State ex rel. Stovall v. Reliance Ins. Co., No. 87,393.

Citation278 Kan. 777,107 P.3d 1219
Decision Date21 January 2005
Docket NumberNo. 87,393.
PartiesSTATE OF KANSAS ex rel. CARLA J. STOVALL, Appellant, v. RELIANCE INSURANCE COMPANY, GEORGE M. MYERS, INC., d/b/a GMM, INC., PROFESSIONAL MECHANICAL CONTRACTORS, INC., DEAN E. NORRIS, INC., and AMERICAN THERMAL PRODUCTS, INC., Appellees.
CourtUnited States State Supreme Court of Kansas

Paul G. Schepers, of Seigfreid, Bingham, Levy, Selzer & Gee, P.C., of Kansas City, Missouri, argued the cause, and Duane Fox, of the same firm, and Eliehue Brunson and Scott Poor, assistant attorneys general, were with him on the briefs for appellant.

Donald Patterson, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, argued the cause, and James P. Nordstrom, of the same firm, was with him on the brief for appellee American Thermal Products, Inc.

Wyatt A. Hoch, of Foulston Siefkin LLP, of Wichita, argued the cause, and James D. Oliver, of the same firm, was with him on the brief for appellees George M. Myers, Inc., d/b/a GMM, Inc., and Reliance Insurance Company.

Eric T. Swanson, of Harris, McCausland & Schmitt, P.C., of Kansas City, Missouri, argued the cause, and Matthew F. Mulhern and Ronald D. Montieth, of the same firm, were with him on the brief for appellees Professional Mechanical Contractors, Inc., and Dean E. Norris, Inc.

Per Curiam:

This litigation arises from the failure of the underground thermal piping system for heating and cooling at the El Dorado Correction Facility (EDCF). The State sued various entities believed responsible for the defective construction, including George M. Myers, Inc., d/b/a GMM, Inc. (GMM), Professional Mechanical Contractors, Inc. (PMC), Dean E. Norris, Inc. (DEN), and American Thermal Products, Inc. (ATP). The district court entered final orders which fixed the amount of the State's potential recovery against GMM and its surety, Reliance Insurance Company (Reliance), and dismissed the State's third-party beneficiary claims against PMC, DEN, and ATP. The State's applications for interlocutory appeal and notices of appeal were timely filed, and the appeal was granted. The appeal is before this court pursuant to a K.S.A. 20-3018(c) transfer. We filed our original opinion in this case on June 18, 2004 (State ex rel. Stovall v. Reliance Ins. Co., 278 Kan. 3, 91 P.3d 531). On July 8, 2004, the State filed a timely motion to clarify or modify that opinion. We grant the motion to modify, order the original opinion withdrawn from publication, and file this modified opinion.

Two issues are raised on appeal:

1. Did the district court err in fixing the amount of the State's potential recovery of damages? Our answer is, "Yes."
2. Did the district court err in dismissing the State's third-party beneficiary claims? Our answer is, "No."

We affirm in part, reverse in part, and remand for further proceedings.

The Underlying Circumstances and Proceedings

In 1989, under federal court order, the State undertook construction of a 1,000-bed maximum security prison in El Dorado, Kansas. The State employed a multi-bid prime contracting scheme under which several contractors contracted directly with the State for various phases of the project. The State employed Booker & Associates (Booker) as construction manager to coordinate the activities of the various prime contractors. The $50 million project was completed in 1992.

GMM constructed the prison's site utilities pursuant to a $6.5 million lump sum contract with the State. For contract billing purposes, GMM allocated approximately $1.097 million of its contract to the cost of the 3,900-foot long underground thermal piping system. The State has stipulated, for purposes of the summary judgment motions giving rise to this appeal, that the State's cost for the original underground thermal piping system was $1.097 million. The underground thermal system pipes transport chilled water and steam at temperatures in excess of 300°F from the central plant to all the buildings in the facility. The contract required GMM to insulate the system for the underground pipes to meet performance criteria set out in the contract. Generally, the insulation system was to insulate the pipes to approximately 100°F where the system interfaces with the soil and to protect the pipe exteriors from corrosive moisture.

Different types of underground thermal piping systems for heating and cooling fall into several broad categories: (1) walk-through utility tunnels; (2) shallow concrete trenches; (3) direct-bury preinsulated piping; and (4) direct-bury piping with a poured-in-place insulation envelope. Walk-through tunnel systems cost the most initially but have the lowest lifetime costs due to ease of access, maintenance, and correction of maintenance errors. Shallow concrete trenches are usually the next most expensive system, followed by direct-bury preinsulated piping, and then direct-bury piping with poured-in-place insulation.

The State's design team initially recommended a walk-through tunnel system but rejected the idea due to cost and security concerns. It found that the direct-bury pipe with poured-in-place insulation was the lowest cost alternative.

The project mechanical engineer, Professional Engineering Consultants, P.A. (PEC), warned the State that "[a]though the poured-in-place insulation system appears to offer considerable first savings, our firm has no past experience with this method and has some skepticism regarding the long term insulating value of the material." PEC therefore recommended that the State solicit construction bids setting forth prices for not only poured-in-place insulation but also the preinsulated piping alternative.

GMM subcontracted with Professional Mechanical Contractors, Inc. (PMC) for the installation of the underground thermal system to meet the performance criteria specified by the State. PMC in turn entered into a contract with American Thermal Products, Inc. (ATP) for the design of a preengineered insulation system to meet the performance criteria for the underground thermal system. There were no direct contracts between the State and the subcontractors.

During the design process, the State's representatives met with representatives of ATP and its sales representative, R.B. Summers Associates, Inc. (Summers), concerning ATP's insulation product, Gilsulate 500xr. The State later chose the poured-in-place insulation alternative. In its first amended petition, the State alleged that it approved the use of Gilsulate 500xr as the poured-in-place insulation around all the underground thermal piping based on the representations of ATP and Summers. ATP's president stated that such a system, if properly installed, was a "zero maintenance" system.

The State contends that ATP provided a preengineered insulation system that included, in addition to the Gilsulate 500xr insulation, the design for the pipe guides, pipe anchors, pipe expansion loops, insulation thickness details and calculations, and heat transfer calculations. PMC eventually installed ATP's system by placing the pipe and ancillary features into an open earthen trench, encasing the pipes in a formed envelope of dry-powdered Gilsulate 500xr insulation, then backfilling the trench with sand and soil. The district court and the parties referred to this as an "earthen trench" system.

The site utilities package work awarded to GMM under its contract with the State was substantially completed in May 1991. The EDCF staff soon began reporting problems with the steam condensate return system, which appeared to be the result of malfunctioning steam traps throughout the thermal piping system. By the end of 1991 there were indications that high heat was escaping from various areas of the underground thermal system. The first symptoms were dead grass and melted snow above the steam pipes in an area outside the prison fence. The State notified GMM of the problems within 1 year of completion but claims that GMM did not return to the site to investigate further during the warranty period.

Excavations identified construction defects by PMC, and an infrared survey revealed hot spots. Excavators noted wet insulation, improperly installed pipe support anchors, wood blocks being used as pipe supports, lack of flashing above pipe penetrations in the manholes, and inadequate insulation coverage.

The State also attributed damage to other underground lines situated near the underground steam pipes — including fire alarm, fiber optic telephone, energy management, electric, and water lines — to the failure of the earthen trench system. In approximately October 1999, the State abandoned this earthen trench system and installed a concrete shallow trench system.

On November 26, 1997, the State filed suit against Gossen, Livingston & Associates (Gossen), the project architect; PEC, the mechanical engineering consultant; Booker, the construction manager; GMM, the contractor for the underground thermal system and its surety, Reliance; PMC, GMM's installation subcontractor; DEN, alleged by the State to be the parent company of PMC; and ATP, the subcontractor to PMC. The State alleged that a combination of product defects and design and installation errors caused a failure of the system over time.

Under the State's theory, it alleged that (1) GMM, PMC, and ATP breached their contracts by failing to provide materials and work in compliance with the contract documents, (2) the Gilsulate 500xr system was not reasonably suited for the use to which it was applied at the prison, and (3) the most reasonable solution was to abandon the earthen trench system and replace it with a concrete trench system, which was done at a lower cost than repairing or replacing it with another earthen trench system.

DEN filed a motion for summary judgment in September 1999, contending that it had not entered a contract involving Bid Package 3A, had performed no work at the prison, and, as a matter of law, should not be made a party to the lawsuit.

On February 10, 2000,...

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