Aselco, Inc. v. Hartford Ins. Group

• Decision Date: 13 April 2001
• Docket Number: No. 84,476.,84,476.
• Citation: 28 Kan. App.2d 839,21 P.3d 1011
• Parties: 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.
• Court: Kansas Court of Appeals

28 Kan. App.2d 839

21 P.3d 1011

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.

No. 84,476.

Court of Appeals of Kansas.

Opinion filed April 13, 2001.

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 crossappeals 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...