Summary
holding that plaintiff "could not recover twice for the same harm"
Summary of this case from Welton v. Amco Ins. Co.Opinion
No. 02-1185-WEB
August 14, 2003
Memorandum and Order
This matter is before the court on the defendants' Motion for Summary Judgment as to Count II of the complaint. The court finds that oral argument would not assist in deciding the issues presented.
I. Facts.
The background of the case is as follows. ( See Doc. 36). Lone Star operates a restaurant in Battle Creek, Michigan. As part of the construction of the restaurant, Lone Star maintained a water storage basin on its property to handle storm water run-off from the property. Battle Creek Hospitality, Inc. operated a Holiday Inn Express on the property next to Lone Star's restaurant. In 1998, Battle Creek filed suit against Lone Star alleging that overflow from Lone Star's water basin damaged Battle Creek's property ("the 1998 case"). The 1998 case was settled for $95,000 and defendant Liberty Mutual paid the full amount of the settlement. Plaintiffs are the named insureds under a commercial general liability insurance policy issued by defendant Liberty Mutual.
Shortly after the settlement of the 1998 case, Battle Creek filed a second action ("the 2000 case") against Lone Star alleging additional flooding incidents and seeking damages in excess of $6,000,000. Liberty Mutual initially defended Lone Star, but sent reservation of rights letters to Lone Star indicating there were questions about coverage under the insurance policy.
Shortly before a settlement conference set in the 2000 case, Liberty Mutual advised Lone Star that it was only willing to contribute a maximum of 20% of any settlement amount up to $750,000 ( i.e., a maximum of $150,000). The settlement conference proceeded on May 7, 2002, but no settlement was reached. Lone Star later settled the 2000 case with Battle Creek for $890,000.
On May 30, 2002, Lone Star filed the instant action. Count I of the complaint, entitled "Breach of Contract," alleges that Liberty Mutual's failure to contribute to the settlement of the 2000 case was a breach of its contract of Commercial General Liability Insurance, and that as a result of the breach Lone Star is entitled to recover the full settlement amount of the 2000 case. Count II of the complaint, entitled "Bad Faith Breach of Insurance Contract," alleges that Liberty Mutual breached an implied covenant of good faith and fair dealing with Lone Star in numerous respects, including by applying exclusions not contained in the policy, by knowingly misconstruing provisions of the policy, by not attempting in good faith to effectuate a prompt and fair settlement of the claims in the 2000 case once liability had become reasonably clear, and by forcing Lone Star to retain counsel to secure benefits to which Liberty Mutual knew Lone Star was entitled under the policy. Count II further alleges that Liberty Mutual acted intentionally and with malice, and it prays for $890,000 in actual damages and an unspecified amount of punitive damages.
II. Arguments on Summary Judgment.
Liberty Mutual now moves to dismiss Count II, pursuant to Fed.R.Civ.P. 12(b) and/or Fed.R.Civ.P. 56, on the grounds that "Kansas law does not recognize a tort claim for 'bad faith breach of insurance contract' as alleged in Count II. . . ." Doc. 46 at p. 6. Defendants note that in Spenser v. Aetna Life Cas. Co., 227 Kan. 914, 611 P.2d 149 (1980), the Kansas Supreme Court held that Kansas would not recognize the tort of bad faith handling of insurance claims, and that numerous Kansas decisions since Spenser have continued to apply the same rule. In its response, Lone Star concedes that punitive damages cannot be awarded on its claims and that any tort claim for bad faith is precluded by Kansas law, but it argues that Count II in fact alleges a breach of contract, specifically a violation of the duty of good faith and fair dealing implied in every contract. In reply, Liberty Mutual argues that Lone Star is merely attempting to circumvent the Kansas holdings by bringing a tort claim under the guise of a contract claim. Doc. 64 at p. 4.
Lone Star explains that the claim for punitive damages was included in the complaint so as to preserve the issue in the event it was determined that the law of some state other than Kansas governed. Lone Star now concedes that Kansas law governs and "[a]ccordingly, Lone Star respectfully withdraws its claim for punitive damages or, in the alternative, agrees that defendants are entitled to an order of dismissal or partial summary judgment on that issue." Doc. 59 at p. 4. Lone Star opposes the motion insofar as it seeks dismissal of the allegation of bad faith breach of contract, however, arguing that "[t]his is a valid claim, sounding in contract rather than tort. . . ." Id.
III. Discussion.
Lone Star concedes that any claim for punitive damages or for the tort of bad faith is precluded by Kansas law. Pl. Br. at 2. As such, the court will grant defendants' motion for summary judgment as to Count II insofar as that count seeks punitive damages or to the extent it can be construed as alleging a claim for the tort of bad faith. The motion for summary judgment will be denied with respect to the remaining allegations of Count II, however, because those allegations are sufficient to state a claim for breach of contract. As Lone Star points out, Kansas courts imply a duty of good faith and fair dealing in every contract. See Daniels v. Army Nat. Bank, 249 Kan. 654, 658, 822 P.2d 39, 43 (1991). "Specifically, an insurance contract contains an implied term that if the insurer assumes the defense of an insured, then the insurer 'owes to an insured the duty to act in good faith and without negligence.'" Aves By and Through Aves v. Shah, 258 Kan. 506, 906 P.2d 642, 648 (1995) ( quoting Bollinger v. Nuss, 202 Kan. 326, Syl. ¶ 1, 449 P.2d 502 (1969)). "If the insurer negligently or in bad faith refuses to settle a case within the policy limits, the insurer has breached this implied term in the insurance contract." Id. (citations omitted). In considering settlement offers, the insurer is also bound to give consideration to the interests of the insured as well as its own interests. Bollinger, 202 Kan. at 337-38. Because Kansas does not recognize the tort of bad faith in such situations, an insured seeking damages from its insurer on grounds of bad faith must bring the action as a contract claim. Aves, 258 Kan. at 512.
The question of whether an insurer's refusal to settle constitutes a breach of its duty to exercise good faith depends upon the circumstances of the particular case and must be determined by taking into account the various factors present. Bollinger v. Nuss, 202 Kan. 326, 338, 449 P.2d 502 (1969). Relevant factors include: (1) the strength of the injured claimant's case on the issues of liability and damages; (2) attempts by the insurer to induce the insured to contribute to a settlement; (3) failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; (4) the insurer's rejection of advice of its own attorney or agent; (5) failure of the insurer to inform the insured of a compromise offer; (6) the amount of financial risk to which each party is exposed in the event of a refusal to settle; (7) the fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts; and (8) any other factors tending to establish or negate bad faith on the part of the insurer. Id. As noted previously, Lone Star alleges in Count II that Liberty Mutual breached its implied contractual obligation of good faith and fair dealing in various respects. If Lone Star were able to prove these allegations, it would be entitled to recover for a breach of the contract. That fact is sufficient to overcome the current motion for summary judgment, which argues only that Count II fails to state a claim for relief under Kansas law because it is based on a tort duty. Although Liberty Mutual also argues strenuously in its Reply Brief that Lone Star's allegations of bad faith are unsupported by evidence and that it acted at all times in good faith, it recognizes that such arguments were not raised in the motion for summary judgment and are irrelevant to the issue currently before the court. Def. Rep. Br. at 5.
Liberty Mutual's additional argument that Count II is duplicitous of Count I or that Lone Star is somehow attempting to recover tort damages or duplicate damages on Count II is unpersuasive. See Def. Rep. Br. at 4. The allegations of breach in Count II are distinct from the allegations in Count I, and Lone Star's manner of setting forth its claims is permissible under the Rules of Civil Procedure. See Fed.R.Civ.P. 8(e). Moreover, Lone Star concedes it cannot recover tort damages on Count II, and it clearly could not recover twice for the same harm if it were to prevail on both Counts I and II. Cf. State ex rel. Stephan v. GAF Corp., 242 Kan. 152, 747 P.2d 1326 (1987) (plaintiff entitled to seek only one recovery for actual damages).
IV. Conclusion.
Defendants' Motion for Summary Judgment (Doc. 45) as to Count II of the complaint is GRANTED IN PART and DENIED IN PART. The motion is granted insofar as Count II seeks punitive damages or alleges the tort of bad faith. Such allegations are hereby dismissed. The motion for summary judgment is denied insofar as Count II alleges that the defendants breached the contract by violating an implied covenant of good faith and fair dealing.