v. Lexington Ins. Co.
| Decision Date | 15 September 2015 |
| Docket Number | No. 14-3130,14-3130 |
| Parties | B.S.C. HOLDING, INC. and LYONS SALT COMPANY, Plaintiffs-Appellants, v. LEXINGTON INSURANCE COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
(D. of Kan.)
ORDER AND JUDGMENT*Before TYMKOVICH, EBEL, and GORSUCH, Circuit Judges.
B.S.C. Holding and Lyons Salt Company (collectively BSC) appeal the district court's dismissal of their claims against Lexington Insurance, the insurer of the Lyons Salt Mine. The Lyons Salt Mine is a Kansas facility that experienced a large inflow of water beginning in 2008, which was eventually attributed to an abandoned surface gas well.
BSC argues that the district court erred in dismissing its case based on an insurance policy provision requiring all suits be commenced within twelve months of the discovery of the underlying loss or series of losses. It argues that the district court made two errors in reaching its conclusion. First, BSC contends that Kansas law prohibits the enforcement of suit-limitation provisions unless the insurer can show it was prejudiced by the plaintiff's failure to file a timely suit. Although Kansas applies a prejudice requirement when plaintiffs fail to comply with notice-of-loss provisions, we decline to extend the prejudice requirement to cases involving suit-limitation provisions.
Second, BSC argues the district court erred in finding the limitation period expired before it brought its suit. BSC contends that the limitation period should not have begun until it understood the causes that led to the flooding of the mine. Under the provisions of the insurance policy, BSC had an obligation to bring suit within twelve months of any event leading to direct physical loss. Although there may be cases where a plaintiff needs to know the cause of seemingly uncovered damage in order to discover that he may be dealing with a covered loss, this is not such a case.
Exercising jurisdiction under 28 U.S.C. 1291, we AFFIRM.
BSC Holding is the sole shareholder of Lyons Salt Company, the operator of the Lyons Salt Mine. Beginning in 2002, BSC purchased from Lexington Insurance a series of annual all-risk insurance policies covering the property.
In late 2004, BSC first learned of problems with the mine. At that time, it discovered the space between the floor and ceiling in a section of the mine was contracting at an abnormally high rate. The problem reoccurred again in April of 2005 and again a few months after that. In September 2005, a consultant informed BSC that water may enter the mine due to the abnormal closure rates and that this could be a "huge problem." App., Vol. 6 at 1489. By December 2006, one portion of the mine had closed from an original height of 16.5 feet to 4.5 feet. At this point BSC began considering a number of remedies, including construction of an underground bulkhead to seal off the area. They also began performing backfilling in the area.
In January 2008, BSC discovered a water leak of twenty-two gallons per minute in the section of the mine where closure had occurred. Unsure as to the cause, BSC retained outside mining experts to investigate the situation. Although the experts initially believed the problem to be naturally occurring, they ultimately concluded in April 2010 that an improperly sealed well had caused a deformation in the rock above the mine, which in turn created a path between the mine and an aquifer. Because of the nature of the problem, the panel furtherconcluded the flooding could not be stopped and that, eventually, the roof of the mine would collapse, flooding the entire mine and destroying structures on the surface above.
BSC finally informed Lexington of the leak in May 2010 and made a claim against its policy, requesting compensation for the expenses it had incurred in attempting to diagnose and remedy the situation. In October 2010, Lexington sent a response letter. In the letter, Lexington acknowledged the claim and reminded BSC that it was "required to take steps to minimize the exposure and risk associated with this loss." App., Vol. 7 at 1940.
Lexington made no further response to BSC's request for reimbursement, and BSC filed suit in May 2011. In 2013, the district court granted summary judgment to Lexington on the grounds that BSC had not complied with a policy provision requiring it to provide Lexington with notice of its loss "as soon as practicable." B.S.C. Holding, Inc. v. Lexington Ins. Co. (B.S.C. I), 559 F. App'x 663, 665 (10th Cir. 2014). We reversed, holding that an insured's failure to comply with such notice-of-loss provisions does not bar suit unless the insurer demonstrates it was prejudiced by the delay.
On remand, the district court again granted Lexington summary judgment and dismissed all of BSC's claims. Specifically, the court found that the case was time-barred by the suit-limitation provision in the insurance policy. The district court found that BSC discovered the occurrence—or loss—giving rise to the claimno later than January 18, 2008, the day water first entered the mine in large quantities. Because BSC did not file its suit until forty-one months later, the court found the suit barred by the limitation provision. In the alternative, the court found the mine was not covered under the policies in the first place because they covered neither "land" nor "property situated underground." App., Vol. 6 at 2310.
BSC contends the district court erred in applying the insurance policy's twelve-month suit-limitation provision.1 It first argues the limitation provision is unenforceable under Kansas law as a matter of public policy. Second, even if the provision was not violative of Kansas law, BSC also argues that the clock on the twelve-month limitation period should not have started until April 2010, when its investigative team discovered the cause of the leak.
We review a grant of summary judgment de novo, applying the same standards used by the district court. Pittman v. Blue Cross & Blue Shield of Okla., 217 F.3d 1291, 1295 (10th Cir. 2000). "As a federal court sitting in diversity of citizenship litigation, our duty under Erie v. Tompkins . . . is of course to conform to [Kansas's] substantive law." Stauth v. Nat'l Union Fire Ins.of Pittsburgh. Pa., 236 F.3d 1260, 1267 (10th Cir. 2001). In the absence of definitive direction from the Kansas Supreme Court, we must "predict the course that body would take if confronted with the issue." Id.
BSC first argues we need not issue an interpretation of the policy language at all. Instead, it maintains the one-year suit-limitation provision is unenforceable because it violates Kansas public policy. BSC contends Kansas law disfavors the forfeiture of insurance benefits unless an insured's failure to comply with a contractual provision substantially prejudices the insurer. Although it acknowledges that the Kansas courts have not applied this rule to suit-limitation provisions, BSC says the prejudice requirement has been consistently applied to similar provisions and thus should apply here.
Suit limitation provisions are not per se invalid under Kansas law. In Pfeifer v. Federal Express Corp., 304 P.3d 1226, 1231 (Kan. 2013), the Kansas Supreme Court rejected the argument that Kansas statutory law prohibits contractual shortening of limitations periods. Id. Even so, the court struck down the six-month contractual limitation period at issue, finding it conflicted with Kansas's "policy of protecting injured workers from retaliation for exercising their statutory rights under the Workers Compensation Act." Id. Because it was also concerned with the freedom of parties to contract, id. at 1230, the courtlimited its holding to "circumstances in which there is a strongly held public policy interest at issue," id. at 1234.
BSC contends similar public policy objections apply to the one-year provision here. It points to Cessna Aircraft Co. v. Hartford Accident & Indemnity Co., 900 F. Supp. 1489, 1518 n.38 (D. Kan. 1995), for the proposition that Kansas public policy disfavors forfeitures of insurance benefits which would result in a windfall to the insurer. But as Cessna itself noted, "[f]orfeitures of insurance policies" are permitted "when expressed in clear and unmistakable terms." Id. The language in the suit-limitation provision here is unmistakably clear: "No suit, action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months . . . ." App., Vol. 1 at 58.
Although the limitation provision complies with Cessna's clear statement rule, BSC argues that because Kansas disfavors insurance forfeiture as a general matter, we should only enforce the provision if Lexington can show prejudice from the delay. As BSC asserts, an insured's failure to timely comply with a notice- or proof-of-loss provision will not bar suit under Kansas law unless the insurer can show substantial prejudice from the delay.2 See, e.g., B.S.C. I, 559 F.App'x at 665. BSC argues there is no reason to distinguish suit-limitation provisions from notice- and proof-of-loss provisions—that is, because Kansas law protects insureds who fail to give timely notice or proof of their claims, it should also excuse those who fail to file timely suit, unless the insurer can show prejudice from the delay.
We disagree. Although notice-of-loss and suit-limitation provisions may share some superficial similarities, their purposes are quite different. " " Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. F.D.I.C., 957 P.2d 357, 367 (Ka...
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