $2 million. After reviewing the claim, Western notified the Chamber that Clem’s injuries
were excluded from the policy by the “participants’ exclusion” clause, discussed in greater detail
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below. The Chamber later reached a settlement with the Estate on August 25, 2003, wherein it
agreed to settle for $6 million for loss of parental consortium, wrongful death, and a survivor claim
for damages incurred prior to Clem’s death. However, the monetary settlement was entirely illusory,
for the decedent’s estate also agreed not to make any attempt “toward collection of the settlement
amount above-mentioned from the” Chamber, and, any “failure of the [Chamber] to personally pay
such amounts voluntarily shall not constitute a material breach of this agreement nor operate to
invalidate its other terms.” Most pertinently,
The [Chamber] does hereby fully and completely assign, transfer and convey to
[decedent’s estate], any and all claims and rights of recourse which it may have
against any liability carrier by which it was insured on the date of the occurrence
aforementioned . . . [including] the [Chamber’s] rights to indemnification for liability
respecting the occurrence in question; its obligations under this instrument; and to
reimburse for amounts incurred by the [Chamber] in defense of the pending action,
and extra-contractual claims for bad faith, and for extracontractual damages.
Provided, however, that [decedent’s estate] agree to reimburse [Chamber] the actual
amount of its reasonable attorney fees incurred to date, not to exceed [$12,500], from
any recovery actually recovered . . . .
In other words, the “settlement” not only relieved the Chamber of all liability, it offered the prospect
of recouping all the attorneys’ fees that the Chamber had incurred, up to $12,500. The settlement
was also not to be construed as an admission of liability by the Chamber, and it required the Estate
to execute an order dismissing its action against the Chamber with prejudice, which was effected
in state court on September 8, 2003.
In consequence, the Estate notified Western of Western’s purported obligation in April 2004,
claiming that Western was liable for the entire amount of the settlement between the Chamber and
decedent’s estate. Subsequently, the Estate filed suit in state court against Western, and this action
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was removed to the United States District Court for the Eastern District of Kentucky on June 18,
2004. On July 7, 2004, the decedent’s estate filed a motion for partial summary judgment or
judgment on the pleadings, and Western responded by filing its own motion for summary judgment
on July 21.
On January 6, 2005, the district court granted Western’s motion for summary judgment,
holding that the liability for Clem’s death was excluded from the Chamber’s insurance policy with
Western because (a) the policy exclusion language was not ambiguous, and (b) the float was still
participating in the parade by heading toward the disembarkation zone even though it had just left
the official parade route. The district court therefore did not reach the questions of an insurance
company’s liability under a covenant not to execute when it wrongly refused coverage and defense
or of the settlement’s reasonableness. The decedent’s estate thereafter filed a motion to alter,
amend, or vacate judgment, and the district court denied that motion on June 7, 2005. The Estate
filed a timely notice of appeal.
II
Because the district court granted summary judgment in favor of appellee, we apply a de
novo standard of review, “drawing all reasonable inferences in favor of the non-moving party.”
Johnson v. Karnes, 398 F.3d 868, 873 (6th Cir. 2005). Summary judgment is proper “if the
pleadings, depositions, answers to interrogatories, 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
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party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). The nonmoving party
“must do more than simply show that there is some metaphysical doubt as to the material facts,”
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), it must present
significant probative evidence in support of its complaint to defeat the motion for summary
judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). “The mere existence of
a scintilla of evidence in support of the plaintiff’s position will be insufficient; there must be
evidence on which the jury could reasonably find for the plaintiff.” Id. at 252.
The principal issue here is whether the Chamber’s insurance policy obligates Western to
indemnify the Chamber in this particular instance; that is to say, we must ascertain whether the
participants’ exclusion clause operates to exclude the decedent’s injury from the Chamber’s policy
with Western. Kentucky’s substantive law controls this diversity case.
A
In Kentucky, insurance contract interpretation is generally a matter of law. Westfield Ins.
Co. v. Tech Dry, Inc., 336 F.3d 503, 507 (6th Cir. 2003) (citing Stone v. Ky. Farm Bur. Mut. Ins.
Co., 34 S.W.2d 809, 810 (Ky. Ct. App. 2000)). The “plaintiff must show the existence and the
breach of a contractually imposed duty.” Lenning v. Commerc. Union Ins. Co., 260 F.3d 574, 581
(6th Cir. 2001). As we have previously noted
Under Kentucky law, a court should determine at the outset of litigation whether an
insurance company has a duty to defend its insured by comparing the allegations in
the underlying complaint with the terms of the insurance policy. An insurance
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company has a duty to defend its insured if the language of an underlying complaint
against the insured brings the action within the scope of the insurance contract.
Westfield, 336 F.3d at 507 (citing DiBeneditto v. Med. Protective Co., 3 F. App’x 483, 485 (6th Cir.
2001)). However, the duty to defend in Kentucky is broader than the duty to indemnify, for
“insurers have an obligation to defend if there is an allegation which potentially, possibly or might
come within the coverage of the policy.” Lenning, 260 F.3d at 581 (citations and internal quotation
marks omitted). As such, “even if an insurance company denies coverage based on the mistaken
belief that it is justified in doing so, the company may still breach its contact with the insured.” Ibid.
To determine whether an insurance company has violated its duty to defend under Kentucky
law, courts must first determine whether the relevant policy terms are ambiguous. The Kentucky
Supreme Court has held, in the context of uninsured motorist coverage,
When faced with the necessity of construing such statutory and contractual language,
we must look to prior pronouncements of any policy by which such insurance
contracts will be interpreted by the courts of Kentucky. In so doing, we find that two
cardinal principles apply: (1) the contract should be liberally construed and all
doubts resolved in favor of the insureds; and (2) exceptions and exclusions should
be strictly construed to make insurance effective.
Ky. Farm Bur. Mut. Ins. Co. v. McKinney, 831 S.W.3d 164, 166 (Ky. 1992). As such, “Kentucky
should adhere to its stated policy of liberally construing insurance contracts in favor of the asserted
‘insured’ to provide insurance coverage and thereby make insurance effective.” Id. at 167.
Kentucky’s Supreme Court has not limited its policy disfavoring exclusion clauses to situations
where statutes regulate particular types of insurance: “Kentucky law is crystal clear that exclusions
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are to be narrowly interpreted and all questions resolved in favor of the insured.” Eyler v.
Nationwide Mut. Fire Ins. Co., 824 S.W.2d 855, 859 (Ky. 1992). However, this is not to suggest
that Kentucky has pronounced exclusion clauses entirely inoperative. Ky. Farm Bur. Mut. Ins. Co.
v. Thompson, 1 S.W.3d 475, 476-77 (Ky. 1999) (recognizing that only the legislature can establish
public policy, and that prior holdings abrogating certain exclusion clauses were based on legislative
acts). Thus, the interpretative canon disfavoring exclusion clauses operates only where the policy
language is found to be ambiguous.
“An essential tool in deciding whether an insurance policy is ambiguous, and consequently
should be interpreted in favor of the insured, is the so-called ‘doctrine of reasonable expectations.’”
Simon v. Cont. Ins. Co., 724 S.W.2d 210, 212 (Ky. 1986). That is to say, “[a]n insurance contract
must be construed according to its true character and purpose, and in accordance with the intentions
and expectation interests of the parties.” Nat. Ins. v. Lexington Flying Club, 603 S.W.2d 490, 493
(Ky. Ct. App. 1980). Therefore, the language of an insurance policy “must be interpreted according
to the usage of the average man and as they would be read and understood by him in the light of the
prevailing rule that uncertainties and ambiguities must be resolved in favor of the insured.” Fryman
v. Pilot Life Ins. Co., 704 S.W.2d 205, 206 (Ky. 1986).
Finally, an insurance company that mistakenly fails to defend an insured is liable for
reasonable settlements under Kentucky law. Interstate Cas. Co. v. Wallins Creek Coal Co., 176
S.W. 217, 219 (Ky. 1915). When the insured reaches such a settlement without the insurance
company’s defense, the insured “is entitled to recover all damages naturally flowing from the
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breach.” Grimes v. Nationwide Mut. Ins. Co., 705 S.W.2d 926, 932 (Ky. Ct. App. 1985). Such
settlements by the insured “will not be rescinded for fraud unless the evidence showing fraud is
clear, unequivocal and convincing.” Gumm v. Combs, 302 S.W.2d 616, 617 (Ky. 1957).
B
As an initial matter, we must determine whether Western violated the terms of its insurance
contract with the Chamber by refusing to defend. Pertinent to that inquiry, we must ascertain
whether the contract’s relevant policy terms are ambiguous. Kentucky’s courts have taken broad
views of ‘ambiguity’ in the past. For instance, the Kentucky Supreme Court has recently found
policy exclusions relating to losses suffered “while committing or attempting to commit a crime”
and “treatment for injuries sustained as a result of being under the influence of alcohol” to be
ambiguous. Healthwise of Ky., Ltd. v. Anglin, 956 S.W.2d 213, 216 (Ky. 1997). In that case
involving injuries sustained while drag-racing under the influence of alcohol, the court held that,
although “[w]e believe that the average person would view Anglin’s behavior in this case as
criminal,” nevertheless, “we do not believe that the word ‘crime’ . . . should be defined as the
ordinary person would use the word” because “[p]eople often use the words ‘crime’ and ‘criminal’
to describe actions which, though perhaps reprehensible, are neither illegal nor unlawful.” Ibid.
Following the state’s policy of adopting the interpretation most favorable to the insured when an
exclusion is ambiguous, the court found that the policy only excluded misdemeanors and felonies,
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whereas drag racing “is a traffic infraction . . . and is not a ‘crime’ as defined in [the state’s] Code.”
Ibid.
Similarly, Kentucky’s courts have found that an injured motorist was covered by her motor
vehicle insurance despite the fact that she was injured while driving her car by a rock that was flung
from a nearby lawnmower. Ky. Farm Bur. Mut. Ins. Co. v. Hall, 807 S.W.2d 954, 955 (Ky. App.
1991). This would seem to follow the decisions of sister states upholding insurance coverage
despite the presence of athletic exclusion clauses for a golfer who was injured by lightning while
hiding from the thunderstorm (and therefore not playing golf any longer) under a tree on the golf
course, The Glens Falls Group Ins. Co. v. Simpson, 439 S.W.2d 292, 294 (Ark. 1969), and for a
softball player who was injured while retrieving a ball that had been hit out of the park after the
softball game had apparently ended. Town of Surfside, Fla. v. Morrison Assurance Co., Inc., 394
So. 2d 530, 530-31 (Fla. Dist. Ct. App. 1981). But it is worth noting that Kentucky’s courts have
also required employees to allege some causal nexus between their duties as employees and their
driving of a company-provided automobile closer than mere commuting in order to state a valid
workers compensation claim. Davis v. Southeastern Stone Quarries, Inc., 464 S.W.2d 258, 259 (Ky.
1971) (injured party was “coming or going” to or from work when injured, and therefore not covered
by workers compensation). See Harlan Collieries Co. v. Shell, 239 S.W.2d 923, 925 (Ky. 1951).
Kentucky’s courts have required that the nexus connecting the injury to the insurance
coverage be more than merely incidental to afford coverage. For instance, the Kentucky Supreme
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Court has required a nexus between the operation of a vehicle and indemnity stronger than mere
proximity to the covered vehicle. State Farm Mut. Auto. Ins. Co. v. Rains, 715 S.W.2d 232, 234
(Ky. 1986) (motorist denied recovery under statutory motorist reparations benefit plan when struck
by a baseball bat while trying to enter his car during a fight with people who were already fighting
on and around his vehicle; this case was consolidated with another involving the intentional shooting
by a third party of the insured while he was in his car, for which the court also affirmed summary
judgment). Very recently, the Kentucky Supreme Court has held that an insurance company was
not required to indemnify local elected officials who were found to have violated provisions of the
Kentucky constitution prohibiting elected officials from increasing their salaries during their current
terms of office. But the insurance policy in that case covered only breaches of fiduciary duty and
commissions of torts, and the state supreme court held that their violations involved neither type of
offense. Ky. Assoc. of Counties v. McClendon, 157 S.W.3d 626, 628 (Ky. 2005).
Returning to the instant case, it is not disputed that the Chamber’s policy had the following
“participants’ exclusion” clause:
Such insurance as it provided by this policy does not apply to, and the Company
shall have no duty to defend any action brought to recover damages because of: A.
“Bodily injury” or “personal and advertising injury” to any person while practicing
for or participating in any contest, demonstration, event, exhibition, race or show.
As used in this provision any person shall include but not be limited to participants,
attendants, mechanics, stewards, timing officials, announcers, corner men, musicians,
singers, animal handlers, officials or any other person employed by or doing
volunteer work for the named insured.
Clem was killed after his float had completed its tour on the parade route but before he had debarked
the float. The float was undoubtedly headed for a locale where its passengers could disembark (for
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Estate of Clem v. Western Ins. Co.
it could not stop on the official parade route to debark its passengers), and it was within about 150
feet of the parade route’s official terminus when Clem was killed. Thus, the question before us is
whether the word participation as it is used in the policy is sufficiently ambiguous to require us to
define the term in a reasonable manner favoring coverage. If so, we must then determine whether
the resulting construction would reasonably allow us to find that Clem’s injuries were not subject
to the insurance company’s policy exclusion clause.
We find that the contractual phrase “practicing for or participating in” is not ambiguous. The
exclusion clause’s purpose is evident on its face: participation in town festivities, particularly in
parades, creates a heightened risk of injury, and the insurance company was unwilling to indemnify
that risk at the premium rate that the Chamber was willing to pay. We believe it follows as a
“reasonable expectation” that riding on a parade float constitutes “participation” in a parade, and that
the outer limits of such “participation” are best defined in the instant case by the fact of riding on
the float rather than the float’s location with respect to the parade’s official viewing route.
Riding on an open-top parade float is an inherently unsafe activity, for passengers are
typically not provided with any of the normal safety devices that ordinary automobile passengers
enjoy. As such, riding on a float constitutes a special activity specific to a parade, distinct from
riding on a vehicle to meet transportation needs, and the float’s riders would necessarily be aware
of their participation in a parade by riding on the float. Moreover, reasonably large parades
necessarily require some staging area before and after the parade’s official viewing area for the
floats and other parade marchers to congregate and organize. Specifically, people intending to ride
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on floats must get on the float at some point prior to the official “beginning” and they then must be
given the opportunity to get off the float at some point after it has passed the viewing area’s
terminus. In the instant case, the parade’s organizers had specifically ordered the floats to debark
their riders somewhere other than at the official terminus so as to avoid generating a traffic jam that
could bring the parade itself to a grinding halt, though the organizers did not identify a specific place
where passengers could get off the floats.
The Estate strenuously argues that the decedent was no longer participating in the parade
because the float had left the parade’s official route by the time of the accident. We do not agree.
Whether a float could travel beyond some outer boundary so that its riders would no longer be
participating in the parade by their lack of proximity to the parade route would require us to engage
in needless speculation. It is unquestioned that the float in this case had just left the parade’s
viewing terminus, had traveled only about 150 feet further, and had not yet provided its riders with
any opportunity to debark. Whatever the possible merits of this argument on other facts, no
reasonable trier of fact could find that traveling 150 feet with no opportunity to debark constitutes
exiting the parade’s zone of participation.
In consequence, we hold that the policy exclusion clause was not ambiguous, and we further
hold that the clause operated to exclude the decedent’s injury from the insurance policy’s coverage
because his injuries were incurred at a time when he was still participating in the town parade. We
therefore do not reach the questions respecting the reasonableness of the settlement or the effect in
Kentucky of the Chamber’s agreement with the Estate.
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III
We AFFIRM the district court’s grant of summary judgment to Western.
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