Opinion
Case No. 02-2403-JWL
January 21, 2003.
MEMORANDUM ORDER
In February 2002, defendants Sam Stout and Debbie Stout, d/b/a Stout Fiberglass, Inc., contracted with defendant Garold Powers to construct a building. Mr. Powers is insured by a commercial general liability policy issued by plaintiff American States Insurance Company (hereinafter "American States"). After construction of the building was complete, the Stouts filed a lawsuit against Mr. Powers in the District Court of Neosho County, Kansas alleging that they sustained damages as a result of Mr. Powers' breach of contract, negligence and fraudulent and negligent misrepresentations. American States is presently defending Mr. Powers in the Neosho County suit under a reservation of rights and has filed this declaratory judgment action seeking a declaration that there is no coverage under the policy issued to Mr. Powers and that it owes no duty to defend or indemnify Mr. Powers with respect to the underlying suit.
This matter is presently before the court on Mr. Powers' motion to dismiss or, in the alternative, to stay (doc. #9). Mr. Powers moves to dismiss American States' complaint on the grounds that this declaratory judgment action requires the resolution of key factual issues that must be resolved in the underlying state court action. American States, on the other hand, urges that the issues relevant to this declaratory judgment action simply do not overlap in any way with the issues relevant to the underlying action. As set forth in more detail below, Mr. Powers' motion is denied.
Mr. Powers' motion to dismiss is based solely on the Kansas Supreme Court's decision in State Farm Casualty Company v. Finney, 244 Kan. 545 (1989) — a decision that Mr. Powers contends bars this declaratory judgment action. In Finney, the Kansas Supreme Court affirmed the district court's holding "that an insurer may not maintain a declaratory judgment action to determine if there is coverage for the acts of its insured if the declaratory judgment also decides key factual issues in an underlying tort suit brought against the insured." Id. at 545-46. In that case, Gordon Finney brought an action in state court against Dean Johnson, a person insured under a homeowners policy issued by State Farm, claiming that Mr. Johnson shot him with a gun either intentionally or negligently. Id. at 546. As the policy covered only negligent acts and not intentional ones, State Farm defended Mr. Johnson under a reservation of rights and filed a declaratory judgment action asking the district court to determine whether Mr. Johnson acted intentionally or negligently and, if intentionally, to find that there was no coverage under the policy and that State Farm had no duty to defend. Id.
The district court dismissed the declaratory judgment action, agreeing with the insured that the action was improper as it would require the court to resolve key factual issues to be determined in the underlying action. Id. at 547. On appeal, the Kansas Supreme Court affirmed the district court. Id. at 553. Essentially, the court held that State Farm had a duty to defend the underlying action because the complaint in the underlying action alleged negligent acts as well as intentional acts and, thus, the alleged negligent acts gave rise to a "potential for liability" under the policy. Id. The court also emphasized the prejudice to the insured that might result from requiring the insured to litigate, in a declaratory judgment action filed by the insurer, the key issues in the underlying suit:
First, the insured may be bound by the declaratory judgment suit by principles of collateral estoppel. Second, since the issue in the declaratory judgment action is whether the insured's acts were intentional or negligent, the insured may be prejudiced by being forced into claiming the acts were merely negligent to insure coverage under the insurance policy.Id. (emphasis in original).
American States acknowledges the general rule that a declaratory judgment action cannot be used to resolve key factual issues to be determined in the underlying suit. According to American States, however, this declaratory judgment action is entirely proper because, unlike the facts of Finney, there is simply no potential for liability under the policy issued to Mr. Powers and the facts alleged by the Stouts in the underlying action. As the Finney court noted, in determining whether there is a "potential for liability," the insurer must examine the allegations in the complaint; for if the complaint alleges only acts that are clearly not covered by the policy, then a declaratory judgment action is proper to determine the issue of coverage. Id. at 553-54. The court turns, then, to examine the complaint in the underlying action.
The Stouts' complaint in the Neosho County suit alleges that Mr. Powers breached his contract with the Stouts by failing to construct the building in a safe, workmanlike manner; by failing to construct the building according to specifications; by failing to construct the building in the time frame agreed upon; by failing to meet building codes for the structural design; and by failing to stay within the contract price. The complaint further alleges that Mr. Powers was negligent in failing to construct the building in a workmanlike manner; in failing to meet the current building code for structural design and safety; in failing to construct the building according to the agreed specifications; in failing to provide and properly supervise the laborers used to construct the building; and in failing to complete the work in a timely manner. Finally, the Stouts' complaint alleges that Mr. Powers made fraudulent or negligent misrepresentations concerning his experience and expertise; the time frame in which the project would be completed; and his ability to supply laborers for the project.
American States contends that, even assuming the truth of each of the Stouts' allegations, there is no coverage under the policy issued to Mr. Powers. Specifically, American States urges that the allegations in the Stouts' complaint did not meet the policy definition of "occurrence" ( i.e., "an accident including continuous or repeated exposure to substantially the same harmful conditions") and that, even assuming such acts were "occurrences" within the meaning of the policy, the acts — regardless of whether they are considered intentional or negligent — would nonetheless be excluded from coverage under specific policy exclusions. The court agrees with American States that these issues are separate and independent from the issues raised by the Stouts' complaint. The declaratory judgment action filed by American States will require this court to interpret several provisions of the policy — what constitutes an "occurrence" and what types of acts or conduct are excluded under several specific policy exclusions. There is no indication from the parties' papers that this court will be required to ascertain whether Mr. Powers acted intentionally or negligently. By contrast, the complaint filed by the Stouts will require a determination of whether Mr. Powers acted intentionally or negligently and that action will not resolve the coverage issues raised by American States in this declaratory judgment action. Even the Finney court acknowledged that, in such circumstances, the maintenance of a declaratory judgment would be appropriate. See id. at 552 ("[M]aintenance of a declaratory judgment action prior to trial of the underlying tort action could be a valuable means of resolving policy questions `where those questions are independent and separable from the claims asserted in the pending suit.'") (quoting Brohawn v. Transamerica Ins. Co., 276 MD. 396, 405 (1975)).
According to Mr. Powers, the fact that the Stouts have alleged negligence in their complaint is sufficient to bring this case within the four corners of Finney and is sufficient to trigger the duty to defend under the policy. In support of this argument, Mr. Powers highlights the following language from Finney: "Where the complaint alleges both a negligent and intentional act, these alleged facts give rise to the potential for liability and the duty to defend arises." Id. at 554. Mr. Powers, however, has misconstrued the Finney decision and has taken this particular sentence out of context. A review of the Finney opinion in its entirety reveals that the court, although somewhat vague in its explanation, was referring only to those cases in which the insurer was seeking to have the court in the declaratory judgment action determine whether the insurer's contractual liability flows from a negligent act or is excluded because the insured's act was intentional. By contrast, American States is asserting that they have no liability even if Mr. Powers' acts as alleged by the Stouts are negligent.
For the foregoing reasons, the motion to dismiss is denied.
IT IS THEREFORE ORDERED BY THE COURT THAT defendant Garold Powers' motion to dismiss or, in the alternative, to stay (doc. #9) is denied.