Jones v. Reliable Security, Inc., 85,530

• Decision Date: 10 August 2001
• Docket Number: No. 85,530,85,530
• Citation: 28 P.3d 1051,29 Kan. App.2d 617
• Parties: MATTHEW JONES, Plaintiff/Appellee, v. RELIABLE SECURITY INCORPORATION, INC., DEQUINCE ATKINSON, d/b/a RELIABLE SECURITY AND INVESTIGATIONS, Defendant, v. ACCEPTANCE INSURANCE COMPANY, Garnishee/Appellant.
• Court: Kansas Court of Appeals

29 Kan. App.2d 617

28 P.3d 1051

MATTHEW JONES, Plaintiff/Appellee, v. RELIABLE SECURITY INCORPORATION, INC., DEQUINCE ATKINSON, d/b/a RELIABLE SECURITY AND INVESTIGATIONS, Defendant, v. ACCEPTANCE INSURANCE COMPANY, Garnishee/Appellant.

No. 85,530

Court of Appeals of Kansas

Opinion filed August 10, 2001.

John G. Schultz and Lisa A. Brunner, of Franke & Schultz, P.C., of Kansas City, Missouri, for appellant.

Donald W. Vasos and David A. Hoffman, of Vasos Law Offices, of Shawnee Mission, for appellee.

Before MARQUARDT, P.J., JOHNSON, J., and JACKSON, S.J.

JACKSON, J.:

Acceptance Insurance Company (Acceptance), appeals the trial court's ruling finding it liable for a judgment entered against its insured, Reliable Security, Inc. (Reliable), because Acceptance breached its contractual duty to act in good faith when Acceptance refused to defend or indemnify Reliable in a tort claim brought against it by Matthew Jones. We reverse. Reliable is a Missouri company in the business of providing private armed security services to the public. In June 1994, Reliable submitted an application for insurance through Marino & Wolf, Inc. (M&W), insurance agents located in Kansas. M&W sent the application to Chris-Leef General Agency, Inc. (CLGA), also located in Kansas. CLGA acts as a managing general agent for several different insurance companies. CLGA provides insurance to independent agents such as M&W for insureds who are unable to obtain a policy through the normal marketplace.

Prior to 1994, Reliable was insured through Scottsdale Insurance Company (Scottsdale). The Scottsdale policy did not have an assault and battery exclusion. It appears that there was a question as to whether Scottsdale would continue to insure Reliable under the same terms. M&W asked CLGA to find a policy for Reliable. CLGA advised M&W that Scottsdale would insure Reliable, but a policy from Acceptance would cost less.

Scottsdale and Acceptance are surplus line insurance carriers who are only allowed to issue policies in Kansas through general agents licensed in Kansas. See K.S.A. 40-4117. The insurance forms of these carriers do not have to be approved by the Kansas Insurance Department. Insureds purchase these policies because they are unable to purchase insurance from other companies. There are no statutes, written regulations, or proclamations by the Kansas Insurance Department prohibiting the use of an assault and battery exclusion in policies issued in Kansas.

In April 1994, CLGA advised M&W that it could write an Acceptance policy for Reliable. The proposed policy sent to M&W indicated that an assault and battery exclusion was included. In June 1994, CLGA issued a coverage binder for Reliable through Acceptance. The binder indicated that the policy had an exclusion for assault and battery. The policy limits were $1,000,000. M&W returned the binder signed by one of its agents. No one from M&W asked CLGA to remove the exclusion prior to March 1997, or questioned the exclusion. CLGA knew that Reliable had previously been insured by Scottsdale, but it was not aware of the policy terms and did not have a copy of that policy. The policy issued by Acceptance was compiled by Gary Peterson at CLGA. Peterson intentionally included the assault and battery exclusion in Reliable's policy. Peterson believed that Acceptance required this exclusion in policies for security companies. He also testified that it was his practice to include this exclusion in any policy issued for this type of risk. The exclusion form was among the forms he received from Acceptance. Peterson believed that adding the exclusion in this policy was prudent in underwriting the risk.

The record on appeal is not clear as to when Reliable received a copy of the policy. Scott Brown, counsel for Reliable in the underlying claim, testified that Reliable's owner reviewed the Acceptance policy initially, but may not have read it word for word. Brown later testified that he was not sure Reliable received a copy of the policy until he requested it after Jones' suit was filed. There is no direct testimony from Reliable's owner in the record on appeal.

Reliable renewed the Acceptance policy for June 1995 to June 1996 and June 1996 to June 1997. These policies also contained an assault and battery exclusion which stated:

"It is agreed that this policy does not cover any claims arising out of Assault and Battery or out of any act or omission in connection with the prevention or suppression of such acts, whether caused by or at the instigation or direction of you, your employees or volunteers, patrons or any other persons. Claims, accusations or charges of negligent hiring, placement, training or supervision arising from any of the foregoing are not covered. Furthermore, we shall have no obligation to defend you, or any other insured, for any such loss, claim or suit."

This exclusion is on a form developed by Acceptance.

The policy also contained a Detective or Patrol Agency Endorsement (Patrol Endorsement), which provided, in part:

"1. This insurance provides coverage for sums which you become legally obligated to pay because of any negligent act, error or omission committed during the policy period in the conduct of the operations shown above [Security Patrol], whether committed by you or by any person for whom you are legally responsible.

"3. In addition to those exclusions already found in the coverage form, this insurance does not apply to any dishonest, fraudulent, criminal or malicious act or omission of yours, any partner or employee or to any allegations against you that such loss arose out of your failure to properly hire, train or supervise any employee." (Emphasis added.)

Jones was shot and severely injured by a third party on March 1, 1997, in Kansas City, Kansas, while attending a wedding reception. Reliable had been hired to provide armed security at the event.

On April 22, 1998, Jones filed a civil action against Reliable in Wyandotte County District Court. In the petition, Jones alleged that he was shot and asserted Reliable was negligent in failing to (1) warn or protect him from the assailant; (2) expel, disarm, or subdue the assailant; (3) have a sufficient number of trained security guards on duty; (4) promptly call the police; and (5) use ordinary care in providing adequate security.

Jones requested $2,000,000 in damages. Reliable filed an answer denying it was negligent. Reliable made demand on Acceptance to defend it in the suit. Acceptance's litigation specialist, Rob Plenger, reviewed the policy, summons, and complaint. In a letter to Reliable, Acceptance cited the assault and battery exclusion, disclaimed coverage, and declined to provide a defense. The letter indicated that Acceptance's decision was based on all facts "presently available" and invited Reliable to notify it if there was any additional information relevant to the case or if an amended petition was filed. Acceptance also notified Jones that his claim was not covered under the policy.

Shortly thereafter, Jones offered to settle all claims it had against Reliable for the policy limits or $5,000,000, whichever was less.

In June 1998, Peterson faxed a copy of the Patrol Endorsement to Plenger and asked him to review it to determine if it provided coverage for Jones' claim. Plenger discussed the endorsement with Peterson and his supervisor. They both agreed that the exclusion still applied to Jones' claim.

In October 1998, Reliable's attorney sent a letter to Acceptance. Counsel asserted that (1) Reliable assumed that it was buying a defense to any claim brought against it and it had such coverage in the past; (2) Reliable was not notified of the exclusion by M&W or Acceptance; and (3) the exclusion was against public policy because Reliable was required to have such coverage under local law. Counsel cited a Louisiana case, Hickey v. Centenary Oyster House, 690 So.2d 858 (La. App. 1997) as authority for his argument.

Plenger discussed counsel's letter with Acceptance's claims counsel. They found that Hickey had been overruled and found a Kansas Supreme Court case, First Financial Insurance v. Bugg, 265 Kan. 690, 962 P.2d 515 (1998), which upheld an assault and battery exclusion. See Hickey v. Centenary Oyster House, 719 So. 2d 421 (La. 1998). Accordingly, Acceptance sent another letter to Brown and refused to defend based on the exclusion and included copies of the Hickey and Bugg cases. CLGA also was notified about Acceptance's refusal to defend Reliable.

On March 10, 1999, Jones and Reliable entered into a written settlement agreement. The parties agreed that the matter should proceed to trial and Jones would be assessed 10% at fault and Reliable 90% at fault. The parties also agreed as to the evidence of damages that Jones would introduce at trial, and the end result would be a judgment entered against Reliable for $1,400,000.

The parties proceeded to a bench trial on March 11, 1999. The trial court entered judgment for Jones in the amount of $1,400,000 based on the fault percentages and damages set forth in the settlement agreement.

In May 1999, Jones and Reliable signed a Covenant Not to Execute and Assignment of Claims. In this agreement, Reliable assigned to Jones any claims against Acceptance Insurance Company arising out of its negligent or bad faith failure or refusal to defend or settle within policy limits. In exchange, Jones agreed not to pursue the collection of Reliable's assets.

Shortly thereafter, a request for garnishment was filed against Acceptance. Acceptance filed a timely answer, denying that the company held any money or indebtedness to Reliable and attached a copy of its denial letter to its answer.

In the garnishment action, Jones asserted that (1) Reliable was not aware the exclusion was in the policy and would not have purchased it had it known of the exclusion; (2) the Patrol Endorsement is inconsistent with the exclusion and therefore, negated it; (3)...