No. 84,476
IN THE COURT OF APPEALS OF THE STATE
OF KANSAS
ASELCO, INC., DR. S. JUSTIN KIM, RICK
SOPHA,
JOHN DICKESON, and SOS TELE-DATA,
INC.,
Appellant/Cross-appellee,
v.
HARTFORD INSURANCE GROUP,
Appellee/Cross-appellant.
SYLLABUS BY THE COURT
1. Any person having an interest under a written contract, or whose rights,
status, or other legal relations are affected by a contract, may seek
determination of any question of construction or validity arising under that
agreement and may obtain a declaration of rights, status, or other legal
relations thereunder in a declaratory judgment action.
2. The existence of a factual issue or issues is no obstacle to pursuit of a
declaratory judgment action. Such issues may be tried and determined in the
same manner as issues of fact in other civil actions in the court in which the
proceeding is pending.
3. The existence of another adequate remedy is no basis for rejecting or
short-circuiting declaratory relief in cases where it is appropriate.
4. Garnishment is a proper procedure, but not the only proper procedure, for
determining a garnishee's indebtedness.
5. Insurance coverage issues may be, and frequently are, determined in
declaratory judgment actions.
6. Under the facts of this case, given plaintiff's full and proper
litigation of its rights under an insurance policy for more than 2 years in a
declaratory judgment proceeding, it was an abuse of discretion for the district
court to grant summary judgment to defendant insurance company because it
believed a yet-to-be-filed garnishment addressing the same issues between the
same parties was a more appropriate avenue to plaintiff's remedy.
7. Kansas law determines the existence of an insurer's duty to defend in a
Kansas court. The law of the place of performance determines the manner and
method as well as the legality of the acts required for performance.
8. In order to determine the existence of a duty to defend under Kansas law,
an insurer must look beyond the effect of the pleadings and must consider any facts
brought to its attention or any facts it could reasonably discover. If those
facts give rise to a potential of liability, even if remote, under the policy,
the insurer bears a duty to defend. The possibility of coverage must be
determined by a good faith analysis of all information the insurer may know or
could have reasonably ascertained. If ambiguities in coverage, including
exclusionary clauses, are judicially determined against the insurer, the
ultimate result controls the insurer's duty to defend.
9. Kansas courts have recognized three possible consequences of an insurer's
breach of its duty to defend and its failure to reserve its rights under a
policy of insurance: (a) the possibility of an award of damages in excess of
policy limits; (b) collateral estoppel; and (c) equitable estoppel. Equitable
estoppel to prevent an insurer from raising coverage or policy defenses does
not inevitably apply.
10. Questions that require construction of the language of an insurance
policy must be decided under the law of the state where the insurance contract
was made.
11. The function of an appellate court is to determine whether the trial
court's findings of fact are supported by substantial competent evidence.
Substantial evidence is such legal and relevant evidence as a reasonable person
might accept as sufficient to support a conclusion.
Appeal from Johnson District Court; JANICE D. RUSSELL, judge. Opinion filed
April 13, 2001. Affirmed in part, reversed in part, and remanded with
directions.
Thomas R. Buchanan, and Kristie Remster Orme, of McDowell,
Rice, Smith & Garr, P.C., of Kansas City, Missouri, for
appellant/cross-appellee SOS Tele-Data, Inc.
Lee M. Baty, of Field, Gentry & Benjamin, P.C., of Kansas City,
Missouri, and Theresa A. Otto, David C. Kennedy, and Brian
J. Doherty, of Field, Gentry & Benjamin, P.C., of Overland Park, for
appellee/cross-appellant Hartford Insurance Group.
Before GERNON, P.J., KNUDSON and BEIER, JJ.
BEIER, J.: Plaintiff SOS Tele-Data, Inc. (SOS), appeals the district court's
ruling granting summary judgment in favor of Hartford Insurance Group
(Hartford) in this declaratory judgment action and directing SOS to pursue a
garnishment action. Hartford cross-appeals the district court's ruling that it
is estopped from litigating issues already decided in a liability action
against its insured and the court's finding that it participated in certain
settlement negotiations.
The parties' various arguments require us to answer four questions:
Did the district court abuse its discretion by dismissing SOS's declaratory
judgment action and finding that a garnishment proceeding was a more
appropriate avenue for SOS to pursue?
Did the district court find that Hartford breached its duty to defend SOS's
judgment debtor, Aselco, Inc. (Aselco)?
What consequences follow from an insurance company's breach of its duty to
defend and its failure to reserve its rights under the policy?
Did the district court err in finding that Hartford attended settlement negotiations
in the underlying litigation?
Hartford insured Aselco under a commercial general liability policy.
Hartford is a foreign insurance corporation registered to do business in
Kansas. Aselco is a Maryland corporation with its principal place of business
in Maryland.
The Hartford policy applied to "'[a]dvertising injury' caused by an
offense committed in the course of advertising [Aselco's] goods, products or
services." It defined "[a]dvertising injury" to include:
"injury arising out of . . . [m]isappropriation of advertising ideas or
styles of doing business." The beginning date on the policy was August 1,
1994, and its ending date August 1, 1995.
Aselco had no insurance from August 1, 1995, until December 1, 1995. It then
obtained insurance from Maryland Casualty Insurance Company (Maryland Casualty)
until December 1, 1996.
In February 1996, SOS, a Colorado corporation with its principal place of
business in Harbinger, North Carolina, filed a civil action against Aselco and
several of its officers and employees in state court in Johnson County, Kansas.
SOS alleged defendants had misappropriated information concerning
telecommunications products from March 4, 1995, to December 31, 1997.
Aselco first notified Hartford of the lawsuit in June 1997. Hartford denied
Aselco's tender of defense. Maryland Casualty also denied a duty to defend or
indemnify Aselco but provided a defense under a reservation of rights.
Maryland Casualty filed this declaratory judgment action against Aselco in
October 1997 to determine if it had a duty to defend in the underlying
litigation. Aselco brought in Hartford as a third-party defendant, and SOS was
granted leave to intervene. Aselco eventually filed a petition for bankruptcy
in February 1998.
On August 14 and 15, 1998, SOS, Aselco, and Maryland Casualty participated
in settlement negotiations in the underlying litigation. They reached a
settlement agreement under which Maryland Casualty agreed to pay $300,000 to
SOS, and Aselco agreed to an entry of judgment against it for $1.5 million.
A few days later, one judge of the district court presided over an
abbreviated trial in which he took judicial notice of the volumes of
depositions, pleadings, and exhibits filed in the case. Only one witness
testified, and his testimony was limited to the amount of SOS's damages. As
previously agreed by the parties, the judge found Aselco liable to SOS in the
amount of $1.5 million for a pattern of continuing tortious conduct that began
before March 4, 1995, and continued until at least December 31, 1997.
The judge also made the following pertinent findings:
"On plaintiff's claim for misappropriation, the Court finds that
Aselco: 1) misappropriated SOS' advertising ideas or styles of doing business .
. . f) [A]s part of defendant's advertising and marketing activities, defendant
created marketplace confusion as to SOS, its goods and services, and its
ability to provide those goods and services."
Two days later, Hartford was notified of the judgment against Aselco in the
underlying litigation. Hartford did not attempt to file a motion for new trial
or a motion to modify the judgment in the underlying litigation.
The next month, Maryland Casualty dismissed its portion of the declaratory
judgment action against Aselco. SOS was granted leave to file a petition
seeking indemnification against Hartford in the declaratory judgment action a
month later, and the parties were realigned, with SOS and Aselco as the
plaintiffs and Hartford as the defendant. Hartford and Aselco later reached an
agreement in which Aselco agreed to dismiss its petition in declaratory
judgment and release all claims against Hartford for an undisclosed sum. This
left only the parties to this appeal in the declaratory judgment action: SOS as
plaintiff and Hartford as defendant.
Hartford filed a motion for summary judgment, arguing that SOS should be
forced to pursue any remedy through a garnishment proceeding rather than
through a declaratory judgment action. SOS sought partial summary judgment on
the issue of whether Hartford was collaterally estopped from relitigating
issues decided in the underlying litigation.
After two hearings on the cross-motions, a different district judge issued
her ruling. She held that Hartford was bound by what she saw as the
noncollusive judgment entered in the underlying litigation, including "a
determination that one of the torts committed by Aselco involved advertising
injury." She described its policy as an "occurrence policy" that
"only provides coverage for acts or offenses which occur while the policy
was in effect" and continued:
"The issue that is not resolved by this decision is a factual one.
Clearly . . . [the] decision [of the judge who heard the underlying litigation]
was that the tortious conduct took place over a period that far exceeded the
period when Hartford's policy was in effect. His decision was that Aselco
engaged in tortious conduct from March 4, 1995 to December 31, 1997. Of that
approximately thirty-four month period, Hartford only insured Aselco until
August 1, 1995, approximately five months.
"This Court's ruling is that the factual issue of how to apportion the
total damages assessed by [the judge who heard the underlying litigation]
between Hartford, Maryland Casualty, and Aselco, which acted as a self-insurer
for a period of some four months, is a factual issue which should be determined
in a garnishment proceeding. A garnishment proceeding is more appropriate to
the determination of factual issues than is a declaratory judgment action, and
[the judge who heard the underlying litigation] is much more conversant with
the facts of the underlying case and will therefore be able to make a more
informed decision about what portion of the total judgment is covered by
Hartford's policy.
. . . .
". . . Obviously, the portions of the damage judgment for offenses
occurring after August 1, 1995, are outside the coverage, and Hartford should
not be held liable for that portion of the judgment."
SOS filed a motion to alter or amend judgment, arguing that the court erred
in finding that Hartford was not responsible for those portions of the damages
related to offenses occurring after August 1, 1995. The judge refused to amend
her journal entry on that point.
Declaratory
Judgment Action v. Garnishment Proceeding
The entertainment of a declaratory judgment action rests within the
discretion of the district court. Wichita Computer & Supply, Inc. v.
Mulvane State Bank, 15 Kan. App. 2d 258, 260-61, 805 P.2d 1255, rev.
denied 248 Kan. 999 (1991). Judicial discretion is not abused if
reasonable persons could disagree as to the propriety of the decision of the
district court. State v. Ford, 23 Kan. App. 2d 248, 251, 930
P.2d 1089 (1996), rev. denied 261 Kan. 1087 (1997). However,
"[t]he discretion lodged within a court is not a boundless, but a
judicial, discretion. It is a discretion limited to sound judgment to be
exercised, not arbitrarily, but with regard to what is right and equitable
under the circumstances and the law." State v. Collins, 195 Kan.
695, 700, 408 P.2d 639 (1965).
SOS argues the district court abused its discretion by forcing it to file a
garnishment to obtain a remedy. It contends that this decision would
unnecessarily prolong the litigation and that issues of insurance coverage are
routinely determined in declaratory judgment actions. SOS is correct.
"Any person having an interest under a . . . written contract . . . or
whose rights, status or other legal relations are affected by a . . . contract
. . . may seek determination of any question of construction or validity
arising under that . . . agreement and may obtain a declaration of rights,
status or other legal relations thereunder [in a declaratory judgment
action]." K.S.A. 60-1704.
In addition, the existence of a factual issue or issues is no obstacle to
pursuit of a declaratory judgment action. Such issues "may be tried and
determined in the same manner as issues of fact in other civil actions in the
court in which the proceeding is pending." K.S.A. 60-1710. Despite
Hartford's reliance on it, Alliance Mutual Casualty Co. v. Bailey,
191 Kan. 192, 198, 380 P.2d 413 (1963), is not authority for the contrary
proposition. It was decided before the effective date of the Kansas Declaratory
Judgment Act (Act), K.S.A. 60-1701 et seq., which governs this case,
and even it includes language acknowledging that a declaratory judgment
proceeding in which questions of fact are incidental to the determination of
the main issue may be maintained. 191 Kan. at 200-01.
The Act also provides that the existence of another adequate remedy is no
basis for rejecting or short-circuiting declaratory relief in cases where it is
appropriate. K.S.A. 60-257.
The district judge relied primarily on a federal district court case to find
that a garnishment would be a more appropriate avenue for SOS. Although it is
true that the cited federal decision, Sapp v. Greif, 961 F. Supp. 243,
246, (D. Kan. 1997), stated: "Kansas law provides that a garnishment
action is the proper procedure for determining a garnishee-insurer's
liability" (emphasis added), the case it cited, Bergeson v. Dilworth,
749 F. Supp. 1555 (D. Kan. 1990), aff'd 959 F.2d 245 (10th Cir. 1992), relied
in turn upon Gilley v. Farmer, 207 Kan. 536, 544, 485 P.2d
1284 (1971). 749 F. Supp. at 1558. In Gilley, our Supreme Court found
only that "[u]nder the circumstances . . . garnishment was a proper
procedure for determining the garnishee's indebtedness." (Emphasis added.)
207 Kan. at 544. Furthermore, neither Sapp nor Bergeson nor Gilley
is authority on its facts for granting summary judgment to a defendant in a
long-pending, fully developed and discovered declaratory judgment action so
that a garnishment action addressing the same issues can be instituted against
it by the same opponent.
Kansas appellate decisions also provide ample support for SOS's contention
that insurance coverage issues are frequently determined in declaratory
judgment actions. See Garrison v. State Farm Mut. Auto. Ins. Co., 258
Kan. 547, 907 P.2d 891 (1995) (insurers bringing declaratory judgment action
seeking determination that policies did not provide personal injury protection
or liability coverage); State Farm Fire & Cas. Co. v. Martinez,
26 Kan. App. 2d 869, 995 P.2d 890, rev. denied 269 Kan. 934
(2000) (insurer bringing declaratory judgment action against insured business
owner to determine whether insured had coverage under business liability
policy); State Farm Ins. Co. v. Gerrity, 25 Kan. App. 2d 643,
968 P.2d 270 (1998), rev. denied 267 Kan. 887 (1999) (insurer seeking
declaratory judgment on whether homeowner's personal liability umbrella
policies provided coverage for claims arising from insured's sexual molestation
of minor victim).
Here, SOS's original petition in the declaratory judgment action sought resolution
of the question of whether Hartford bore a duty to defend and indemnify Aselco
in the underlying litigation and definition of the contours of Hartford's
obligation to pay the judgment entered against Aselco. SOS, as judgment
creditor, clearly had a potential interest in the Hartford policy, and it was
entitled to a determination of its legal rights to any insurance proceeds.
This determination could have been made through a declaratory judgment
action or as a garnishment proceeding. Given that each was an avenue properly
available to SOS, and that it selected declaratory judgment and proceeded to
litigate its claims fully for more than 2 years, we view the district judge's
belated decision to jettison that action in favor of a yet-to-be-filed garnishment
as an abuse of discretion. It simply did not reflect "sound judgment to be
exercised, not arbitrarily, but with regard to what is right and equitable
under the circumstances and the law." Collins, 195 Kan. at 700.
Even if it was true that the judge who heard the underlying litigation was more
familiar with the facts of the case, the less drastic action of a transfer back
into his division could have been pursued rather than forcing the litigants and
counsel to make additional substantial expenditures of time and resources in a
new action. This portion of the judgment granted below must be reversed.
Breach of Duty to
Defend
We must next address the question of whether the district court determined
that Hartford breached its duty to defend Aselco. Hartford asserts that this
issue remains to be decided.
SOS's motion for partial summary judgment argued that Hartford was
collaterally estopped under Kansas law from relitigating issues from the
underlying action because it failed to provide a defense to its insured. In
Hartford's response to this motion, all of its legal arguments proceeded from
the assumption that there was a duty to defend in this instance. Hartford made
several arguments as to why it was not bound by the underlying judgment and how
it was still entitled to litigate coverage issues, but it did not argue what it
now argues on appeal: that Maryland law controls on the issue of whether it had
a duty to defend and that genuine issues of material fact remain on the
existence of that duty.
At the summary judgment hearings, the judge stated: "In my mind, at
least at this point, it's pretty clear to me that Hartford had a duty to
provide a defense in this case, and they didn't do it." Hartford's counsel
responded that the outcome on that issue would depend on whether Maryland or
Kansas law applied, and he referred the judge to his brief. However, as
mentioned, the choice of law issue was not addressed in the brief. Instead the
brief's arguments proceeded from the assumption that such a duty existed and
had been breached.
In its amended journal entry, the district court did not make explicit
findings that Hartford had a duty to defend Aselco and breached it. Rather, the
judge discussed the duty to defend and consequences that flow from its breach, citing
Patrons Mu. Ins. Ass'n v. Harmon, 240 Kan. 707, 709-711, 732
P.2d 741 (1987), regarding collateral estoppel. The court went on to find,
under Kansas law, that Hartford had the opportunity but did not provide a
defense and that Hartford was bound by the judgment in the underlying
litigation. What is not explicit is therefore implicit: According to the
district judge, Hartford had a duty to defend and breached it. Otherwise, the
decision that Hartford was bound by the underlying judgment would be factually
unsupported.
We uphold these implicit findings for procedural and substantive reasons.
Procedurally, we need not address issues not raised before the district
court. Lindsey v. Miami County National Bank, 267 Kan. 685,
690, 984 P.2d 719 (1999). As noted, Hartford did not rely on its choice of law
argument below. In addition, Hartford attempts to raise the choice of law issue
on appeal only in response to SOS's allegation that the judge misinterpreted
the policy's wording. If it was interested in obtaining reversal of the judge's
implicit findings on the duty to defend and its breach, it should have
cross-appealed on this issue. It did not do so. See Otta v. Johnson,
204 Kan. 366, 367, 461 P.2d 758 (1969).
Nevertheless, because these implicit findings are relevant to the next
issue, we address their merits as well.
First, we observe that the district judge was correct in employing Kansas
law to determine the existence of the duty to defend. "The law of the
place of performance determines the manner and method as well as the legality
of the acts required for performance." Restatement (First) of Conflict of
Laws § 358, comment (a) (1934). Because Hartford's performance of its duty to
defend would have taken place in Kansas, Kansas law governs the determination
of the existence of the duty.
The district court was also correct in its application of Kansas law. In Steinle
v. Knowles, 265 Kan. 545, 554, 961 P.2d 1228 (1998), our Supreme
Court described when an insurer has a duty to defend:
"'Under the present code of civil procedure, an insurer must look
beyond the effect of the pleadings and must consider any facts brought to its
attention or any facts which it could reasonably discover in determining
whether it has a duty to defend. If those facts give rise to a 'potential of
liability,' even if remote, under the policy, the insurer bears a duty to
defend. MGM, Inc. v. Liberty Mut. Ins. Co., 253 Kan. 198, 202, 855
P.2d 77 (1993). The duty to defend rests primarily on the possibility that
coverage exists, and the possibility of coverage must be determined by a good
faith analysis of all information the insurer may know or could have reasonably
ascertained. If ambiguities in coverage, including exclusionary clauses, are
judicially determined against the insurer, the ultimate result controls the
insurer's duty to defend. [Citation omitted].'" (Quoting Spivey v.
Safeco Ins. Co., 254 Kan. 237, 245-46, 865 P.2d 182 [1993].)
Here, it is clear that Hartford had some "potential of liability"
under Aselco's policy. The petition alleged that Aselco had misappropriated
SOS's trade secrets, including customer and supply lists. The evidence obtained
in discovery indicated that Aselco had copied SOS's line card and put its
letterhead in place of that of SOS. Line cards are used to inform potential
purchasers of the products that suppliers sell, essentially functioning as
catalogs. There was at least a "potential of liability" under the
language of the Hartford policy, giving rise to a duty to defend under Kansas
law, and there is no dispute that Hartford refused to provide a defense to
Aselco. The district judge's implicit findings in this regard are affirmed.
Consequences of
Breach of Duty to Defend and Failure to Reserve Rights
Because the district court has determined that Hartford bore a duty to
defend and breached it, the court must then determine the character and extent
of the consequences that flow from the breach and Hartford's failure to reserve
its rights. Although the district judge began this analysis, in our view, she
did not complete it, and we remand for a decision following the pattern
outlined below.
Kansas state and federal courts have discussed three possible consequences
of an insurer's breach of its duty to defend and its failure to reserve its
rights under the policy.
1. Damages in Excess of Policy Limits
The first consequence is that an insurer can be held liable for damages in
excess of policy limits. In Snodgrass v. State Farm Mut. Auto. Ins. Co.,
15 Kan. App. 2d 153, Syl. ¶ 7, 804 P.2d 1012, rev. denied 248
Kan. 997 (1991), this court found:
"An insurer who wrongfully declines to defend and who refuses to accept
a reasonable settlement within the policy limits in violation of its duty to
consider in good faith the interest of the insured in the settlement is liable
for the entire judgment against the insured even if it exceeds the policy
limits."
However, a failure to defend, without a settlement offer, does not alone
justify judgment in excess of the policy limits. George R. Winchell, Inc.
v. Norris, 6 Kan. App. 2d 725, 729, 633 P.2d 1174, rev.
denied 230 Kan. 817 (1981). Thus, in determining whether a judgment in
excess of policy limits is a possible or actual consequence of Hartford's
breach, the court must decide if a settlement offer was in fact made and
rejected in bad faith.
2. Collateral Estoppel
Second, under Kansas law, as the district judge realized, an insurer is
collaterally estopped from relitigating issues that were actually litigated and
determined in the underlying litigation. In Patrons, the
court found that, because Patrons had failed to provide its insured with a
defense or reserve its rights under its policy, it was collaterally estopped
from relitigating the issue of the insured's intent in a subsequent action. 240
Kan. at 710.
The answers to three questions are pertinent to whether an insurer is bound
by decisions on issues decided in the underlying litigation: "Was the
issue decided in the prior adjudication identical with the one presented in the
action in question? Was there a final judgment on the merits? Was the party
against whom the claim is asserted a party or in privity with a party to the
prior adjudication?" 240 Kan. at 711.
As we see it, Hartford was in privity with Aselco as its insurer, but there
was a prior adjudication and final judgment in the underlying litigation on
only two issues: (1) Aselco's liability to SOS for certain torts; and (2) the
existence of consequential damages in the amount of $1.5 million. Under Patrons,
Hartford is bound by these two determinations. We do not, however, agree
with SOS that Hartford is also bound to a finding that the damages arose from
an "advertising injury," as that phrase is employed in the Hartford
policy. We do not believe that issue was actually litigated in the underlying
case. The necessity of reaching the issue now is subject to our determination
of whether Kansas law requires application of the third possible consequence in
Hartford's situation.
3. Equitable Estoppel
The third of the possible consequences involves the applicability of the
doctrine of equitable estoppel. Before we can ask the district judge to rule
upon which policy defenses Hartford can invoke in this case, we must determine
whether Kansas law prohibits an insurer in its position from raising any at all
as a consequence of its failure to defend and reserve its rights.
Judge Lungstrum opined on his perceptions of Kansas authority on this point
in Johnson v. Studyvin, 828 F. Supp. 877, 886-87 (D. Kan.
1993). In that case, he concluded that an insurer was not estopped from raising
policy defenses:
"The Johnsons argue that, if given the opportunity, Kansas would adopt
a rule of law that if an insurer breaches its duty to defend its insured from
some claim, it is estopped from denying coverage for that claim. The court
disagrees. The Johnsons have not cited any authority that Kansas courts have
adopted or are inclined to adopt such a rule. Such a rule is a minority
position among the states. See R. Jerry, Understanding Insurance Law, § 111[6]
at 581 (1987).
"Kansas courts have addressed situations in which this rule could have
been applied if the courts were so inclined but have not done so. In Spruill
Motors Inc. v. Universal Underwriters Ins. Co.[,] 212 Kan. 681,
512 P.2d 403 (1973), the insurer breached its duty to defend the insured but
the Kansas Supreme Court dealt with the merits of the insurer's policy defenses
anyway. A similar situation was present in Snodgrass v. State Farm Mut.
Auto Ins., 15 Kan. App. 2d 153, 804 P.2d 1012 (1991), in which a
jury determined that State Farm had breached its duty to defend but on appeal,
the appellate court considered State Farm's policy defenses concerning
coverage. In either of these cases, had they chosen to do so, the court could
have estopped the insurer from asserting its policy defenses after finding that
it breached it duty to defend.
"Many courts have declined to follow such a rule because it has the
potential of creating coverage where none has been contracted for. . . .
"Because Kansas courts have been presented with situations in which
they could have estopped insurers who have breached their duties to defend from
denying coverage and have not done so, this court will not find that Kansas
courts would so hold. Although there may be arguably sound public policy
grounds for doing so, that is a matter better left to the Kansas courts or
legislature."
We must also consider the Kansas Supreme Court's clear statement in Patrons
that the proper way for an insurer to protect both its insured's and its
own interests in cases of conflict is to hire independent counsel for the
insured and reserve all of its own rights under the policy. 240 Kan. at 712.
Again, there is no dispute that Hartford took neither action here.
Nevertheless, the court's actions in Patrons speak louder than its
words. Despite the insurer's earlier refusal to provide a defense, the court
considered the insurer's policy arguments and held that coverage was excluded.
Like Judge Lungstrum, we believe the cases decided to this point mean our
Kansas Supreme Court would not adopt a bright line rule that insurers who fail
to provide a defense and reserve their rights are inevitably equitably estopped
from raising their coverage defenses. We are persuaded that an insured in SOS's
position should not automatically reap coverage without limits. Hartford is
therefore free to argue in the district court that, despite the breach of its
duty to defend and its failure to reserve rights, Aselco did not contract for
coverage for this loss.
The district judge will need to determine which coverage defenses are
available and meritorious. Because these questions will require construction of
the language of the policy, they must be decided under Maryland law. "In
interpreting an insurance contract where there is a conflict of laws, Kansas
follows the lex loci rule, and the law of the state where the contract
is made governs." Safeco Ins. Co. of America v. Allen, 262
Kan. 811, Syl. ¶ 1, 941 P.2d 1365 (1997).
The district judge must first decide whether Aselco's tortious conduct was
covered under Hartford's policy, i.e., led to an "advertising
injury." If the outcome on that question favors coverage, then the judge
must also determine how a continuing course of conduct or injury was intended
to be treated. In the underlying litigation, the court found a pattern of
continuing conduct by Aselco that began before March 4, 1995, and continued
until at least December 31, 1997. Applying Maryland law, the court must determine
whether the Hartford policy was an occurrence or an offense policy. Likewise,
it must determine under Maryland law whether damages should be apportioned or
whether Hartford would be jointly and severally liable for the entire judgment.
We agree with SOS that the district judge's previous statements related to
these issues were at least premature.
Attendance at
Settlement Conference
Hartford also argues the district court erred in making the following
finding:
"On August 14 and 15, 1998, a settlement conference on the Division 4
case was held. Counsel for SOS, Aselco and Maryland Casualty participated, and
at the special insistence of Judge Elliott (Division 4), counsel for Hartford
attended the settlement conference, but refused to participate in the negotiations
or payment of the amount that was finally agreed upon."
Based on this finding of fact, the court later found that "[i]t is
extremely difficult for Hartford to take the position that the judgment was
collusive when Hartford's presence at the August 14 and 15 settlement
conference was required by Judge Elliott. Hartford [has] only itself to blame
if a compromise was reached that was not to its liking, as it steadfastly
refused to participate in the settlement."
The function of an appellate court is to determine whether the trial court's
findings of fact are supported by substantial competent evidence. Substantial
evidence is such legal and relevant evidence as a reasonable person might
accept as sufficient to support a conclusion. Sampson v. Sampson, 267
Kan. 175, 181, 975 P.2d 1211 (1999).
Hartford is correct that no evidence in the record supports a finding that
Hartford was actually present at the settlement negotiations on the evening of
August 14 and August 15, 1998. Following arguments in the declaratory judgment
action on August 14, Hartford's counsel was informed by Aselco's counsel that
Judge Elliott wanted to meet with all of the parties to discuss the status of
the settlement negotiations in the underlying litigation. At the meeting, the
new allegations against Aselco were recited orally and Judge Elliott told that
parties that they should attempt to settle the matter. However, a later letter
from SOS's counsel to Hartford's counsel indicates that Hartford was neither
present nor participating at negotiations on August 14 and 15.
In that letter, dated August 20, 1998, SOS informed Hartford of the parties
that participated in the negotiations "[l]ate Friday and early
Saturday" and the various agreements that were reached. Had Hartford been
present, this letter would not have been necessary. We therefore rule that
substantial competent evidence does not support the quoted finding and reverse
it. Should the absence of evidence be corrected on remand, so be it. If not,
the district judge may decide she needs to revisit the collusion argument.
Affirmed in part, reversed in part, and remanded for further proceedings
consistent with this opinion.
END