Fidelity & Deposit Co. of Md v. Hartford Cas. Ins., Case No. 01-2015-JWL.

• Decision Date: 25 June 2002
• Docket Number: Case No. 01-2015-JWL.
• Parties: FIDELITY & DEPOSIT COMPANY OF MARYLAND, Plaintiff, v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Kansas

215 F.Supp.2d 1171

FIDELITY & DEPOSIT COMPANY OF MARYLAND, Plaintiff, v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.

Case No. 01-2015-JWL.

United States District Court, D. Kansas.

June 25, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

J. Nick Badgerow, Spencer, Fane, Britt & Browne, Overland Park, KS, for Plaintiff.

Lee M. Baty, Theresa A. Otto, Randall W. Brown, Baty, Holm & Numrich, P.C., Kansas City, MO, for Defendant.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

This duty to defend and indemnify action arises out of an insurance coverage dispute over faulty workmanship on a construction project in LaCygne, Kansas. Plaintiff Fidelity & Deposit Company of Maryland ("F & D") claimed that defendant Hartford Casualty Insurance Company ("Hartford") breached its duties to defend and indemnify its insured parties, National Contractors, Inc. ("National") and Midwest Drywall, Inc. ("Midwest Drywall"), under a Commercial General Liability ("CGL") policy and an Umbrella policy. This court previously granted partial summary judgment on liability to plaintiff. Fidelity & Deposit Co. of Maryland v. Hartford Cas. Ins. Co., 189 F.Supp.2d 1212 (D.Kan.2002).

A trial to the court on damages was held in this matter in May of 2002. The court has thoroughly considered the evidence and arguments presented at the damages trial and is now prepared to issue its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). For the reasons set forth fully below, the court concludes that F & D is entitled to $1,680,818.13 in damages. Specifically, F & D is entitled to $1,000,000.00 for damages National incurred as a result of property damage to the project and $680,818.13 for attorneys' fees and expenses National incurred in the underlying lawsuit against it. The court further concludes that F & D is not entitled to an award of attorneys' fees for expenses incurred in this action.

I. Background

Although the facts underlying this case are set out in detail in the court's February 27, 2002, Memorandum and Order, Fidelity & Deposit Co. of Maryland v. Hartford Cas. Ins. Co., 189 F.Supp.2d 1212, 1213-15 (D.Kan.2002), and in the parties' stipulated facts, by way of background the court will incorporate a brief summary of those facts here.

Hartford issued two insurance policies to Midwest Drywall, each of which added National as an additional named insured. The first policy, the CGL policy, has policy limits of $1,000,000. The second policy, the Umbrella policy, has policy limits of ten million dollars.

Prairie View, Kansas School District (the "School District") hired National pursuant to an owner/contractor agreement to construct a performing arts center and middle school (the "project") in LaCyne, Kansas. F & D issued a performance bond with National as the principal and the School District as the obligee, bonding the performance of the project. As a condition of issuing the performance bond, National and Midwest Drywall entered into a written agreement with F & D in which they promised to indemnify F & D for all losses which F & D might sustain as a result of F & D having to complete the project on National's behalf.

In September of 1997, National began work on the project. The project consisted of three areas: Area A, an auditorium, commons and kitchen; Area B, a gymnasium, some classrooms and a media center; and Area C, classrooms and administration. On July 21, 1998, the School District purported to issue a stop-work order on portions of the project to National, but it failed to enforce or observe the terms of that order and continued to pay National for work performed thereafter. On October 22, 1998, after determining that National's work on the project was defective, the School District terminated National, and F & D completed the project through another contractor pursuant to its performance bond obligations. During F & D's completion of the project, it determined that much of Areas B and C needed to be demolished and rebuilt, and a part of Area A would also need to be repaired.

On June 16, 1999, the School District filed a lawsuit against National and F & D. On August 24, 1999, the School District amended its petition against National and F & D asserting, in part, that National was negligent in its work on the project. F & D filed a cross-claim against National and Midwest Drywall seeking reimbursement of damages sustained by F & D to satisfy claims of the School District. Later, F & D filed a lawsuit in federal court against National, Midwest Drywall and other defendants to enforce the indemnification agreement between the parties in an attempt to recover expenses it had incurred to complete the project.

After Hartford was notified of the School District's lawsuit by its insured, Hartford investigated the claim and determined from the available facts and under applicable case law that it believed the claim fell outside of the policies' coverage and, therefore, it had no duty to defend or indemnify National or Midwest Drywall.

On October 5, 2000, a settlement was reached between National, Midwest Drywall and F & D. Under the settlement agreement, National agreed to pay F & D $4,638,500. Additionally, National and Midwest Drywall assigned to F & D any rights they may have had under the Hartford CGL and Umbrella policies.

On January 9, 2001, F & D filed this lawsuit against Hartford seeking damages for Hartford's breach of its duties to defend and indemnify its insured parties, National and Midwest Drywall, under the terms of the CGL and Umbrella policies. In its February 27, 2002, Memorandum and Order, this court granted partial summary judgment on liability in favor of plaintiff. Fidelity & Deposit Co. of Maryland v. Hartford Cas. Ins. Co., 189 F.Supp.2d 1212 (D.Kan.2002). Specifically, the court concluded that the cracked walls and other physical damage to the project caused by National's faulty workmanship constituted an occurrence that resulted in property damage; that Hartford waived its right to rely on policy exclusions not set out in the pretrial order; that the Umbrella policy would drop down to provide coverage in the event that there were any gaps in the CGL policy; that the policy exclusions contained in the Umbrella policy and listed in the pretrial order did not exclude the property damage to the project from coverage under the Umbrella policy; and, finally, that Hartford had a duty to defend its insured parties, National and Midwest Drywall, in the underlying lawsuits against them. Thus, having previously determined that Hartford is liable, the final issue for the court to address is the amount of damages to which F & D is entitled to recover on behalf of National and Midwest Drywall.

II. Discussion¹

F & D is pursuing a contract claim assigned to it by National and Midwest Drywall. F & D, as the assignee, stands in the shoes of National and Midwest Drywall, the assignors, to pursue claims that Hartford breached its duties to defend and indemnify its insured parties. The burden of proof is on F & D to prove the breach and the loss that results from the breach. Sours v. Russell, 25 Kan.App.2d 620, 967 P.2d 348, 351 (1998) (citing Fox v. R.D. McKay Motor Co., 188 Kan. 756, 366 P.2d 297 (1961) (further citations omitted)). The measure of damages is "the loss directly and naturally resulting from the breach." Id. (citing Ricklefs v. Clemens, 216 Kan. 128, Syl. ¶ 1, 531 P.2d 94 (1975)); Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 563 P.2d 414, 415 (1977) (noting that Kansas follows the rule of Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145, 5 Eng. Rul. Cas. 502 (1854)). Having previously found that a breach occurred (National had a contractual right to be defended and indemnified by Hartford and Hartford declined to defend and indemnify National), the court must now determine the amount of damages to National and Midwest Drywall that directly and naturally resulted from Hartford's breach.

Under Kansas law, in a duty to defend case the insured has the burden of proving damages. George R. Winchell, Inc. v. Norris, 6 Kan.App.2d 725, 633 P.2d 1174, 1178 rev. denied 230 Kan. 817 (1981). In Winchell, the court explained that an insurance company that wrongfully refuses to defend its insured is liable for the following damages: (1) the full amount of any judgment or reasonable settlement up to the policy limits; (2) the expenses incurred by the insured in defending the lawsuit; and (3) any additional damages traceable to the insurer's refusal to defend. Id. at 1176. In Winchell, the full amount of the judgment was covered under the insurance policy; therefore, the court did not address the issue of whether an insurer that breaches its duty to defend is liable for a portion of the insured's settlement that is attributable to claims not covered by the policy. In fact, no Kansas courts have addressed the particular issue.

The Eighth Circuit recently addressed the precise issue in Esicorp, Inc. v. Liberty Mutual Ins. Co., 193 F.3d 966, 970 (8th Cir.1999). In Esicorp, the Eighth Circuit, applying Missouri law, held: "[A]n insurer's liability when the insured has settled the underlying action may not exceed the policy coverages; therefore, a settlement encompassing both covered and noncovered claims must be fairly apportioned between the two." Id. at 971. The decision is consistent with other courts that have dealt with the issue. See, e.g., Lang Tendons, Inc. v. Northern Ins. Co. of New York, 2001 WL 228920, at *11 (E.D.Pa. March 27, 2001) (holding that when the insured has settled the underlying claim, the court must apportion the settlement between covered and uncovered claims) (listing cases from other circuits reaching a similar result). The court, finding Esicorp persuasive and not finding anything directly to the contrary, concludes that the Kansas Supreme Court would similarly adopt the principle.

In sum, in order to determine the...