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applying shorter Colorado limitations to bar action brought in Kansas
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CIVIL ACTION No. 01-2414-KHV.
January 9, 2002
MEMORANDUM AND ORDER
Peoples Mortgage Corp. ("PMC") brings suit against Kansas Bankers Surety Trust Co. ("KBS") alleging that KBS breached its contract to insure PMC against claims of employment discrimination. This matter is before the Court on the Motion To Dismiss (Doc. #3) which KBS filed September 18, 2001. For the reasons stated below, the motion is sustained in part.
Standards For Motion To Dismiss For Failure To State A Claim
A Rule 12(b)(6) motion should not be granted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." GFF Corp. v. Assoc. Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). The Court accepts all well-pleaded factual allegations in the complaint as true and draws all reasonable inferences from those facts in favor of plaintiff. See Shaw v. Valdez, 819 F.2d 965, 968 (10th Cir. 1987). The issue in reviewing the sufficiency of plaintiff's complaint is not whether plaintiff will prevail, but whether it is entitled to offer evidence to support its claims. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Although plaintiff need not precisely state each element of its claims, it must plead minimal factual allegations on those material elements that must be proved. See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
Factual Background
PMC's complaint alleges the following facts, which the Court accepts as true for the purposes of this motion:
On November 5, 1996, KBS, a Kansas corporation, issued Bank Employment Practices Insurance Policy No. EP 2638 KS ("the policy") to PMC, a corporation whose principal place of business is in Colorado. The policy stated that KBS would "appoint attorneys and pay the cost and expenses of the appointed attorneys to defend the Bank and to indemnify the Bank for up to a maximum of one year of claimant's salary which [PMC] is legally obligated to pay by reason of any actual or alleged Wrongful Act arising out of an Employment Claim first Filed against [PMC] during the Policy Period." Exhibit A to Complaint (Doc. #1) filed August 16, 2001.
In June of 1997, Debra Lindt, a former employee of PMC, filed a charge of discrimination with the Colorado Civil Rights Commission. Although PMC gave KBS timely notice of the claim, KBS denied defense and indemnity coverage on June 24, 1997. In February of 1998, Lindt filed suit against PMC in the United States District Court for the District of Colorado. PMC again gave timely notice of the claim, but on February 10, 1998, KBS again denied defense and indemnity coverage. The decision to deny coverage occurred at the KBS corporate office in Topeka, Kansas, and KBS communicated its decision from that location.
On June 30, 1999, PMC settled its lawsuit with Lindt. After PMC first gave notice of the claim, through June 30, 1999, PMC incurred costs, expenses and liabilities as a direct and proximate result of the KBS refusal to defend and indemnify.
On August 16, 2001, PMC sued KBS, alleging breach of contract. PMC seeks damages for $69,993.50 in legal expenses incurred in defending the lawsuit with Lindt, $10,465.43 in costs incurred, and $30,000 in settlement proceeds which it paid to Lindt. KBS contends that the applicable statute of limitations bars PMC's complaint.
Analysis
KBS contends that PMC's breach of contract claim is barred by a three-year statute of limitations under Colorado law, Colo. Rev. Stat. § 13-80-101, while PMC argues that a five-year limitation applies under Kansas law, K.S.A. § 60-511(1). Because this is a diversity action, the Court applies Kansas choice of law rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). Kansas applies its own statutes of limitations, and any exceptions must be found in those statutes. See Brauer v. Republic Steel Corp., 460 F.2d 801, 803 (10th Cir. 1972) (under Kansas law, law of forum governs application of statutes of limitation unless exception provided); F.J. Joseph, Inc. v. Lida Adver., Inc., 2 F. Supp.2d 1425, 1427 n. 3 (D.Kan. 1998) (under Kansas law, law of forum state determines applicable statute of limitations); Menne v. Celotex Corp., 722 F. Supp. 662, 663 (D.Kan. 1989) (Kansas applies lex fori, law of forum, to determine statute of limitations); Wortman v. Sun Oil Co., 241 Kan. 226, 232, 755 P.2d 488, 493 (1987) (statutes of limitations are procedural for purposes of choice of law), aff'd, 486 U.S. 717 (1988); Green v. Kensinger, 199 Kan. 220, 223, 429 P.2d 95, 98 (1967) (law of forum governs limitation period; exceptions must be found in law of forum). KBS bears the burden to show that PMC's action is untimely. See Koch v. Shell Oil Co., 52 F.3d 878, 880 (10th Cir. 1995).
I. Kansas Borrowing Statute
KBS asserts that the Colorado statute of limitations applies under the Kansas borrowing statute, K.S.A. § 60-516, which provides that no action can be maintained in this state where (1) the cause of action has arisen in another state and (2) an action cannot be maintained in that state due to lapse of time. KBS argues that PMC is attempting to engage in the exact behavior that K.S.A. § 60-516 was intended to prevent: forum shopping to evade the Colorado statute of limitations.
The Kansas borrowing statute provides an exception for actions maintained by Kansas residents, but that exception does not apply here since PMC is a Colorado corporation.
A. Where Cause Of Action Arose
In order for the Colorado statute of limitations to apply, KBS must first show that PMC's claim arose in Colorado. Therefore the first question is where the alleged breach occurred. KBS asserts that any failure to defend and indemnify occurred in Colorado because the underlying litigation took place in federal court in Colorado between Lindt, a Colorado resident, and PMC, a Colorado corporation, based on a charge of discrimination before the Colorado Civil Rights Commission. KBS argues (and Kansas case law suggests) that a cause of action for failure to pay arises at the place where the payment was to be received — PMC's place of business in Colorado. See, e.g., Alliance Life Ins. Co. v. Ulysses Volunteer Fireman's Relief Ass'n, 215 Kan. 937, 939-40, 529 P.2d 171, 174 (1974) (breach of obligation to pay under insurance policy arises at residence of insured); Travelers Fire Ins. Co. v. Ranney-Davis Mercantile Co., 173 F.2d 844, 849-50 (10th Cir. 1949) (same); Lips v. Egan, 178 Kan. 378, 379-80, 285 P.2d 767, 768-69 (1955) (cause of action for nonpayment arose in Kansas where note specified that payment was to be made in Kansas); Swift v. Clay, 127 Kan. 148, 272 P. 170, 171 (1928) (cause of action for nonpayment arose in Missouri where note specified that payment was to be made in Missouri).
In Travelers, the Tenth Circuit looked to all the circumstances to determine where the parties had agreed to pay losses under an insurance policy. 173 F.2d at 850. In that case, applying Kansas law, the Tenth Circuit noted that
[s]ome of the elements in this case bearing on the question where the cause of action arose are that the headquarters and the head office and principal place of business of the [insured] was [sic] in Arkansas City, Kansas, the policies of insurance were kept there, checks in payment of premiums were sent from that place, notices of loss and proofs of loss were made and sent from Arkansas City, all correspondence from the adjusters with respect to this claim was addressed to . . . Arkansas City.
Id. Based on these factors, the court concluded that payment for loss under the insurance policy was to be made in Kansas and that breach of the obligation to pay occurred in Kansas. See id.
In opposing defendant's motion to dismiss, PMC argues that its cause of action arose in Topeka, Kansas where KBS made the decision to refuse coverage. In support of this argument, PMC relies on Halley v. Mut. Of Omaha Ins. Co., 156 F.3d 1243, 1998 WL 516841 (10th Cir. Aug. 17, 1998). In Halley, a Nebraska insurance company implemented a series of administrative changes that caused general agents and sales managers in Wyoming and Washington to resign. See Halley, 1998 WL 516841, at *1. A number of general agents and sales managers brought a breach of contract action against the insurance company in federal district court in Wyoming. Plaintiffs argued that they had timely brought their claim under Wyoming's statute of limitations, even though their cause of action would have been barred under Nebraska's statutory period. The Tenth Circuit affirmed the district court holding that the Nebraska statute of limitations applied under Wyoming's borrowing statute. Id. The Tenth Circuit held that the relevant acts took place in Nebraska, and that Nebraska was the place where the changes occurred which affected plaintiffs. Id. at *5.
KBS points out that PMC has not followed the local rule which governs citation to unpublished opinions, because it did not attach the unpublished opinion to its brief. See D. Kan. Rule7.6(b) ("Unpublished opinions may be cited only if the unpublished decision is furnished to the court and to opposing parties or their counsel when the memorandum is filed."). Although the Court could ignore PMC's citation as a penalty for breaching the local rule, an analysis of Halley reveals that it is not helpful to PMC's case and that any punitive measure is unnecessary. In fact, KBS also cited an unpublished opinion which it failed to attach to its brief. See Brief In Support Of Motion To Dismiss (Doc. #4) filed September 18, 2001 (citing Tex. Farm Bureau Mut. Ins. Co. v. Foulston Siefkin Powers Eberhardt, No. 87-1498-K, 1990 WL 168760 (D.Kan. Oct. 26, 1990)).
Plaintiffs alleged that the companywide administrative changes breached their employment contracts with defendant because the changes imposed new requirements on plaintiffs.
Halley is distinguishable because the alleged bad acts were companywide administrative changes that took place in the home office. In this case, the alleged bad act is a single failure to provide coverage in Colorado with respect to Colorado litigation. Although KBS may have decided in Kansas not to provide coverage in Colorado, its failure to act occurred in Colorado. The Court therefore concludes that PMC's cause of action for breach of contract arose in Colorado.
B. Whether Action Is Time-Barred In Colorado
In Colorado, contract actions must be brought within three years after the cause of action accrues. Colo. Rev. Stat. § 13-80-101(1)(a). Because claims for breach of duties to defend and indemnify are contract actions, this statute of limitations applies to both. See Farmers Ins. Exchange v. Am. Mfr. Mut. Ins. Co., 897 P.2d 880, 882 (Colo.Ct.App. 1995) (applying three-year statute of limitations from Section 13-80-101(1)(a) in claim for breach of duty to defend); Brown v. Am. Family Ins. Group, 989 P.2d 196, 197 (Colo.Ct.App. 1999) (applying three-year statute of limitations from Section 13-80-101 in claim for breach of duty to indemnify). PMC brought suit against KBS on August 16, 2001. Therefore, for PMC's claims to be timely in Colorado, PMC's causes of action must have accrued after August 16, 1998.
To determine when PMC's causes of action would have accrued in Colorado, however, its action for breach of contract must be split into two separate components. Although PMC does not separate its breach of contract claim into two parts, the Court recognizes that it is actually bringing an action for failure to defend and an action for failure to indemnify. This is the logical implication of the holdings in two Colorado cases which deal with this issue. In those cases, the Colorado Court of Appeals held that a cause of action for breach of duty to defend accrues at a different time than a cause of action for breach of duty to indemnify. See Farmers Ins. Exchange, 897 P.2d at 880; Brown, 989 P.2d at 197.
Although it is not controlling, John Beaudette, Inc. v. Sentry Ins. A Mut. Co. provides useful guidance on this issue. 94 F. Supp. d 77 (D.Mass. 1999). Beaudette contains facts which are similar to those in the case at bar. In Beaudette, the insured filed a breach of contract claim, seeking damages for the costs of defense and indemnification. The insured did not divide its claims into claims for breach of duty to defend and breach of duty to indemnify. The District of Massachusetts noted that Massachusetts and the First Circuit distinguish between the duty to defend and the duty to indemnify. Id. at 102. The court inBeaudette held that the duties must be examined separately to determine the date of the breaches. Id. It also held that the contract claim for breach of duty to defend was time barred, while the contract claim for breach of duty to indemnify was not time barred. Id. at 102-103.
1. Breach Of Duty To Defend
Under Colorado law, "[a] cause of action for breach of any express or implied contract, agreement, warranty, or trust shall be considered to accrue on the date the breach is discovered or should have been discovered by the exercise of reasonable diligence." Colo. Rev. Stat. § 13-80-108(6). In the insurance context, as soon as the insured learns of the breach and expends monies to conduct the defense, a cause of action accrues for breach of the contractual duty to defend. See Farmers Ins. Exchange, 897 P.2d at 882. Thus the Court may find that PMC's cause of action for breach of duty to defend accrued on any one of the following three dates: June 24, 1997, when PMC first learned that KBS would not fulfill its contractual duty to defend; February 10, 1998, when KBS denied coverage for the second time; or an unspecified date in February of 1998, when Lindt filed her complaint in the underlying litigation. Even assuming that PMC did not begin to expend money in its defense until the end of February 1998, PMC's claim against KBS on August 16, 2001 is time-barred.
Although not controlling, the Massachusetts District Court has held that the insurer has a duty to defend the insured when the state court action is filed against the insured. See Beaudette, 94 F. Supp.2d at 102.
The Court has not been provided documents that pinpoint the precise date on which PMC began to expend money to conduct its defense.
PMC responds that an insurer's duty to defend is continual and that defendant's continued refusal to defend constitutes a series of breaches of its contractual obligation. PMC reasons that even if it cannot recover litigation expenses and damages which it incurred prior to the statutory period, it should be able to recover damages which it incurred within three years of filing suit. In support of this position, PMC relies onPaul Holt Drilling, Inc. v. Liberty Mut. Ins. Co., 664 F.2d 252 (10th Cir. 1981). In Paul Holt Drilling, the Tenth Circuit concluded that "Oklahoma courts would find that the insurer's obligation to defend the insureds is a `continuing contract,'" id. at 254, and held that the insureds were only barred from recovering litigation expenses incurred prior to the statutory period. Id. at 256.
KBS asserts that Paul Holt Drilling is not valid precedent because it applies Oklahoma law and Colorado courts have limited the continuing violation doctrine to discrimination cases. See Polk v. Hergert Land Cattle Co., 5 P.3d 402, 405 (Colo.Ct.App. 2000). In Polk, the court noted that when a defendant has engaged in a series of unlawful acts over an extended period, the "continuing violation" doctrine allows a plaintiff to obtain relief for a time-barred act by linking it with an act that occurs within the limitation period. Id. at 405. However, the court in Polk also noted that the continuing violation doctrine has only been applied in discrimination cases. Id. (citing Harmon v. Fred S. James Co., 899 P.2d 258 (Colo.Ct.App. 1994)). Therefore, this Court declines to apply the continuing violation doctrine to the case at bar and finds that Colorado law would bar PMC's claim for KBS's breach of duty to defend.
The Court notes that in addition to Colorado courts, a number of jurisdictions have held that a breach of the duty to defend accrues when the insured first learned that the insurer would not defend or when the insured began to expend money for its defense. See Beaudette, 94 F. Supp.2d at 77; Int'l Bd. of Elec. Workers Local 98 Pension Plan v. Aetna Cas. Sur. Co., No. 97-7407, 1999 WL 116285, at *2-4 (E.D.Pa. Mar. 5, 1999); Cardin v. Pacific Employers Ins. Co., 745 F. Supp. 330, 334 (D.Md. 1990); Canadian Indem. Co. v. K T, Inc., 745 F. Supp. 661, 664 (D.Utah 1990).
2. Breach Of Duty To Indemnify
A claim for payment of settlement proceeds constitutes a claim for money owed under Colo. Rev. Stat. § 13-80-108(4). See Brown, 989 P.2d at 197 (claim for payment of UIM benefits represents claim for money owed under Section 13-80-108(4)). In Colorado, "[a] cause of action for debt, obligation, money owed, or performance shall be considered to accrue on the date such debt, obligation, money owed, or performance becomes due." Colo. Rev. Stat. § 13-80-108(4). In Brown, plaintiff settled his claim in January 1992, but waited more than four years (until February 1996) to demand benefits from his insurer. See 989 P.2d at 197. The Colorado Court of Appeals held that under the insurance policy, plaintiff's cause of action for denial of benefits accrued at the time of the settlement. Id. at 198. The court declined to follow earlier precedent which could be read as holding that the statutory period begins to run on the date that the carrier denies a claim for benefits. Id.
In Brown, 989 P.2d at 198, the Colorado Court of Appeals expressly declined to follow this precedent, which was set forth in State Farm Mut. Auto. Ins. Co. v. Springle, 870 P.2d 578 (Colo.Ct.App. 1993).
In the case at bar, PMC settled its lawsuit with Lindt on June 30, 1999. Under Colorado law, its cause of action for breach of duty to indemnify accrued June 30, 1999 and is within Colorado's statute of limitations.
II. Applicable Statute Of Limitations
As discussed above, PMC's cause of action for breach of duty to defend accrued in February of 1998, at the latest, and it is barred under the three-year Colorado statute of limitations. The Kansas borrowing statute would utilize Colorado's shorter statutory period to bar this action in Kansas.
Since PMC's cause of action for breach of duty to indemnify accrued on June 30, 1999, it is within Colorado's three-year statute of limitations. The Kansas borrowing statute does not apply and the Court will utilize the five-year statute of limitations for contract claims in Kansas. The KBS motion to dismiss is overruled with respect to PMC's claim for breach of duty to indemnify and PMC may proceed with that claim. IT IS THEREFORE ORDERED that KBS's Motion To Dismiss (Doc. #3) filed September 18, 2001 be and hereby is SUSTAINED in part. The applicable statute of limitations precludes PMC from recovering for breach of duty to defend, but it is not barred from recovering for breach of duty to indemnify.
The Court notes that damages for breach of duty to defend are distinct from damages for breach of duty to indemnify. Costs of defense are not figured into damages for breach of duty to indemnify. The court in Beaudette, 94 F. Supp.2d at 100, noted that the contractual duty to defend is dependent upon commencement of a lawsuit, id. (citing Sterilite Corp. v. Cont'l Cas. Co., 458 N.E.2d 338, 341 n. 4 (Mass.Ct.App. 1983)), and that the duty to indemnify is dependent upon the entry of a final judgment, settlement, or final resolution by other means, id. (citingBankwest v. Fid. Deposit Co. of Md, 63 F.3d 974, 978 (10th Cir. 1995)). Therefore, in the case at bar, PMC may be able to recover damages in the amount of the settlement, but PMC is barred from recovering the costs and expenses which it incurred in defending its lawsuit against Lindt.