Phila. Indem. Ins. Co. v. Necco Holding Co. I

1

Philadelphia Indemnity Insurance Company Plaintiff v. Necco Holding Company I, Inc., et al. Defendants

No. 3:18-cv-847-BJB

United States District Court, W.D. Kentucky, Louisville Division

June 3, 2022

MEMORANDUM OPINION &amp ORDER

Benjamin Beaton, District Judge United States District Court

Necco a foster-care (or “child-placing”) agency licensed in Kentucky, placed Hunter Payton with foster parents, Billy and Travis Embry-Martin. See MSJ (DN 40-1) at 1-2.^[1] After four-year-old Payton died in the Embry-Martins' care, administrator Alton Cannon sued the Embry-Martins on behalf of Payton's estate in Kentucky state court. Id. The Cannon lawsuit alleges that while in the Embry-Martins' care, Payton suffered “physically violent punishment, physical abuse, and denial of food” from both men. Id. It further alleged that Necco breached its duty to ensure Payton's care and well-being, and was also vicariously liable for the Embry-Martins' conduct. Id.

Philadelphia Indemnity Insurance Company, Necco's insurer, defended Necco and the Embry-Martins in the Cannon suit under a reservation of rights. Complaint (DN 1) ¶¶ 33-34. While that state-court suit remained in discovery Philadelphia Indemnity filed this federal suit against three sets of defendants: Necco and its corporate affiliates, Cannon as the administrator of Payton's estate, and the Embry-Martins. It seeks a declaratory judgment, under 28 U.S.C. § 2201 and Federal Rule of Civil Procedure 57, that it owes no duty to defend any of the defendants in the state-court proceeding. ¶ 1-2. Philadelphia Indemnity moved for summary judgment, arguing that the Embry-Martins are neither employees nor volunteers and thus fall outside the Policy's coverage. Both questions appear to be novel under Kentucky law.

Under Federal Rule 56(a), Philadelphia Indemnity bears the initial burden of specifying the basis for its motion and identifying that portion of the record that demonstrates the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once satisfied, the non-moving party must produce specific facts demonstrating a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The Court reviews the evidence in the light most favorable to the non-moving party, but the non-moving party must do more than merely show that there is some “metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

Could a jury reasonably conclude that the Embry-Martins were either employees or volunteers under the terms of Necco's insurance policy? The unfortunately named “SPAM” provision (short for “sexual or physical abuse or molestation vicarious liability”) covers the vicarious liability of “insured” persons for:

sums that the insured is legally obligated to pay as “damages” because of “bodily injury” to which this insurance applies, if the insured is alleged to be liable for another person's “abusive conduct”, by reason of:

(1) the negligent:

(a) employment;

(b) selection;

(c) investigation;

(d) supervision;

(e) reporting to the proper authorities, or failure to so report; or

(f) retention;

of any “employee”, volunteer or any other person or persons for whom the insured is or ever was legally responsible[.] Policy (DN 1-2) at 431.

Necco is an “insured, ” and the Policy covers its liability arising from its negligence in connection with any abusive conduct by its employees and volunteers, so long as that liability “aris[es] within the scope of their [employment or volunteer] duties.” Id. at 432. The SPAM provision defines “employee” as a “leased worker” or “temporary worker.” Id. at 435.^[2] And the umbrella-liability policy, which SPAM modifies, defines “volunteer worker” as “a person who is not your ‘employee,' and who donates his or her work and acts at the direction of and within the scope of duties determined by you, and is not paid a fee, salary or other compensation by you or anyone else for their work performed for you.” Id. at 781 ¶ 26.

The Embry-Martins contend they were employees: Necco paid them to care for Hunter Payton and exercised a great deal of control over their duties as foster parents. Embry-Martin Response (DN 47-1) at 2. Alternatively, they contend that Necco's payments amount to reimbursements for the foster child's expenses, such that the Embry-Martins would qualify as volunteers who “donat[ed] their time and labor.” Id.

Both parties agree that Kentucky law governs this dispute. See Compl. ¶ 38 (citing Kentucky law); Embry-Martin Response at 4-5 (same). Kentucky courts will “enforc[e] as written” unambiguous and reasonable contractual terms. Foreman v. Auto Club Property-Casualty Ins. Co., 617 S.W.3d 345, 349 (Ky. 2021). But “[a]mbiguous terms and the language of exclusions are strictly construed against the insurer.” Id. at 349-50.

Whether the Embry-Martins are employees under the Policy is relatively clear: both the Policy's definition and the common law indicate they are not. No one contends the Embry-Martins were either “leased workers” or “temporary workers” under the contractual definition. Policy at 435.

But the parties agree that the SPAM definition isn't exclusive; if the Embry-Martins qualify as employees under the Kentucky common law, then the SPAM would also cover them. MSJ at 13 (conceding a person is an employee if he comes within “the Policy or common law definition of that term”) (emphasis added). So the Court considers how the term is defined under the case law in similar contexts. Surprisingly, the employment status of foster parents remains a novel issue of Kentucky law. But Kentucky law has developed two tests courts use to determine employee status. Courts developed one in workers' compensation cases, and the other in employment-discrimination cases. The first considers several factors:

(a) the extent of control which, by the agreement, the master may exercise over the details of the work;

(b) whether or not the one employed is engaged in a distinct occupation or business;

(c) [t]he kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;

(d) the skill required in the particular occupation;

(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;

(f) the length of time for which the person is employed;

(g) the method of payment, whether by the time or by the job;

(h) whether or not the work is a part of the regular business of the employer; and (i) whether or not the parties believe they are creating the relationship of master and servant.

Ratliff v. Redmon, 396 S.W.2d 320, 324-25 (Ky. 1965). Of those factors, four are “predominant”-“(1) the nature of the work as related to the business generally carried on by the alleged employer; (2) the extent of control exercised by the alleged employer; (3) the professional skill of the alleged employee; and (4) the true intent of the parties.” Uninsured Employers' Fund v. Garland, 805 S.W.2d 116, 118-119 (Ky. 1991).

For employment-discrimination cases under the Kentucky Civil Rights Act, Kentucky has adopted a Sixth Circuit test. See Steilberg v. C2 Facility Sols., LLC, 275 S.W.3d 732, 735 (Ky. App. 2008) (citing Shah v. Deaconess Hosp., 355 F.3d 496 (6th Cir. 2004)). This multi-factor test derives from the common-law doctrine of agency. The factors, none of which are decisive, include:

(i) the hiring party's right to control the manner and means by which the product is accomplished;

(ii) the skill required by the hiring party;

(iii) the duration of the relationship between the parties;

(iv) the hiring party's right to assign additional projects;

(v) the hired party's discretion over when and how to work;

(vi) the method of payment;

(vii) the hired party's role in hiring and paying assistants;

(viii) whether the work is part of the hiring party's regular business;

(ix) the hired party's employee benefits; and

(x) tax treatment of the hired party's compensation.

Shah, 355 F.3d at 499-500 (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24 (1994)). Whether a person is an employee under these tests is a question of law for the judge to decide, assuming the facts are not genuinely disputed. Uninsured Employers' Fund, 805 S.W.2d at 117; see also Sanford v. Main St. Baptist Church Manor, Inc., 449 Fed.Appx. 488, 491 (6th Cir. 2011).

Neither the Kentucky courts nor the Sixth Circuit has applied these tests to consider whether foster parents are employees of the placement agencies that paired them with their child. But other courts have applied similar tests to this precise question. And those decisions have overwhelmingly concluded that foster parents are not “employees” of the agency.

One recent case involved Necco itself and the same contractual language at issue here. In Blankenship v. Necco LLC, the Fourth Circuit applied a multifactor test under West Virginia law (which resembles Kentucky's), focused predominantly on the element of “control” under Necco policies and procedures, and persuasively held that Necco wasn't vicariously liable for the actions of the foster parents. 780 Fed.Appx. 32, 33 (4th Cir. 2019).^[3] The foster parent had “not produced more than a scintilla of evidence indicating that Necco has the power to control the process of child rearing to the degree necessary to establish an employer-employee relationship.” Id. at 35. True, state law imposed “broad requirements” reflected in Necco's agreements with its foster parents, including Necco's obligation to outline an individual plan for each foster child. But the agency lacked control...