Opinion
Case No. 99-1355-JTM
November, 2000
MEMORANDUM AND ORDER
This matter is before the court on several motions: 1) Defendant's Motion to Dismiss Plaintiff's Count II (dkt. no. 44); 2) Plaintiff's Motion for Partial Summary Judgment (dkt. no. 49); and 3) Defendant's Motion for Partial Summary Judgment (dkt. no. 52). The motions are fully briefed and ripe for determination. The court has carefully considered the parties' submissions and, for the reasons set forth below, defendant's motion to dismiss is granted; plaintiff's motion for partial summary judgment is granted; and defendant's motion for partial summary judgment is denied.
I. Factual Background
Plaintiff corporation is the owner and operator of the Salina Inn motel in Salina, Kansas. Defendant is an insurance provider incorporated in the state of Iowa. The parties' dispute arises out of an insurance contract and seeks to resolve the question of whether the contract covers storm damage to plaintiff's motel. Plaintiff claims a breach of the insurance contract and fraud in the contract's inducement, while defendant brings a fraud counterclaim and asserts an estoppel defense. The court has diversity jurisdiction pursuant to 28 U.S.C. § 1332.
In early 1998, the parties negotiated and entered into a "replacement cost" policy designed to insure the plaintiff against wind, rain, or hail damage to its motel facility. Defendant, acting through its authorized agent, Joseph Apsey, initially provided plaintiff with a sixty-day binder, but retained the right, thereunder, to require repair of existing damage as a precondition to issuing the actual policy. On March 3, 1998, defendant's agent, Gary Luttrell, conducted a "loss control survey." Request for Admission No. 9. Luttrell's report concluded that the Salina Inn's roof would need to be "completely replaced or repaired by a competent qualified roofing company." Deposition of Gary Luttrell, at 44. Plaintiff's replacement or repair of the roof was a precondition to defendant's agreement to insure the property.
Citing the condition of the roof, defendant issued a March 12, 1998 declination of insurance notice. Deposition of Mark Beam, at 42. Defendant gave plaintiff until May 12, 1998 to make the repairs. Deposition of Joseph Apsey, at 28. If the loss requirements were satisfied, then defendant would continue the coverage. Id. Plaintiff hired Gene Douglas, d/b/a DD Supply, to apply a coating of rubberized paint to plaintiff's roof. At plaintiff's request, Mr. Douglas prepared and forwarded to defendant a letter describing his work. Deposition of Gene Douglas, at 39. Additionally, plaintiff requested a letter from JA Specialties, Inc. confirming that Douglas performed the work appropriately. Id. at 58. James Wieck of JA Specialties, Inc. prepared the letter, which plaintiff forwarded to defendant. Deposition of James Wieck, at 15. Wieck did not visually inspect the roof, but only discussed the coating job with Gene Douglas. Deposition of Gene Douglas, at 58. After receiving these letters, defendant issued policy coverage and accepted premium payments from the plaintiff. Deposition of Phyllis Cole, at 98. Defendant accepted plaintiff's premium payments throughout the relevant time period. Request for Admission No. 10.
On April 8, 1999, a storm struck Salina, Kansas causing extensive wind and hail damage to the area. Plaintiff, arguing that the storm damaged the Salina Inn's roof, made a replacement cost claim against the insurance policy. Defendant tendered only $4,500 which it believed to be the extent of new damage caused by the storm. Defendant argues that the remainder of the replacement cost reflects pre-policy damage that plaintiff failed to repair.
II. Motion to Dismiss Plaintiff's Count 2
In ruling on a motion to dismiss, the court must accept all the well-pleaded factual allegations of the complaint as true and must view them in the light most favorable to the nonmoving party. Sutton v. Utah State Sch. for the Deaf Blind, 173 F.3d 1226, 1236 (10th Cir. 1999). In accepting the complaint's allegations as true, the court must consider whether the complaint, standing alone, is legally sufficient to state a claim upon which relief may be granted. Ordinance 59 Ass'n v. United States Dep't of Interior Secretary, 163 F.3d 1150, 1152 (10th Cir. 1998). "A 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. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).
Defendant argues that plaintiff's fraud claim is, in actuality, a contractual dispute and that "[t]he existence of a contractual relationship bars the assertion of tort claims covering the same subject matter governed by the contract." Smith v. Hawkeye Security Ins. Co., 842 F. Supp. 1373 (D.Kan. 1994) (citing Isler v. Texas Oil Gas Corp., 749 F.2d 22, 24 (10th Cir. 1984). Plaintiff responds that its claim of fraud in the inducement arises out of defendant's misrepresentations that are entirely independent of the contractual dispute.
Isler and numerous other cases defendant cites hold that the existence of a contractual relationship bars the assertion of tort claims covering the same subject matter governed by the contract. See Smith v. Hawkeye-Security Ins. Co., 842 F. Supp. 1373, 1375 (D.Kan. 1994). Such cases find that the law may not impose tort duties where a contract defines the parties' rights and duties. However, when a plaintiff alleges a tortious act that is sufficiently independent of the acts giving rise to the alleged breach of contract, then the tort claim falls outside of the rule presented in Isler and Smith. See Atchison Casting Corp. v. Dofasco, Inc., 889 F. Supp. 1445, 1462 (D.Kan. 1995). Hence, the critical question here is whether the plaintiff's fraud claim is beyond the ambit of the Isler rule.
Plaintiff's fraud claim "is that the Defendant from the beginning, intended to take premium and not provide coverage for loss to the roofs at Salina Inn." Plaintiff's Reply to Defendant's Motion to Dismiss, at 2. In other words, the fraud claim arises not only out of defendant's "refusal to pay, but also by the taking of premium for two years of coverage of Plaintiff's roofs when it never intended to pay if any claim was made." Id. at 3. Plaintiff attempts to distinguish fraud from breach of contract based on the timing of defendant's decision to deny the present claim. According to plaintiff's distinction, if defendant intended to deny the claim at the contract's outset, then this is fraud in the inducement. By contrast, once the defendant actually denied the plaintiff's claim, a breach of contract occurred. The court finds this distinction disingenuous. Regardless of when defendant decided to deny plaintiff's claim, that decision directly relates to the alleged breach of the parties' contract. The allegedly fraudulent representations are the promises made in the contract itself. The parties entered a bargained-for agreement that created contractual duties. Plaintiff agreed to pay insurance premiums at a specified rate and defendant agreed to insure the plaintiff against "specified causes of loss." The bargained-for nature of these duties displaces the imposition of similar tort duties such as those advanced by plaintiff's second count. See Isler, 749 f.2d at 24. As there is no evidence of contract-independent misrepresentations, the court finds plaintiff has failed to state a cause of action on its second count and thus grants defendant's motion to dismiss. See Heller v. Martin, 14 Kan. App.2d 48, 54, 782 P.2d 1241, 1245 (1989) (breach of contract action is not turned into an action for fraud by merely alleging reliance on representations that the party would perform the contract).
In view of the court's decision to grant defendant's motion, plaintiff's request for punitive damages must fail. "Punitive damages may not be recovered in a breach of contract action even if the breach is intentional, unless the plaintiff pleads and proves an independent tortious act causing injury." Atchison Casting Corp., 889 F. Supp. at 1462 (citing Cornwell v. Jesperson, 238 Kan. 110, 708 P.2d 515, 524 (1985)). Atchison Casting goes on to note that Isler and the rule limiting punitive damages address the same problem: "preventing parties from turning what are ordinary breach of contract actions into fraud or other tort claims that open the door to more lucrative awards of damages and in effect allow parties to rewrite the terms of their agreement." Id. Incidentally, the court denies defendant's motion for summary judgment on plaintiff's fraud count as moot.
III. Plaintiff's Motion for Partial Summary Judgment
Plaintiff seeks summary judgment on its breach of contract claim and on defendant's fraud counterclaim and estoppel affirmative defense. The court will address each of these issues in turn. The principle that guides the court's decision is that summary judgment is proper only where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all of the evidence in a light most favorable to the opposing party. Jurasek v. Utah State Hosp., 158 F.3d 506, 510 (10th Cir. 1998). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Baker v. Board of Regents, 991 F.2d 628, 630 (10th Cir. 1993). The moving party need not disprove the nonmoving party's claim or defense; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir. 1987).
Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). The opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the opposing party must come forward with significant admissible probative evidence supporting that party's allegations. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).
A. Plaintiff's Breach of Contract Claim
The court has considered the evidence in the light most favorable to defendant and finds summary judgment for plaintiff is proper. As set out above, the defendant initially issued an insurance binder to plaintiff. Issuance of the actual insurance contract was subject to the completion of a "loss survey," which the defendant's loss control representative, Gary Luttrell, conducted. The loss report concluded that the Salina Inn's roof would need to be "completely replaced or repaired by a competent qualified roofing company." Plaintiff's Motion for Summary Judgment, Letter from Gary Luttrell, p. 2. On March 12, 1998, the defendant issued a declination of insurance citing the roof's condition and giving plaintiff until May 12, 1998 to replace or repair the roof. Plaintiff's Motion for Summary Judgment, Declination of Insurance. Plaintiff then hired a roofing contractor, Gene Douglas, to coat the motel's roof with a Truco Rubber Coating.
At plaintiff's request, Douglas prepared a letter stating: "Work on Salina Inn is completed. Sprayed Truco Rubber Coating on roof. Product and labor are warranteed for two years." Plaintiff's Motion for Summary Judgment, Letter from Gene Douglas. Plaintiff forwarded this letter to the defendant. Additionally, plaintiff obtained a letter from James Wieck of JA Specialties, Inc., stating: "The work done on the Salina Inn in Salina, KS completed by DD Supply and Roofing Co. is satisfactory." Plaintiff's Motion for Summary Judgment, Letter from James Wieck. Plaintiff similarly forwarded this letter to defendant. Upon receipt of the letters and without further inquiry, the defendant, acting through Phyllis Cole, reinstated the policy. Finally, the April 8, 1999 storm damaged the Salina Inn's roof.
Phyllis Cole provided the following deposition testimony: "Q: Did you ask anyone whether additional work had been done besides the sprayed Truco Rubber Coating? A: No, I didn't. Q: You accepted the letters from Mr. Douglas and Mr. Weeks and reissued and reinstated the coverage, didn't you? A: That's correct." Deposition of Phyllis Cole, at 98.
On the basis of these uncontroverted facts, the court finds that plaintiff is entitled to judgment as a matter of law on its breach of contract claim. The Salina Inn is clearly a "covered property" under the contract (Form CP 00 170 06 95, Section A.1.a) and a "covered cause of loss" (Form CP 10 30 06 95, Section F) damaged the roof. Additionally, the defendant agrees that the plaintiff must replace the roof and that the contract provides for "replacement cost" of the building. The real dispute is whether the plaintiff repaired the roof prior to defendant's issuance of the policy. Defendant contends that plaintiff did not repair the roof, as required by the loss report, because the Truco Coating was primarily a cosmetic repair. See Deposition of Gene Douglas, at 64. Defendant concludes that it is not bound to replace plaintiff's roof because the repairs made by the plaintiff were insufficient. The court disagrees.
Defendant did not require specific repairs, only that a competent qualified roofing company must make repairs. Clearly, plaintiff selected a comparatively stopgap measure of repair. However, the plaintiff disclosed the exact nature of the limited repairs. Plaintiff's representation to the insurer, through Gene Douglas' letter, was that Douglas had applied a Truco Rubber Coating to the roof. See Deposition of Phyllis Cole, at 65-68. Despite this clear statement, Ms. Cole assumed that other repairs were also completed. The risk of making such an assumption, as well as the ambiguity to which such an assumption gives rise, must fall on the insurer. See Reynolds v. S D Foods, Inc., 822 F. Supp. 705, 707 (D.Kan. 1993) (holding that in cases of ambiguity a construction favoring the insured must prevail) (citing American Media, Inc. v. Home Indemnity Co., 232 Kan. 737, 740, 658 P.2d 1015 (1983).
When asked what she believed had been done after seeing the letters from Douglas and Weeks, Phyllis Cole stated: "I assumed that the roof had been repaired and that he also sprayed some rubber coating on the roof." Counsel then made the following inquiry of Ms. Cole: "Q: Where does it say in this letter that Mr. Hammer had done any other repairs, other than spray the rubber coating on the roof? A: It doesn't." Deposition of Phyllis Cole, at 67.
The defendant could have made subsequent inspections of the Salina Inn's roof. Instead, the defendant issued the insurance policy without informing the plaintiff of any further problems. By issuing the policy, defendant indicated that it was prepared to bear the risk of loss based on the structure's existing condition. Defendant entered the contract with full knowledge of plaintiff's repairs, but made a faulty assumption of additional repairs. The court finds that defendant cannot rely on this assumption to avoid the consequences and duties created by the contract. The court grants judgment for the plaintiff on its breach of contract claim. The issue of damages remains for trial.
B. Defendant's Fraud Claim
Defendant suggests that plaintiff made material misrepresentations by soliciting the Douglas and Weeks letters indicating that the "requested work had been completed." Defendant also points out that both letters were prepared before the completion of the Truco Rubber Coating application. Deposition of Gene Douglas, at 78. Defendant claims these allegedly fraudulent misrepresentations induced it to issue coverage on the motel. Under Kansas law, "actionable fraud includes an untrue statement of material fact, known to be untrue by the person making it, made with the intent to deceive or recklessly made with disregard for its truthfulness, where another party justifiably relies upon the statement and acts to his injury." Slaymaker v. Westgate State Bank, 241 Kan. 525, 531, 739 P.2d 444, 450 (1987).
Defendant has failed to show that plaintiff made an "untrue statement of material fact" regarding the repairs. Plaintiff informed defendant that Gene Douglas had "sprayed Truco Rubber Coating on roof." Plaintiff's Motion for Summary Judgment, Letter from Gene Douglas. The defendant does not controvert the fact that Douglas applied a rubber coating to the roof and that he performed the task appropriately. Thus, plaintiff's representations were true and cannot form the basis of a fraud or misrepresentation claim. Ms. Cole may have assumed that plaintiff had made additional repairs, but the court cannot construe that as plaintiff's "untrue statement."
Gene Douglas admits that he drafted the above referenced letter prior to total completion of the rubber coating application. Deposition of Gene Douglas, at 78. Douglas' letter was dated May 16, 1998 while the work was actually completed on May 18, 1998. Whatever the reason for the premature statement, the misrepresentation is immaterial because the rubber coating was, in fact, properly completed. Based on the stated repairs, the defendant issued coverage without further inspection. The court does not believe that Douglas' misstatement, regarding the time at which the project was complete, altered the defendant's actions nor that the statement injured the defendant. The defendant simply did not rely on the two-day differential. Significantly, plaintiff's repairs had already extended past the grace period stated in the Notice of Declination, which allowed the plaintiff until May 12 to complete the repairs. The court finds that the defendant relied on the stated repairs, not upon the time of completion. Hence, Douglas' misstatement is immaterial. The court thus grants summary judgment for plaintiff on defendant's fraud counterclaim.
C. Defendant's Estoppel Defense
The court may properly dispose of an affirmative defense by summary judgment. See Miller v. Shell Oil Co., 345 F.2d 891 (10th Cir. 1965). To state a claim for estoppel, the party must show (1) a false representation or concealment of material facts when defendant had a duty to reveal such facts; (2) that the representation was made with knowledge, actual or constructive, of the facts; (3) that the party to whom the representation was made was without knowledge or means of knowing the real facts; (4) that the representation was made with the intention that it would be acted upon; and (5) that the party to whom it was made relied on or acted upon the representation to his prejudice. See Place v. Place, 207 Kan. 734, 739, 486 P.2d 1354, 1358-59 (1971); Turon State Bank v. Bozarth, 235 Kan. 786, 789, 684 P.2d 419 (1984). These elements are essentially the same as those of defendant's fraud counterclaim. The court thus grants plaintiff's motion as to the estoppel defense under the same rationale discussed above.
IT IS THEREFORE ORDERED this ___ day of November, 2000 that Defendant's Motion to Dismiss Plaintiff's Count II (dkt. no. 44) is granted; Plaintiff's Motion for Partial Summary Judgment (dkt. no. 49) is granted; and Defendant's Motion for Partial Summary Judgment (dkt. no. 52) is denied as moot.