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Accident Fund Insurance Co. of America v. Custom Mechanical Construction, Inc.

United States District Court, S.D. Indiana, Evansville Division

January 16, 2018




         In an effort to save on annual premium, Custom Mechanical Construction, Inc. (“CMC”) purchased workers' compensation insurance from Accident Fund Company of America (“AFICA”) through CMC's longtime exclusive insurance agent Schultheis Insurance Agency. Schultheis allegedly conveyed to CMC that this new coverage would be “apples to apples” as compared to its previous coverage. However, when CMC submitted a claim to AFICA arising out of a job site in Kentucky, coverage apparently was more like apples to oranges because AFICA denied the claim stating that the policy did not cover claims from Kentucky. This apparent gaffe in coverage is the subject of the dispute between the parties.

         AFICA brought the present declaratory judgment action maintaining that the policy does not cover claims from Kentucky. CMC counterclaimed that AFICA wrongly and unreasonably denied coverage and that Schultheis is liable for failing to procure adequate coverage. Before the court is AFICA's Motion to Dismiss, and for the reasons set forth below, the Court GRANTS AFICA's Motion.

         I. Background [1]

         CMC is a mechanical contractor that was formed in 2005 under the laws of the State of Indiana. (Filing No. 37, Amended Counterclaim ¶¶ 4, 8). Its principal place of business is in Evansville, Indiana. (Id. ¶ 4). CMC is authorized to transact business in Kentucky, and since 2006, many of its projects have been located in Kentucky. (Id. ¶¶ 9-10). Dating back to its formation in 2005, CMC has utilized Schultheis as its exclusive agent to procure all of its insurance. (Id. ¶ 11). CMC relies on Schultheis to procure and maintain the specific types of insurance coverage necessary for the operation of its business. (Id. ¶ 32). Given the nature of construction services provided by CMC, it is necessary to maintain workers' compensation coverage in all of the states where it performs services. (Id. ¶ 13).

         Schultheis first procured workers' compensation insurance for CMC through Praetorian Insurance Company, and CMC maintained this policy (the “Praetorian Policy”) from 2006 until October 24, 2015. (Id. ¶ 12). To the best of CMC's knowledge, the Praetorian Policy provided coverage in Kentucky. (Id. ¶¶ 12, 16, 26). Prior to the renewal of the Praetorian Policy, Lee Sublett, CMC's primary agent at Schultheis, began soliciting new quotes from other workers' compensation carriers. (Id. ¶¶ 14, 15, 20). One of these quotes was through AFICA. (Id. ¶ 14). AFICA's quote was three thousand dollars cheaper than what CMC was paying under the Praetorian Policy. (Id.). Eventually, coverage was bound through AFICA. (See Id. ¶¶ 14, 17).

         AFICA issued a temporary workers' compensation policy for CMC with an effective date of May 15, 2016 lasting through October 24, 2016 (the “Temporary Policy”).[2] (Id. ¶ 20). CMC was led to believe that the coverage provided as between the Praetorian Policy and the Temporary Policy was “apples to apples.” (Id. at ¶ 18). CMC never requested that Schultheis cancel its workers' compensation coverage in Kentucky. (Id. ¶ 16). However, neither Schultheis nor AFICA requested that CMC complete an application prior to the placement of coverage. (Id. ¶ 18).

         After the Temporary Policy was issued, Sublett met with the owners of CMC on a number of occasions about a permanent policy. (Id. ¶ 27).[3] In these meetings, the owners specifically discussed projects in Kentucky. (Id. ¶ 21). They also provided Sublett with several hypothetical scenarios in an effort to better understand the bounds of their coverage. (Id. ¶ 28). Sublett did not explain that coverage had changed or that the AFICA policy would not cover CMC for workers' compensation claims in Kentucky. (See Id. ¶ 17). Sublett advised that CMC had adequate insurance coverage. (Id. ¶ 30).

         However, on October 12, 2016, before a permanent policy was issued, Danny Cope was injured while working for CMC on a project in Mayfield, Kentucky. (Id. ¶¶ 19, 33-38). He was completing a task in a scissor lift when the lift was unexpectedly struck by a piece of a trough. (Id. ¶ 37). The lift tipped over, and Cope fell with it. (Id.). The fall resulted in Cope sustaining several bruises, lacerations to the head, and fractures of the neck, back, ankle, foot, pelvis and elbow. (Id. ¶ 38).

         CMC reported its claim to Schultheis on October 17, 2016. (Id. ¶ 41). On November 4, 2016, Sublett instructed CMC to fabricate its records regarding Kentucky projects so that Cope's claim would apparently fall within the Temporary Policy. (Id. ¶¶ 47, 48). Concerned, CMC spoke with Sublett's superior, Brett Schultheis, who advised CMC not to alter its records and stated that he believed AFICA would cover the claim. (Id. at ¶¶ 49-50). AFICA formally denied coverage on November 11, 2016. (Id. ¶ 52).

         Cope filed his workers' compensation claim with the Kentucky Department of Workers' Claims on November 17, 2016, and that action is currently still pending. (Id. ¶ 55). AFICA filed the present action on December 29, 2016. CMC filed its Amended Counterclaim on April 14, 2017. AFICA now moves to dismiss all of CMC's claims.

         II. Discussion

         CMC advances five claims against AFICA in its Amended Counterclaim: (1) negligence; (2) breach of contract; (3) bad faith; (4) a violation of the Kentucky Unfair Claims Settlement Practices Act, K.R.S. § 304.12-230 et seq.; and (5) a violation of the Kentucky Consumer Protection Act, K.R.S. § 367.110 et seq. AFICA moves to dismiss each claim under Rule 12(b)(6).[4]

         A. Legal Standard

         Rule 12 authorizes the court to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). A complaint that does not plead “enough facts to state a claim to relief that is plausible on its face” will be dismissed. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Although a court must accept all factual allegations as true and draw all inferences in favor of the nonmovant, it need not accept legal conclusions. Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635, 639 (7th Cir. 2015).

         B. Choice of Law

         CMC asserts in its Amended Complaint that Kentucky law applies because the project site (on which Cope was working when he suffered his injuries) is located in Kentucky. AFICA responds that Indiana law applies because the dispute between the parties concerns the interpretation of a contract formed in Indiana, not the underlying accident that resulted in Cope's injuries. Curiously, CMC responds that it “does not agree that Indiana law should apply, but because AFICA has asserted only Indiana law as a basis for its Motion to Dismiss, CMC has responded citing Indiana law. The choice of law to be applied is a decision by this Court for a later time.” (Filing No. 50 at 7 n. 2).

         However, the court cannot pass on the choice of law question now. Where the law of one state applies, claims based on the laws of another state must be dismissed. See Sestito v. Knop, 297 F.2d 33, 33-34 (7th Cir. 1961) (affirming dismissal of claim brought under Michigan law where Wisconsin law applied); see also Doe v. American Stores Co., 74 F.Supp.2d 855, 857, 859 (E.D. Wis. 1999) (dismissing claims based on Wisconsin statutes where Illinois law applied). In other words, the choice of law determination bears on whether CMC's claims are plausible under Rule 12(b)(6). Indeed, it would make little sense to find that CMC has stated claims under Indiana law-the law which CMC cites in its Response to AFICA's motion-if later the court ultimately concludes that Kentucky law applies. If CMC wanted the court to apply Kentucky law it needed to respond to AFICA and brief the issue. CMC did not do that. Accordingly, the court finds that CMC has waived the issue and will apply Indiana law. Ennin v. CNH Industrial America, LLC, No. 17-2270, 2017 WL 6602932, at *3 (7th Cir. Dec. 27, 2017).

         Waiver notwithstanding, the court would still apply Indiana law to CMC's counterclaims. The first step in a choice of law analysis is to apply the forum state's choice of law rules. See Rice v. Nova Biomedical Corp., 38 F.3d 909, 915 (7th Cir. 1994). Indiana's rules for determining choice of law depend on whether the dispute is best characterized as a contract action or a tort action. Compare Kentucky Nat. Ins. Co. v. Empire Fire and Marine Ins. Co., 919 N.E.2d 565, 575 (Ind.Ct.App. 2010) (contract action), with Alli v. Eli Lilly and Co., 854 N.E.2d 372, 376 (Ind.Ct.App. 2006) (tort action). The current dispute is best characterized as a contract action because the parties dispute whether a particular insurance policy covers certain injuries; it does not concern the injuries themselves. See Travelers Ins. Companies v. Rogers, 579 N.E.2d 1328, 1330 (Ind.Ct.App. 1991); American Family Mut. Ins. Co. v. Williams, 839 F.Supp. 579, 583 (S.D. Ind. 1993) (“Because this action asks the court to determine the scope of an automobile insurance policy's coverage, Indiana's choice of law rules for contract actions apply.”).

         As a contract dispute, Indiana law requires the court, after consideration of all of the relevant facts, to apply the “law of that state with which the facts are in most intimate contact.” Empire Fire and Marine Ins. Co., 919 N.E.2d at 575 (citation omitted). The Indiana Supreme Court has recognized that the principal location of the risk carries the most weight. See National Union Fire Ins. Co. of Pittsburgh, PA v. Standard Fusee Corp., 940 N.E.2d 810, 814 (Ind. 2010). Here, the principal location of the risk is Indiana. Although the Temporary Policy could apply to any state under Item 3. C, Indiana is the only state explicitly listed under Item 3. A. Furthermore, the insurance policy was negotiated in Indiana. It is between an Indiana company and a Michigan company. It was procured ...

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