United of Omaha Life Ins. Co. v. Reed

Decision Date23 May 1986
Docket NumberCiv. A. No. 85-2321-O.
Citation649 F. Supp. 837
PartiesUNITED OF OMAHA LIFE INSURANCE COMPANY, Plaintiff, v. Maxine REED, individually and as Administratrix of the Estate of Terry E. Reed, Defendant/Third Party Plaintiff, v. Herbert F. OWENS, Third Party Defendant.
CourtU.S. District Court — District of Kansas

Robert W. McKinley, Richard N. Bien, Swanson, Midgley, Gangwere, Clarke & Kitchin, Kansas City, Mo., John J. Jurcyk, Robert D. Benham, McAnany, Van Cleave & Phillips, Kansas City, Kan., for plaintiff.

Larry E. Gregg, Gregg, Barker & Johnson, Jerry W. Hannah, Hamilton & Hannah, Topeka, Kan., for defendant/third party plaintiff.

Robert M. Sommers, James, Millert, Houdek, Tyrl & Sommers, Kansas City, Mo., Gregory A. Lee, Marshall, Davis, Bennett & Hendrix, Topeka, Kan., for third party defendant.


EARL E. O'CONNOR, Chief Judge.

Plaintiff, United of Omaha Life Insurance Company hereinafter United instituted this action against Terry E. Reed seeking a declaratory judgment regarding its liability for claims under an insurance policy it issued to him. Maxine Reed hereinafter Reed was later substituted for Terry Reed after his death. Reed consequently filed a counterclaim against United for its failure to pay on the policy and a third party complaint against Herbert F. Owens hereinafter Owens, the alleged insurance agent of United. United in turn filed a third party claim against Owens seeking indemnification for any damages Reed may recover against it.

Beginning in 1967, Terry Reed was employed by Franklin County, Kansas and was covered by its group employee health insurance policy provided by The Equitable. On August 1, 1983, he took a leave of absence from his employment. After his leave of absence became effective, he tendered insurance premiums to Franklin County, who included these payments along with the County's insurance premium payments to The Equitable. On December 1, 1983, the County converted its group policy to one provided by United. Thereafter, Terry Reed continued to pay insurance premiums to the County and the County included his payments with their payment of insurance premiums to United. The County never notified United that Terry Reed was on leave of absence.

On July 9, 1984, Terry Reed converted his group coverage to an individual policy of insurance with United, without United's knowledge that he was on leave of absence. Less than a month later, he resigned from his employment with Franklin County. He has submitted claims to United for medical expenses incurred from the period December 21, 1984, through January 4, 1985. United contends that it has no obligation to pay these claims because Terry Reed was never insured by United. According to both the policy of insurance and the employee handbook, an employee is no longer eligible for group coverage when the employee goes on leave of absence. Because Terry Reed was no longer eligible for group insurance, he could not convert to an individual policy.

Reed has counterclaimed against United, alleging that Owens, as United's agent, represented to Terry Reed that he would have group insurance coverage and that he was eligible to convert this group coverage to individual coverage. At the time Owens made these representations, Reed claims that Owens was aware that Terry Reed was on leave of absence and that he had resigned effective August 1, 1984. Reed contends that at all times the required insurance premiums were paid and that United accepted each of the payments. Reed seeks payment of benefits under the policies and damages for inconvenience, mental anguish, humiliation, damages to reputation, defamation of credit, attorney's fees and punitive damages. Reed makes similar claims against Owens in the third party complaint.

Owens has moved to dismiss Reed's third party complaint and United's third party claim. Additionally, United has moved to dismiss Reed's counterclaim.

I. United's Motion to Dismiss Reed's Counterclaim

United seeks dismissal of Reed's counterclaim on the basis that Kansas law does not recognize a cause of action for the tort of bad faith. See Spencer v. Aetna Life & Casualty Insurance Co., 227 Kan. 914, 926, 611 P.2d 149, 158 (1980). We agree with United that Reed may not recover under this cause of action and thus, Reed's claim for bad faith must be dismissed. We recognize, however, that a cause of action exists under the facts of this case for misrepresentation (see Earth Scientists v. United States Fidelity & Guaranty Co., 619 F.Supp. 1465, 1472-73 (D.Kan.1985)) and for reformation of the policy to reflect the agreements actually made (see Stewart v. The Commonwealth Casualty Company of Philadelphia, 137 Kan. 919, 923-25, 22 P.2d 435, 436-38 (1933)). We find that Reed has sufficiently alleged a claim to recover under those theories. Furthermore, we note that Reed has sufficiently pleaded in the alternative a claim for breach of the insurance contract.

We note that punitive damages are normally recoverable under a claim for misrepresentation. See Augusta Bank and Trust v. Broomfield, 231 Kan. 52, 63, 643 P.2d 100, 109 (1982). United, however, argues that Spencer precludes the award of punitive damages in this case. Spencer states that in a suit by an insured against his insurer to recover under the policy, the insured may recover extracontractual damages (such as punitive damages) only if there is an independent tort or wrong causing additional injury. 227 Kan. at 920, 611 P.2d at 154. United contends that, assuming misrepresentations occurred, no additional injury was caused. Consequently, Reed may not recover any extracontractual damages. We must agree.

The court in Guarantee Abstract & Title Co. v. Interstate Fire and Casualty Co., 232 Kan. 76, 652 P.2d 665 (1982), elaborated on the circumstances under which an insured may recover punitive damages:

Damages for breach of contract are limited to pecuniary losses sustained and exemplary or punitive damages are not recoverable in the absence of an independent tort. Temmen v. Kent-Brown Chev. Co., 227 Kan. 45, 605 P.2d 95 (1980). This exception to the rule of unavailability of punitive damages in breach of contract actions is recognized when some independent tort or wrong results in additional injury which justifies the assessment of punitive damages by way of punishment of the wrongdoer. In such a case the proof of the independent tort must indicate the presence of malice, fraud or wanton disregard for the rights of others....
These general rules relative to breach of contract cases are also applicable to actions for breach of an insurance contract and, in the absence of an independent tort, punitive damages may not be allowed. Spencer v. Aetna Life & Casualty Ins. Co., 227 Kan. 914, 611 P.2d 149 (1980); Moffet v. Kansas City Fire & Marine Ins. Co., 173 Kan. 52, 244 P.2d 228 (1952).

232 Kan. at 79, 652 P.2d at 667 (emphasis added). See also, Plains Resources, Inc. v. Gable, 235 Kan. 580, 682 P.2d 653 (1984) (plaintiff allowed to recover punitive damages in a contract action only upon showing that independent tort resulted in additional damages).

In light of the foregoing, we conclude that Reed's claim for extracontractual damages must be dismissed in that Reed has failed to allege any additional injury or damages caused by the alleged misrepresentations. Consequently, Reed's claims for punitive damages, damages for inconvenience, mental anguish, humiliation and defamation of credit, and damage to reputation must be dismissed. Reed's claim for attorney's fees against United will be retained, as K.S.A. 40-256 (1981) provides that an insurance company must pay the insured's attorney's fees when the insured obtains a judgment against an insurance company that has refused to pay on the insurance claim without just cause or excuse. See Spencer, 227 Kan. at 923, 611 P.2d at 156.

II. Owens' Motion to Dismiss the Third Party Complaint

Owens contends that the third party complaint filed against him by Reed must be dismissed because it fails to allege an independent basis of federal jurisdiction. Owens correctly points out that the original complaint in this action is based upon diversity of citizenship: Plaintiff United is a Nebraska corporation and defendant and third party plaintiff Reed is a Kansas resident. Owens, the third party defendant, is also a Kansas resident. Consequently, no diversity jurisdiction exists between Reed and Owens, and the third party complaint must be dismissed. We disagree.

It is well established that a defendant's claim against a third party defendant is within the ancillary jurisdiction of the federal courts. 6 Wright & Miller, Federal Practice and Procedure § 1444 at 223. This doctrine recognizes the power of a federal court, once proper subject matter jurisdiction of the main claim has been established, to hear a claim arising out of the same transaction or occurrence asserted by the defendant against a non-diverse impleaded third party defendant. See generally 13 Wright, Miller & Cooper, Federal Practice and Procedure § 3523. In other words, in a diversity case, the defendant may properly implead a third party defendant without regard to the third party's citizenship. 6 Wright & Miller, Federal Practice and Procedure § 1444 at 224-25; Moore, Moore's Federal Practice ¶ 14.26 at 14-108.

This rule was not altered by the Supreme Court's decision in Owen Equipment and Erection Co. v. Kroger, 437 U.S. 365, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978). The Owen case held only that, in an action based on diversity of citizenship, an independent basis for federal jurisdiction must exist in order for the plaintiff to assert a claim against the third party defendant. Id. at 367, 377, 98 S.Ct. at 2399, 2404. Owen did not hold that an independent basis for federal jurisdiction must exist in order for the third party plaintiff to assert a claim against the third party defendant.

In light of the foregoing, we hold that this court has...

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