Unlike Indiana, Kentucky has a statute, the Unfair Claims Settlement Practices Act (“UCSPA”), KRS 304.12-230, that expressly allows for bad-faith claims to be brought against liability insurers for unfair claims settlement practices. However, so-called captive insurers have taken the position that they are excluded from the law. The Kentucky Supreme Court recently addressed the issue in Merritt v. Catholic Health Initiatives, Inc.
Harold Merritt alleged that Dr. Anthony Smith, an employee of KentuckyOne Health, was responsible for medical negligence in the deaths of his wife, Kimberly, and infant son. During her pregnancy, Kimberly developed placenta previa, a condition wherein the baby’s placenta partially or totally covers the mother’s cervix, which can cause severe bleeding during pregnancy and delivery. Although the high-risk obstetrician to whom Dr. Smith referred Kimberly recommended a caesarian section no later than at thirty-seven weeks gestation, Dr. Smith examined her at thirty-seven weeks and scheduled an appointment one week later. Shortly thereafter Kimberly was found unresponsive at home and died shortly after being transported to the hospital by EMS. The couple’s child was delivered by post-mortem caesarian section, but only survived a few hours, suffering seizures during that time.
In his medical malpractice complaint, Merritt named Catholic Health, an entity that sponsors KentuckyOne Health and its affiliates, and First Initiatives, a foreign, wholly-owned subsidiary of Catholic, which provided self-insurance coverage to Catholic, its affiliates and employees including KentuckyOne Health and Dr. Smith. First Initiatives provided coverage and Catholic paid assessments to First Initiatives, although Catholic’s affiliates did not pay for the coverage. Merrit included a claim that First Initiatives violated the UCSPA, KRS 304.12-230, by engaging in bad faith settlement negotiations.
Shortly after filing his lawsuit, Merritt filed a motion for declaratory judgment asking the court to find First Initiatives is subject to the UCSPA and civil liability for violations of the statute. Merritt alleged that First Initiatives engaged in bad faith by offering a consolidated settlement, rather than negotiating the two claims separately, attempting to leverage the undisputed claims of the couple’s deceased child to settle the disputed claims of Kimberly, failing to timely respond to settlement demands, and failing to provide any basis for denying various settlement demands.
First Initiatives claimed it was not subject to the UCSPA, arguing its captive insurance agreement with Catholic did not include risk shifting or risk distribution like ordinary insurance and that First Initiatives is not in the business of insurance. Ultimately, the trial court denied Merritt’s motion, determining that the UCSPA does not apply to a self-insured person or entity and that First Initiatives was a captive insurer because it only exists to insure Catholic and is located in the Cayman Islands and subject to the captive insurance laws of the Cayman Islands government. The court considered persuasive affidavit evidence that First Initiative’s financial statements were consolidated with Catholic’s and, therefore, First Initiatives was unable to shift risk due to the economic link between the two entities.
Merritt requested the trial court reconsider and, in doing so, conceded First Initiative’s status as a foreign captive insurer. However; Merritt claimed an exception in the UCSPA applied wherein any foreign captive insurer transacting business in Kentucky before July 14, 2000, must petition the insurance commissioner for the subtitle to apply. Ultimately, the trial court denied Merritt’s motion and granted First Initiatives and Catholic summary judgment.
Merritt later settled the negligence claims against the medical defendants, making the claims against First Initiatives and Catholic ripe for appeal. The Court of Appeals affirmed the trial court.
The Kentucky Supreme Court concluded it was undisputed that First Initiatives was a foreign captive insurer. Although the Court found the UCSPA is to be “liberally construed” to serve its purpose of protecting the public from unfair trade practices and fraud, the statute specifically and unequivocally exempts captive insurers. As for Merritt’s argument that First Initiatives was transacting business in Kentucky before July 14, 2000, the Court found that both the trial court and Court of Appeals correctly determined it was not. The Court noted that “Self-insurers are not in the business of entering into contracts of insurance but rather have a self-insurance agreement with covered entities.” Significantly, Catholic “retains the entire financial stake in the self-insured, professional liability claims paid to claimants…any liability for the deaths…remained with Catholic.” As such, the Court found First Initiatives was not transacting business in Kentucky and had no obligation to petition for exemption from the UCSPA. The Court’s opinion can be found here.