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KENTUCKY FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant v. Ryan BREWER and William N. Walters, Appellees
Kentucky Farm Bureau Mutual Insurance Company (Kentucky Farm Bureau) appeals from an order of the Boyd Circuit Court denying its motion for declaratory judgment. The circuit court ruled that Kentucky Farm Bureau was estopped from denying insurance coverage on a claim by Ryan Brewer against William Walters. We conclude the circuit court erred. Kentucky Farm Bureau defended Walters after giving Walters timely notice that it was defending under a reservation of rights and there is no evidence that Walters was prejudiced by Kentucky Farm Bureau's delay in seeking a declaratory judgment.
Walters is a developer and excavator of residential property. Brewer is a purchaser of certain property owned by Walters. In early April 2015, Brewer sent a letter to Walters alleging Walters represented to him that the property was suitable for construction of a residence and claiming that excavation work performed by Walters on the property led to a landslide causing Brewer damages.
At the time the claim was made, Walters had two insurance policies with Kentucky Farm Bureau, a farm owner policy and a commercial general liability policy. After Walters notified Kentucky Farm Bureau of Brewer's claim, on April 16, 2015, Kentucky Farm Bureau sent Walters a reservation of rights letter informing Walters that it was reserving its rights to deny coverage because of the late notice of the loss, and the claims, including allegations of fraud, may be excluded under the policy. It advised that it was reserving any right to additional defenses should they become known during the investigation of the claim. The letter also informed Walters that Kentucky Farm Bureau had employed counsel to represent him in defending any lawsuit. Finally, the letter stated: “If you disagree with our proceeding as outlined above, you may contact this office within 14 days of this letter.”
Brewer filed a complaint against Walters on April 19, 2015, setting forth eleven causes of action including fraud, negligence, gross negligence, negligence per se, and breach of contract. Kentucky Farm Bureau provided legal representation to Walters.
After an answer to the complaint was filed on Walters's behalf, discovery commenced, additional claims were made, and parties were joined. Walters filed a third-party complaint against the builder of Brewer's home, and Brewer amended his complaint adding three new defendants on a bad faith claim. Walters filed a motion for summary judgment arguing that by signing the purchase agreement, Brewer waived any claim against Walters. That motion was denied, and the case was referred to mediation. Throughout the litigation, Walters continued to be represented by legal counsel employed by Kentucky Farm Bureau.
On July 14, 2017, Kentucky Farm Bureau filed an intervening petition. On March 13, 2018, it filed a motion for declaratory judgment requesting that the circuit court declare there was no coverage for Brewer's claims under either policy issued to Walters. The circuit court denied the motion ruling that Kentucky Farm Bureau was estopped to deny coverage. This appeal followed.
Under Kentucky law, an “insurer has a duty to defend if there is any allegation which potentially, possibly or might come within the coverage of the policy.” James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991). An insurer that decides not to defend because it believes there is no coverage risks that coverage will later be found and it will be liable for “all damages naturally flowing from” the failure to provide a defense. Eskridge v. Educator and Executive Insurers, Inc., 677 S.W.2d 887, 889 (Ky. 1984). However, the insurer has another option.
An insurer that believes there may be no coverage can decide to defend the claim and litigate the coverage issue later. In that circumstance, the insurer normally preserves its right to challenge coverage at a later date by a reservation of rights letter. Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830, 841 (Ky. 2005). If an insurer issues a reservation of rights letter to an insured, the insured has the option of accepting the insurer's defense or refusing the defense and conducting his own defense. Med. Protective Co. of Fort Wayne, Indiana v. Davis, 581 S.W.2d 25, 26 (Ky. App. 1979). A timely reservation of rights is significant because without it, the insurer may be estopped from denying coverage after it has defended the insured for a prolonged period.
Generally, to successfully claim estoppel, a party is required to prove four elements:
(1) Conduct, including acts, language and silence, amounting to a representation or concealment of material facts; (2) the estopped party is aware of these facts; (3) these facts are unknown to the other party; (4) the estopped party must act with the intention or expectation his conduct will be acted upon; and (5) the other party in fact relied on this conduct to his detriment.
Gray v. Jackson Purchase Credit Ass'n, 691 S.W.2d 904, 906 (Ky. App. 1985). In the insurance context, estoppel has been applied to prevent an insurer from raising a no-coverage defense when an insurer has provided a defense without a reservation of rights. See American Cas. Co. of Reading, Pa. v. Shely, 314 Ky. 80, 83-84, 234 S.W.2d 303, 305 (1950).
Courts have reasoned it is the “undertaking of providing a defense and the omission of any mention of the possibility of a denial of coverage that constitute a misrepresentation to the insured.” Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678, 682 (6th Cir. 1993). Consequently, “even an insured who has actual knowledge of the contents of his policy and the possibility that the company might deny coverage when a claim is first asserted reasonably relies upon the provision of a defense without reservation of rights as an indication that the company has waived the coverage issue.” Id. (emphasis added). In Shely, 314 Ky. at 83, 234 S.W.2d at 304 (quoting 29 Am.Jur. 672), the Court recited the rule:
The general rule supported by the great weight of authority is that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage.
As indicated in Gray, estoppel requires more than a misrepresentation or concealment of material facts. Gray, 691 S.W.2d at 906. There must be detrimental reliance on that misrepresentation or concealment. Id. In other words, the party asserting estoppel must have been prejudiced. Where the insurer defends an insured without a reservation of rights, “the loss of the right by the insured to control and manage the case is itself a prejudice.” Shely, 314 Ky. at 84, 234 S.W.2d at 305.
Although the law recited above was apparently relied upon by the circuit court, we are confronted with a situation where an insurer has defended under a timely reservation of rights. The circuit court erroneously concluded that the mere passage of time between the reservation of rights and the filing of a declaratory judgment action is sufficient to preclude Kentucky Farm Bureau from asserting a no-coverage defense.
First, Kentucky Farm Bureau must have made a misrepresentation that it was no longer denying coverage for Walters's defense. Second, prejudice cannot be inferred because Walters accepted Kentucky Farm Bureau's defense under the reservation of rights: Prejudice must be proven. As stated in Travelers Indemnity Co. v. Nieman, 563 S.W.2d 724, 726-27 (Ky. App. 1977):
[The insurer] gave timely notice to appellees that it reserved the right to withdraw, at anytime, from defense of the civil action. Since appellees suffered no detriment from withdrawal, [the insurer] is not estopped to deny coverage. In the Annotation on this subject at 38 A.L.R.2d 1148, the text states at page 1161:
As noted in the original Annotation, it is a well established rule that a liability insurer cannot be estopped to set up the defense that the insured's loss was not covered by the insurance policy, notwithstanding the insurer's participation in the defense of an action against the insured, if the insurer gives timely notice to the insured that it has not waived the benefit of its defense under the policy.
Kentucky follows this rule.
The circuit court erroneously concluded that the mere passage of time estopped Kentucky Farm Bureau from raising a no-coverage defense. It did not address whether Kentucky Farm Bureau misrepresented to Walters that it was no longer defending under a reservation of rights or whether Walters has been prejudiced by Kentucky Farm Bureau's failure to earlier assert a no-coverage defense. Consequently, we reverse and remand for these factual findings.
We note that our discussion is limited to estoppel as that was the sole basis for the circuit court's order denying Kentucky Farm Bureau's motion for declaratory judgment. Consequently, we do not address the remaining issues presented by the parties, including whether the Kentucky Farm Bureau policies afford coverage for Brewer's claims.
For the reasons stated, the order of the Boyd Circuit Court is reversed, and the case remanded.
THOMPSON, K., JUDGE:
Response sent, thank you
Docket No: NO. 2018-CA-000736-MR
Decided: February 21, 2020
Court: Court of Appeals of Kentucky.
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