Sours v. Russell

• Decision Date: 13 November 1998
• Docket Number: Nos. 77,335,77,682,s. 77,335
• Citation: 25 Kan.App.2d 20,967 P.2d 348
• Parties: James M. SOURS, Appellant, v. Rollin RUSSELL, Defendant, and American States Insurance Company, Appellee.
• Court: Kansas Court of Appeals

Page 348

967 P.2d 348

25 Kan.App.2d 20

James M. SOURS, Appellant, v. Rollin RUSSELL, Defendant and American States Insurance Company, Appellee.

Nos. 77,335, 77,682.

Court of Appeals of Kansas.

Nov. 13, 1998.

Syllabus by the Court

1. As a general rule, a party seeking damages for breach of warranty must prove the warranty, the breach thereof, and the loss that resulted from the breach. The measure of damages for breach of warranty is the loss directly and naturally resulting from the breach.

2. An insurer that acts negligently or in bad faith in defending a case against its insured is liable for the damages traceable to its conduct. The party asserting such a breach of warranty claim has the burden of proving the amount of damages.

Paul Hasty, Jr., and Robert A. Mintz, of Wallace, Saunders, Austin, Brown and Enochs, Chartered, of Overland Park, for appellant.

James C. Morrow and Mark D. Holmstrom, of Myerson & Morrow, of Kansas City, Missouri, for appellee.

Before ROYSE, P.J., and LEWIS and KNUDSON, JJ.

ROYSE, P.J.

This is a garnishment proceeding. The district court ruled in favor of the garnishee, American States Insurance Company (American States), and the plaintiff, James Sours, appeals.

This case has a complicated factual and procedural history. Highly summarized, the record indicates that James Sours was involved in a motor vehicle collision with Rollin Russell on September 26, 1989. Russell was insured by American States at the time of the collision. In January 1990, American States offered to pay Sours the $25,000 limits under its policy covering Russell. Sours refused the offer.

Sours subsequently filed suit against Russell. American States hired attorney John O'Connor to defend Russell in the negligence action. Eventually, the case was tried to the court, and on January 23, 1991, the district court granted judgment to Sours against Russell in the amount of $107,114.42.

American States, through O'Connor, tendered to Sours a check for $25,000 on the condition that Sours agree not to execute against Russell's personal assets. Sours refused to sign the covenant not to execute. American States made several unsuccessful efforts to tender its policy limits to Sours. Ultimately, American States paid the $25,000 into the district court, and the court ordered the funds disbursed to Sours. In addition, Sours received $100,000 from his insurance company, Allstate.

On August 2, 1993, Sours filed a garnishment against American States, claiming that American States was obligated to pay him the full amount of the judgment he had obtained against Russell. Sours alleged that American States provided a negligent or bad faith defense of Russell in the tort case. In particular, Sours' allegations included the following claims: (1) American States failed to undertake discovery on behalf of Russell; (2) American States waived a jury trial; (3) American States waived the opportunity to cross-examine the treating physicians and expert witnesses; (4) American States failed to have Russell appear and testify at the trial of the negligence case; (5) American States failed to provide Russell a meaningful defense on the issues of liability and damages; and, (6) American States failed to consult with Russell regarding the foregoing decisions in connection with the negligence case.

After a hearing on the garnishment claim, the district court ruled in favor of American States. Specifically, the district court determined that American States did not act negligently or in bad faith in providing a defense to Russell. Second, the district court ruled that Sours had failed to present evidence that any act or omission of American States caused or contributed to a different result in the negligence case. Third, the district court ruled that Sours had failed to present evidence that Russell had sustained any damages as a result of American States' conduct in providing Russell's defense. The district court further granted American States' motion for fees against Sours. Sours appeals.

As a preliminary matter, we want to emphasize that this case involves an unusual failure to defend claim. Nearly every reported case which has addressed such a claim arose out of an insurance company's failure to settle within policy limits, with the result that the insured was exposed to a judgment which exceeded the policy limits. See, e.g., Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79 (1990); Rector v. Husted, 214 Kan. 230, 519 P.2d 634 (1974); Gilley v. Farmer, 207 Kan. 536, 485 P.2d 1284 (1971); Bollinger v. Nuss, 202 Kan. 326, 449 P.2d 502 (1969); Levier v. Koppenheffer, 19 Kan.App.2d 971, 879 P.2d 40, rev. denied 255 Kan. 1002 (1994). In this case, however, one of Sours' complaints is that American States did try to settle the tort case. In fact, the record shows that American States repeatedly made unsuccessful attempts to settle the case for its policy limits in exchange for Sours' agreement not to execute on Russell's assets. Because of the unusual nature of the claims made in this case, the failure to settle precedents have only limited application to the issues presented here.

PROOF OF CAUSATION AND DAMAGES

While Sours raises numerous arguments on appeal, we will focus on his contentions that the district court erred by finding he failed to prove causation or to show that Russell sustained any damages as a result of American States' negligence or bad faith. Sours' position is not that he presented evidence which the district court overlooked. Instead, he claims that evidence of causation and damages is unnecessary--damages to the insured should be presumed as a matter of law from the insurance company's negligence or bad faith. This contention is not persuasive.

We begin our analysis by noting that Sours is pursuing a contract claim. Sours, as a judgment creditor, stands in the shoes of Russell, the judgment debtor, to pursue a claim that American States breached its implied agreement to use reasonable care and act in good faith in defending or settling claims against its insured. See Aves v. Shah, 258 Kan. 506, 512, 906 P.2d 642 (1995); Gilley, 207 Kan. at 544, 485 P.2d 1284; annot., 60 A.L.R.3d 1190, 1196, 1199.

As a general rule, a party seeking damages for breach of warranty must prove the warranty, the breach thereof, and the loss that resulted from the breach. Fox v. McKay Motor Co., 188 Kan. 756, 761, 366 P.2d 297 (1961); see also Springfield Tent & Awning Co. v. Rice, 202 Kan. 234, 238, 447 P.2d 833 (1968) (affirming directed verdict granted by district court on grounds that plaintiff failed to prove that defendant's actions caused plaintiff to sustain any damages). Put another way, the measure of damages for breach of warranty is the loss directly and naturally resulting from the breach. Ricklefs v. Clemens, 216 Kan. 128, Syl. p 1, 531 P.2d 94 (1975); see also Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 27, 563 P.2d 414 (1977) (noting that Kansas follows the rule of Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145, 5 Eng. Rul. Cas. 502 [1854] ).

The cases which arise from an insurer's failure to settle within policy limits apply the same measure of damages. For example, in Levier, 19 Kan.App.2d at 980, 879 P.2d 40, this court stated that an insurer that acts negligently or in bad faith in failing to settle a case is liable for the full amount of the insured's resulting loss. The same measure of damages was recited in Rector v. Husted, 214 Kan. 230, Syl. p 1, 519 P.2d 634, and Smith v. Blackwell, 14 Kan.App.2d 158, 164, 791 P.2d 1343, rev. denied 246 Kan. 769 (1990). Similarly, in Guarantee Abstract & Title Co. v. Interstate Fire & Cas. Co., 232 Kan. 76, 78-80, 652 P.2d 665 (1982), the court observed that damages for breach of contract are limited to the pecuniary losses sustained. The court further concluded that the same measure of damages applies to actions for breach of an insurance contract, including claims based on the insurer's failure to settle within policy limits. See also Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 842, 934 P.2d 65 (1997) (in action for breach of insurer's implied good faith settlement obligation, damages awarded should place injured party in the same position as if breach had not occurred); Medical Mutual v. Evans, 91 Md.App. 421, 432, 604 A.2d 934 (1992) (where insurer negligently fails to settle case within policy limits, the measure of the insured's damages is generally the difference between the amount of judgment obtained and the policy limits).

Levier, 19 Kan.App.2d 971, 879 P.2d 40, provides a good example of how to apply the resulting loss rule. The case arose out of an automobile accident. Levier brought suit against the other driver, Koppenheffer. Koppenheffer was insured under a policy with AEtna. After reaching a settlement with a third person involved in the wreck, AEtna had a balance of $71,900 under the policy to pay Levier's claims. Levier offered to settle his claim for $100,000. AEtna did not accept the offer or communicate it to Koppenheffer. Levier subsequently obtained a $600,000 judgment against Koppenheffer.

Levier then instituted garnishment proceedings against AEtna on the grounds that it had neglected to protect the rights of its insured in the settlement negotiations. The trial court found that AEtna had acted negligently and in bad faith by failing to communicate Levier's offer to Koppenheffer in a reasonable manner. This court affirmed that determination on appeal. We did, however, modify the judgment entered by the district court, because it did not accurately reflect Koppenheffer's resulting loss:

"Koppenheffer's loss was not $528,100 ($600,000 judgment minus $71,900 payment from AEtna) as the district court concluded. If Koppenheffer had accepted Levier's original settlement offer, he would have been personally liable for $28,100. It follows that AEtna's failure to settle cost Koppenheffer $500,000. Since...