MGM, Inc. v. Liberty Mut. Ins. Co., 67,067

• Citation: 855 P.2d 77,253 Kan. 198
• Decision Date: 16 June 1993
• Docket Number: No. 67,067,67,067
• Parties: , 8 IER Cases 988 MGM, INC., and John Mash, Appellees/Cross-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY, Appellant/Cross-Appellee.
• Court: Kansas Supreme Court

Page 77

855 P.2d 77

253 Kan. 198, 8 IER Cases 988

MGM, INC., and John Mash, Appellees/Cross-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY, Appellant/Cross-Appellee.

No. 67,067.

Supreme Court of Kansas.

June 16, 1993.

Syllabus by the Court

1. An insurer's duty to defend arises whenever there is a potential of liability under the policy.

2. In an action by insureds under a comprehensive general liability insurance policy seeking a determination that the policy provided coverage for and a duty to defend against lawsuits filed against the insureds by their employees based upon breach of privacy, the record is examined and it is held: The district court erred in holding that: (1) there was coverage under the policy; (2) the insurer breached its duty to defend; and (3) the insureds were entitled to judgment for the amount of the settlement of the underlying lawsuits and attorney fees incurred.

Lynn D. Preheim, of Morrison & Hecker, Wichita, argued the cause and was on the brief for appellant/cross-appellee.

James R. Schaefer, Wichita, argued the cause and was on the briefs for appellees/cross-appellants.

McFARLAND, Justice:

This is an action by insureds against the defendant insurance company seeking: (1) a determination that the comprehensive general liability insurance policy in question afforded coverage for and a duty to defend against lawsuits filed by employees and former employees of insureds; (2) a judgment reimbursing the insureds for monies paid out in settlement of said lawsuits and satisfying the balance of said settlement; and (3) payment of the insureds' attorney fees arising from defense of said actions and the prosecution of the action herein as well as certain consequential damages arising from the insurer's breach of the insurance contract. The defendant insurance company appealed from the judgment of the district court finding there was coverage and a duty to defend and ordering the insurance company to pay the settlement and the requested attorney fees. The insureds cross-appealed from the refusal of the district court to consider or allow the requested consequential damages. The Court of Appeals reversed the district court's judgment against the insurance company, holding there was no coverage or duty to defend relative to said lawsuits. MGM, Inc. v. Liberty Mut. Ins. Co., 17 Kan.App.2d 492, 839 P.2d 537 (1992). The matter is before us on petition for review.

The facts may be summarized as follows.

MGM, Inc., (MGM), is a Kansas corporation that owned and operated a Western Sizzlin Steak House, on Rock Road in Wichita, at all pertinent times herein. Defendant John Mash was the president of MGM. Telephone service at the restaurant consisted of a pay phone located in a frequently used area and two non-pay telephones located in the manager's office. The office was kept locked in the manager's absence. No other employee worked in the office. In January 1988, Mash became concerned over telephone charges for unauthorized long distance calls originating from the manager's office. He wanted to find out which employee or employees were making these calls. On January 27, 1988, Mash purchased and installed two telephone recording devices in the office ceiling. The employees were not advised of the installations. The devices would activate when the respective telephone receiver was picked up and would disconnect when the receiver was returned to its cradle.

Every few days Mash would listen to the tapes and rewind them for rerecording. On February 19, 1988, a plumber repairing a hot water pipe discovered the recording devices. That same day, Mash removed the devices.

On May 19, 1988, Mash was contacted by an attorney who advised that she represented two MGM employees, that the use of the recording devices was a criminal offense, that lawsuits were being considered based upon invasion of privacy, and that the matter could be resolved by paying each client $10,000.

That same day Mash called defendant Liberty Mutual Insurance Company (Liberty Mutual), relayed the facts of his visit from the employees' attorney and asked if MGM's liability insurance policy issued by Liberty Mutual would provide coverage in this situation. The individual Mash talked to was Viola Schuckman, a claims supervisor. Bill Smith, claims manager, was absent at the time. The conversation lasted about 30 minutes. Schuckman told Mash that she did not think there was coverage as the conduct giving rise to the claims was an illegal act, but that she would check the policy and get back with him. She also advised that if suit were filed, the company would evaluate the allegation for coverage. Mash then contacted his own attorney, James Schaefer, and relayed the events which had occurred. On advice of Schaefer, Mash told Schuckman to contact Schaefer with the company's response to the coverage matter. On May 20, 1988, Schuckman contacted Schaefer. She advised him that she did not think there was coverage for a criminal act, but that "if any lawsuits were filed, he should submit the lawsuits to us so we could review the allegations and make a determination at that point whether there was any coverage." Subsequently, Schuckman conferred with the claims manager as to what had transpired up to that point, and he concurred with Schuckman's initial belief that there was no coverage. Six petitions were filed on June 14, 1988, and Schaefer forwarded these to Liberty Mutual. Coverage was denied based on the petitions, the policy, and the conversations with Mash. No additional investigation was done. Ten petitions were ultimately filed. MGM settled these for $100,000 ($10,000 for each plaintiff).

This action was brought seeking a determination that coverage existed and that the insurer's duty to defend had been breached and damages for that breach. The district court held there was coverage under the "advertising injury" provision of the policy and that the insurer breached its duty to defend. Liberty Mutual was ordered to pay: (1) $55,000, which was the amount paid out in settlement by MGM and Mash; (2) $45,000, which was the balance due on the settlement of the lawsuits; (3) $57,786 for attorney fees; and (4) prejudgment interest and costs. Liberty Mutual appealed therefrom, and MGM and Mash cross-appealed the district court's refusal to consider certain claimed consequential damages.

We turn now to the issues in the appeal of Liberty Mutual. The district court found there was coverage and a corresponding duty to defend under the "advertising injury" portion of the policy. The plaintiffs did not claim coverage under such policy provisions. They relied, instead, on personal injury coverage policy provisions. Before us and the Court of Appeals, the plaintiffs do not argue that the district court's reliance on the "advertising injury" portion was correct. Instead, they argue the judgment of the district court should be affirmed on the basis that it was correct for the wrong reason--specifically, that there was coverage and a duty to defend under the personal injury policy provisions. The Court of Appeals opinion herein discusses the "advertising injury" policy provisions and correctly concludes the conduct giving rise to the claims herein is unrelated to advertising activities and such coverage is inapplicable. Little would be gained, under the circumstances herein, from further discussion of the "advertising injury" policy provisions.

We turn then to the question of whether there was...