          NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                     File Name: 09a0006n.06
                      Filed: January 7, 2009

                                    No. 07-6443

                    UNITED STATES COURT OF APPEALS
                         FOR THE SIXTH CIRCUIT


OLD REPUBLIC INSURANCE                 )
COMPANY,                               )   ON APPEAL FROM THE
                                       )   UNITED STATES DISTRICT
      Plaintiff-Appellee,              )   COURT FOR THE WESTERN
                                       )   DISTRICT OF KENTUCKY
v.                                     )
                                       )   OPINION
UNDERWRITERS SAFETY AND                )
CLAIMS, INC.,                          )
                                       )
      Defendant-Appellant.             )


     Before: DAUGHTREY and GILMAN, Circuit Judges; MILLS, District
Judge.*

      RICHARD MILLS, District Judge. Gregory McCord, an employee of the

City of Louisville, sustained a serious injury on the job in 1987. The City was self-

insured up to a $250,000 retention limit for workers’ compensation liability, and

carried an excess-liability policy from Old Republic Insurance Company. In a 1998

proceeding, an administrative law judge (“ALJ”)found that McCord was permanently


      *
       The Honorable Richard Mills, United States District Judge for the Central
District of Illinois, sitting by designation.
Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

disabled. By 2004, the City had paid more than $44,000 of excess compensation

above its retention limit. Old Republic was not provided notice of the McCord claim

until 2004. Old Republic filed this declaratory judgment action, asserting that it

should be relieved of its obligation to reimburse the City for the excess because the

City and its third-party administrator, Underwriters Safety and Claims, Inc., had failed

to provide notice of the McCord claim as required by the policy. Underwriters has

been substituted for the City as the defendant in this case.

      The district court held that before an insurance company may avoid liability on

a claim because of late notice, Kentucky law requires the company to show a

reasonable probability that it suffered prejudice as a result of the delay. Applying this

rule, the court concluded that because Old Republic lost its right to participate in the

defense of the McCord claim, it was prejudiced as a matter of law, regardless of

whether Old Republic would in fact have participated or whether its participation

could have affected its liability. Accordingly, the district court entered summary

judgment in favor of Old Republic. For the reasons set forth below, we reverse the

judgment of the district court and remand for a consideration of whether Old

Republic was prejudiced because of the late notice.



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
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                                I. BACKGROUND

      On March 9, 1987, McCord sustained a lower back injury during the course of

his employment. The City voluntarily paid McCord temporary total disability

benefits for eleven months from March 9, 1987 through February 1, 1988. On

February 27, 1990, the ALJ ruled that McCord’s period of temporary total

occupational disability extended from March 9, 1987 to September 11, 1987.

McCord was determined to have a 50% permanent partial disability. The ALJ further

found: (1) McCord suffered a 12.5% disability as a result of the March 9 injury,

which became the liability of the City; (2) McCord had a 25% pre-existing

occupational disability which was non-compensable; and (3) he had an additional

12.5% disability which was determined to be due to the arousal of a dormant, non-

disabling condition which became the liability of the state fund. The ALJ ordered the

City to pay McCord $164.80 per week from March 9, 1987 to September 11, 1987,

and thereafter the sum of $20.60 per week for 425 weeks. By the end of 1997, the

total payments made to McCord because of his March 1987 work injury equaled

$92,778.46. On April 30, 1998, an ALJ found McCord to be totally and permanently

disabled.


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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

      By late July of 2004, when Old Republic received its first notice of the McCord

claim, payments exceeding $250,000 had been made to McCord. Underwriters

forwarded to Old Republic a request for reimbursement on the McCord claim in the

amount of $44,178.12, representing the approximate amount by which payments of

workers’ compensation benefits exceeded the City’s retention limit. Underwriters

concedes that its notice to Old Republic was not contractually timely, though the

parties dispute exactly how late the notice was.

      The district court found that Old Republic was entitled to notice in 1988 based

on Part 7(d)(4) of the policy, which provides that immediate notice shall be given in

any case involving “disability for a period of nine months or more.” However, it also

determined that, pursuant to Kentucky law, Old Republic must show that it was

prejudiced because of the late notice. The district court concluded prejudice did

result from the late notice because Old Republic was exposed to liability without

having its contractual right to participate in or control the investigation, defense,

settlement and/or appeal of the McCord claim.

      The district court entered judgment in favor of Old Republic, finding that the

City, individually and by and through its third-party administrators, failed to comply



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

with the notice provisions of the policy. This appeal followed.


                                   II. ANALYSIS

                                         (A)

       This is a diversity action in which Kentucky law applies. In applying Kentucky

law, this Court follows the decisions of Kentucky’s highest court. See Bailey Farms,

Inc. v. Nor-Am Chemical Co., 27 F.3d 188, 191 (6th Cir. 1994) (citation omitted).

“Where a state’s highest court has spoken to an issue, we are bound by that decision

unless we are convinced that the high court would overrule it if confronted with facts

similar to those before us.” Kurczi v. Eli Lilly and Co., 113 F.3d 1426, 1429 (6th Cir.

1997). If the issue has not yet been addressed by the state supreme court, it is this

Court’s duty to anticipate how that court would rule. See Bailey Farms, 27 F.3d at

191.

       Insurance contracts must be liberally construed in the insured’s favor. See

Kentucky Farm Bureau Mut. Ins. Co. v. McKinney, 831 S.W.2d 164, 166 (Ky. 1992).

Moreover, a policy’s “exceptions and exclusions should be strictly construed to make

insurance effective.” Id. (citations omitted). However, the Kentucky Supreme Court

has cautioned:


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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

             The rule of strict construction against an insurance company
      certainly does not mean that every doubt must be resolved against it and
      does not interfere with the rule that the policy must receive a reasonable
      interpretation consistent with the parties’ object and intent or narrowly
      expressed in the plain meaning and/or language of the contract. Neither
      should a nonexistent ambiguity be utilized to resolve a policy against the
      company. We consider that courts should not rewrite an insurance
      contract to enlarge the risk to the insurer.

St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223,

226-27 (Ky. 1994) (citing U.S. Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d

31 (6th Cir. 1988)).

                                         (B)

      Old Republic claims that the district court correctly determined pursuant to Part

7(d)(4) of the policy that notice was due in 1988, after nine months had passed and

McCord had not returned to work. Underwriters acknowledges that notice was due,

at the latest, in 1998 when the ALJ found that McCord was permanently disabled.

Part 7(d)(5) of the policy provided that notice is due immediately in any case which

involves “permanent total disability.” Accordingly, the 2004 notice to Old Republic

was late by at least six years.

      We must determine whether, having established that notice was very late, Old

Republic may escape liability under the policy. Underwriters asserts, and the district


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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

court held, that Kentucky law requires Old Republic to demonstrate a reasonable

probability that it suffered substantial prejudice as a result of the late notice. See

Jones v. Bituminous Casualty Corp., 821 S.W.2d 798, 803 (Ky. 1991) (holding that

an insurance company may not avoid payment of a claim based on late notice unless

it was reasonably probable that the insurer suffered substantial prejudice). Old

Republic, however, argues that the Kentucky Supreme Court would not apply the

Jones rule to the present case, but would instead distinguish excess-liability insurers

from primary liability insurers. See Hiscox Dedicated Corporate Member Ltd. v.

Wilson, 246 F. Supp. 2d 684 (E.D. Ky. 2003) (holding that, under Kentucky law, an

equine-property insurer did not have to demonstrate probable prejudice resulting from

an insured’s failure to comply with a notice requirement in the policy). Accordingly,

in this case involving an excess policy, Old Republic argues that Kentucky law does

not require it to show that it probably suffered prejudice when Underwriters failed to

provide timely notice of the McCord claim.

      There is no Kentucky Supreme Court decision which extends the prejudice

requirement to excess liability policies.       Thus, we must predict the future

development of Kentucky law. The reasoning in Jones is instructive. The court in



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No. 07-6443

Jones discussed four factors to support its shift from the traditional “no prejudice”

rule to the modern view requiring insurance companies to show prejudice. See Jones,

821 S.W.2d at 801-03. We believe that these factors would lead the Kentucky

Supreme Court to extend the Jones rule to the excess-liability context, and therefore

reject Old Republic’s assertion that it need not make any showing of prejudice. We

turn now to the factors discussed by the court in Jones.

                                         (C)

      First, the court noted that many modern insurance policies are contracts of

adhesion. Such contracts have two notable characteristics: disparate levels of

sophistication between the parties and a one-sided “take it or leave it” form that does

not allow for even-handed bargaining. See Jones, 821 S.W.2d at 801-02. Unlike the

typical individual consumer in Jones, the City and Underwriters (and its predecessor

third-party administrators) are sophisticated parties. Nonetheless, the policy in this

case was apparently a pre-printed form contract that did not include individually

bargained-for provisions. The policy in Hiscox, by contrast, contained at least one

bargained-for provision specific to the individual insured. See Hiscox, 246 F. Supp.

2d at 692.



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

      Second, the court in Jones cited the doctrine of reasonable expectations.

Kentucky law requires “an unequivocally conspicuous, plain and clear manifestation

of the company’s intent to exclude coverage” to defeat the insured’s expectation.

Woodson v. Manhattan Life Ins. Co. of N.Y., 743 S.W.2d 835, 839 (Ky. 1987)

(citation omitted). The court in Jones stated that the policy in that case, while plainly

including a notice requirement, did not make clear to an “ordinary insurance

consumer” that coverage could be denied if notice was not timely provided. See

Jones, 821 S.W.2d at 802. Old Republic focuses on the “ordinary consumer”

language in Jones, suggesting that the doctrine of reasonable expectations does not

apply to sophisticated insurance consumers in the excess-liability context. To the

extent that this factor can be examined in that context, Old Republic contends that

when the expectations of an excess insurer are balanced against those of a

sophisticated consumer, it favors neither party.          However, we believe that

sophisticated consumers may also rely on reasonable expectations as to the

consequences of a failure to provide notice. The policy in Hiscox expressly

conditioned coverage on notice. 246 F. Supp. 2d at 690. The policy in this case, like

the one in Jones, does not.



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
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      The third factor discussed in Jones relates to public policies underlying

statutorily mandated insurance coverage. The insured in that case owned a mine and

was required by law to carry the policy at issue. The court reasoned that defeating

coverage under the policy solely because of a lack of notice would interfere with the

public policy underlying the statutory mandate. See Jones, 821 S.W.2d at 802.

Although Old Republic asserts that the City was not required by law to carry an

excess-liability policy, Kentucky law does in fact require self-insuring employers to

carry such insurance. See 803 Ky. Admin. Regs. 25:021 § 5 (2008). Old Republic

argues that in the excess-liability context, unlike in the primary-liability context, there

is no vulnerable third party who may suffer if it does not pay a claim. However,

Kentucky law requires the purchase of excess-liability insurance to protect the third-

party employees in the event that their self-insured employers cannot meet their right

to compensation.

      The final factor is the possibility that if an insurer may avoid payment on

claims where lack of notice created no prejudice, then the premiums paid by the

insured will constitute a windfall to the insurer. See Jones, 821 S.W.2d at 802-03.

Although Old Republic asserts that the Jones rationale was fact-specific and has no



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

bearing in the excess-liability context, we see no reason why it would not also apply

to excess-liability policies. Without some showing of prejudice, allowing Old

Republic to escape its contractual obligation on the notice technicality would result

in a windfall to the company.

                                          (D)

      After weighing each of the factors relied on by the Kentucky Supreme Court

in Jones, we conclude that the court’s reasoning supports extension of the rule

articulated in that case to excess-liability cases such as this. Accordingly, we agree

with the district court’s finding that Old Republic must show a reasonable probability

that it was substantially prejudiced by the late notice. The district court went on to

conclude that Old Republic was not required under Jones to establish that “it would

have actually become involved in resolving the McCord claim and that its

involvement could have effected a different result.” Instead, the court held that “Old

Republic’s undisputed loss of its contractual right to [to participate in defense of the

claim] is conclusive” in establishing prejudice. In so doing, the court discounted as

“irrelevant” Underwriters’ evidence that Old Republic, in more than 1,700 cases, had

never associated in or taken over the defense of any workers’ compensation claim.



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

      We believe that something more than the loss of the right to participate in

defense of the claim is necessary in order to show prejudice. Prejudice requires

“injury or damage.” See Merriam Webster’s Collegiate Dictionary 919 (10th ed.

1997). At the very least, a showing of prejudice requires the insurer to point to some

reasonable possibility that the outcome would have been different had it received

notice. One treatise describes the prejudice rule as follows:

      In proving prejudice as a result of a delay in providing notice, it has
      been stated that an insurer is not required to show precisely what
      outcome would have been had timely notice been given to make [a]
      showing of substantial prejudice. However, an insurer must show the
      precise manner in which its interests have suffered, meaning that an
      insurer must show not merely the possibility of prejudice, but, rather,
      that there was a substantial likelihood of avoiding or minimizing the
      covered loss, such as that the insurer could have caused the insured to
      prevail in the underlying action, or that the insurer could have settled the
      underlying case for a small sum or smaller sum than that for which the
      insured ultimately settled the claim.

Russ & Segalla, 13 Couch on Insurance, § 193:29.

      The Jones rule would be completely eviscerated if an insurer could simply

point to the lack of notice itself to establish prejudice, even where, as here it presents

no evidence to suggest that notice would have made any difference. Old Republic

contends that prejudice should be presumed if the notice is between six and sixteen



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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443

years late. However, we decline to hold that substantial prejudice should be

conclusively presumed in cases where the notice is extremely late.

       Based on the foregoing, we will remand the matter to the district court for

reconsideration of whether a reasonable trier of fact could conclude that, with timely

notice from Underwriters, there is a reasonable probability that Old Republic might

have achieved a more favorable resolution of the McCord claim. If the district court

determines that a genuine issue of material fact exists on this issue, then the question

of “substantial prejudice” should be submitted to a jury. See Jones, 821 S.W.2d at

803 (“If the evidence on [the substantial prejudice] issue is in conflict, or if

reasonable minds could differ as to what the evidence proves in this regard, the issue

is one for the trier of fact.”).


                                   III. CONCLUSION

       For all of the reasons set forth above, we reverse the judgment of the district

court and remand the case for further proceedings as set forth in this opinion.




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Old Republic Insurance Co. v. Underwriters Safety and Claims, Inc.
No. 07-6443
MARTHA CRAIG DAUGHTREY, Circuit Judge, concurring in part and dissenting in part.

         I agree with the majority’s prediction that, if confronted with the dispositive legal issue in

this late-notice case, the Kentucky Supreme Court would extend to excess-liability insurers such as

the defendant the rule in Jones v. Bituminous Casualty Corporation, 821 S.W.2d 798, 803

(Kentucky. 1991), that requires a demonstration of prejudice. On the other hand, I also concur in

the district court’s determination that the notice in this case was 16 years late. Given the extreme

lateness of notice by plaintiff – in the face of the clear import of Part 7(d)(4) of the agreement, as

well as signs along the way that excess liability might well arise – it seems only fair that the court

impose a rebuttable presumption that the delay caused prejudice and let the plaintiff bear the burden

of establishing that it should be allowed to recover despite its obvious failure to honor the terms of

its contract with the defendant.

         For that reason, I, too, would remand but with slightly different directions to the district

court.




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