B.S.C. Holding, Inc. et al v. Lexington Insurance Company
Filing
176
MEMORANDUM AND ORDER granting 170 Motion for Ruling; granting 138 Motion for Summary Judgment. Signed by District Judge Eric F. Melgren on 5/27/14. (alm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
B.S.C. HOLDING, INC., and LYONS
SALT COMPANY,
Plaintiffs,
vs.
Case No. 11-CV-2252
LEXINGTON INSURANCE COMPANY,
Defendant.
MEMORANDUM AND ORDER
Plaintiffs B.S.C. Holding, Inc., and Lyons Salt Company filed this suit against
Defendant Lexington Insurance Company seeking a declaratory judgment and damages for
breach of an insurance contract. The Court previously granted Defendant’s Motion for Summary
Judgment on the basis that Plaintiffs failed to provide timely notice as required by the contract,
and Plaintiffs appealed. The Tenth Circuit reversed the Court’s decision and remanded with
instructions to vacate the summary judgment award. Before the Court is Defendant’s Motion for
Ruling on Its Remaining Summary Judgment Bases (Doc. 170). Because Defendant’s remaining
summary judgment bases were not considered by the Court in its summary judgment Order, the
Court grants Defendant’s motion and addresses two of Defendant’s summary judgment bases
below.
-1-
I.
Factual and Procedural Background1
A.
The Insurance Policies
Plaintiff Lyons Salt Company (“Lyons Salt”) operates a salt mine in Lyons, Kansas.
Plaintiff B.S.C. Holding, Inc. (“BSC”), is the sole shareholder of Lyons Salt. From 2002 to
2010, Defendant Lexington Insurance Company issued eight consecutive policies of commercial
property insurance to Plaintiffs, which named both Lyons Salt and BSC as insured parties under
each policy. Plaintiffs claim that Defendant breached six of these policies, with the first policy
beginning on May 1, 2004, and the last policy terminating on April 1, 2010 (the “Policies”).2
The Policies at issue constitute “all risk” insurance policies, which provide:
Subject to the terms, conditions and exclusions hereafter contained, this Policy
insures: 1. All real and personal property (including improvements and
betterments) and contractors equipment of this Insured or similar property in the
Insured’s care, custody or control for which the Insured may be held liable against
all risks of direct physical loss or damage occurring during the period of this
policy as stated in the Schedule and/or Declarations attaching to and forming part
of this policy.3
Under a section entitled, “Property Excluded,” the Policies exclude coverage of “Water, land or
land values” and “Property while Offshore or situated underground unless otherwise endorsed.”4
The Policies also contain the following under a section entitled, “Exclusions”:
1
Because the Court will address Defendant’s summary judgment motion, the Court has set forth the
uncontroverted facts, and they are related in the light most favorable to the non-moving party in accordance with
summary judgment procedures.
2
The parties stipulate that the relevant terms of the Policies are identical for purposes of Defendant’s
summary judgment motion, and therefore, the Court will refer to the language contained in the most recent policy,
number 021437911, with a policy period of April 1, 2009, to April 1, 2010.
3
4
Policy, Doc. 139-7, p. 57.
Policy, Doc. 139-7, p. 60.
-2-
This policy does not insure against:
....
5. Loss or damage caused by or resulting from moth, vermin, termites or other
insects, inherent vice, latent defect, wear, tear or gradual deterioration,
contamination, rust, wet or dry rot, mold or dampness of atmosphere, smog or
changes in temperature (but not including damage resulting from frozen plumbing
and sprinkler system); or loss or damage by settling, shrinkage, cracking, bulging
or expansion in building or foundation.
6. Loss or damage caused by backing up of sewers or drains or seepage below
ground level but this exclusion shall not apply if the loss to this policy does not
exceed $25,000.00 in any one occurrence.5
Additionally, the Policies contain the following under a section entitled, “Conditions”:
9. Sue and Labor. In case of an actual or imminent loss or damage, it shall be
lawful and necessary for the Insured . . . to sue, labor and travel for, in and about
the defense, safeguard and recovery of the property Insured hereunder . . . . The
expenses so incurred shall be borne by the Insured and the Company
proportionately to the extent of their respective interests.
....
12. Suit. 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 next after discovery by the insured of the
occurrence which gives rise to the claim, provided, however, that if by the law of
the State within which this policy is issued such limitation is invalid, then any
such claims shall be void unless commenced within the shortest limit of time
permitted by the laws of such state.6
The Policies limited Defendant’s liability to $7,500,000.00 per “occurrence,” which is defined as
“any one loss, disaster, casualty, or series of losses, disasters, or casualties, arising out of one
event . . . .”7 The last insurance policy that Defendant issued to Plaintiffs terminated on April 1,
2010. Plaintiffs then obtained coverage from a different insurer.
5
Policy, Doc. 139-7, p. 58-59.
6
Policy, Doc. 139-7, p. 62.
7
Policy, Doc. 139-7, p. 49.
-3-
B.
High Closure Rates and Water Inflow Discovered at the Lyons Mine
In October 2004, Plaintiffs discovered higher than expected closure rates at the
intersection of Panel 1 and Panel 2B of the Lyons Mine. The “higher than expected” closure
rates pertained to the rate that the mine floor and the mine ceiling in Panel 1 and Panel 2B were
coming closer together. Plaintiffs observed these abnormally high closure rates again in April
and August of 2005, and in September 2005, a consultant to the Lyons Mine, Gary Petersen,
advised Lyons Salt of the possibility of water entering the mine. Petersen characterized the
water inflow as a worst-case scenario that “could be a huge problem.”8
On January 17, 2008, Lyons Salt detected an inflow of water near the same area where
Plaintiffs previously observed the abnormally high closure rates. Since this time, the rate of
water inflow has averaged approximately twenty-two gallons per minute, or 31,680 gallons per
day. Plaintiffs were not aware of the cause of the water inflow when they discovered the
intrusion.
After discovering the water inflow, Plaintiffs immediately retained a team of mining
experts and engineers to investigate and devise a solution. Plaintiffs considered the water inflow
a problem that needed to be fixed, and Petersen was concerned about a total loss of the mine due
to catastrophic flooding. In March 2009, there was a possibility that the inflow could be large
enough to flood the mine, and Petersen predicted that a catastrophic event was going to occur at
the Lyons Mine at some time in the future. Also in 2009 one of Plaintiffs’ retained experts and
consultants became concerned about a catastrophic flooding event at the Lyons Mine and
conveyed that concern to Lyons Salt.
8
Petersen Dep., Doc. 139-13, p. 105.
-4-
In April 2010, Plaintiffs’ team of consultants concluded that an improperly sealed oil well
(“the Habinger 3 well”) was causing the inflow of water from a nearby aquifer, compromising
the mine’s structural integrity.
Plaintiffs’ consultants opined that if the problem was not
immediately remedied, an imminent and catastrophic inflow of water would result in total
physical loss of the mine. Plaintiffs’ consultants recommended installation of a bulkhead to seal
off the water inflow, and Plaintiffs expected to complete that installation in October 2012. The
catastrophic flooding event anticipated by Plaintiffs’ consultants has not yet occurred.
C.
Plaintiffs Notify Defendant of the Water Problem and Initiate this Suit
On July 19, 2010, Plaintiffs sent a letter and Notice of Loss to Defendant. The Notice of
Loss informed Defendant for the first time that a water inflow issue was detected in January
2008, that an imminent catastrophic flooding event was going to occur at the mine, and that BSC
had already spent $2,500,000.00 to investigate and remedy the water inflow problem. Upon
receiving the Notice of Loss, Defendant appointed an adjuster to investigate Plaintiffs’ claim.
On October 22, 2010, Defendant sent Plaintiffs a Reservation of Rights Letter, stating that it
expected Plaintiffs to minimize the loss, take all steps necessary to protect its property, and
prevent further damage.
On December 2, 2010, Plaintiffs submitted a Proof of Loss, in which BSC’s President
and CEO certified that BSC discovered the alleged loss from water inflow on January 18, 2008.
The Proof of Loss itemized $11,508,912.00 in expenses that Plaintiffs incurred to investigate and
remedy the water inflow problem. The Proof of Loss did not include any entry for the loss of the
mine itself, and BSC never had any discussions with Plaintiffs’ insurance broker about insuring
the mine itself.
-5-
Plaintiffs initiated this action on May 5, 2011, alleging breach of contract and seeking
declaratory judgment. According to Plaintiffs, they have already expended $6,351,740.07 to
investigate and remedy the water inflow, and they estimate that an additional $14,129,527.52
will be required. Plaintiffs also seek a declaratory judgment that Defendant must pay the
expenditures for the investigation, evaluation, design, and implementation of remedies for the
water inflow problem. Plaintiffs claim that relief is warranted under the Policies all-risk, sueand-labor, and business interruption provisions.
On August 21, 2012, Defendant moved for summary judgment on the basis that
Plaintiffs’ claimed loss does not fall within any of the Policy periods, the sue-and-labor provision
is inapplicable, and Plaintiffs’ claims are precluded by the Policies’ exclusions. Defendant also
argued that Plaintiffs’ claims are untimely under the Policies’ notice conditions and contractual
suit-limitation provision and that Plaintiffs’ claims are barred under the doctrines of fortuity,
known-loss, and loss-in-progress. On May 22, 2013, the Court issued its Memorandum and
Order (Doc. 156) granting summary judgment in favor of Defendant on the basis that Plaintiffs’
claims were barred by the notice conditions in the Policies. The Court declined to address the
remaining bases that Defendant argued warranted summary judgment in its favor.
Plaintiffs appealed the Court’s Order, and the Tenth Circuit reversed and remanded with
instructions to vacate the summary judgment award. On April 3, 2014, the Court vacated its
Order. Defendant now moves the Court for a ruling on the remaining bases it asserted in its
summary judgment motion.
II.
Defendant’s Motion for Ruling on Its Remaining Summary Judgment Bases
Defendant argues that before the Court conducts a trial on this matter, it should rule on
the remaining bases set forth in its summary judgment motion.
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Defendant claims that its
additional summary judgment bases call for the interpretation of the Policies and the application
of undisputed facts to Defendant’s defenses such that a ruling on them may dispose of the case
and obviate the need for trial. In response, Plaintiffs assert that no summary judgment issues
remain because Defendant did not pursue its remaining bases on appeal and the Tenth Circuit did
not otherwise affirm the Court’s summary judgment award on any of those bases. According to
Plaintiffs, there is nothing left for review in this case, and it should be set for trial.
The Court disagrees with Plaintiffs. Plaintiffs presented two issues on appeal—late
notice and substantial prejudice—which were the only issues addressed by this Court when it
granted summary judgment. Neither Defendant nor the Tenth Circuit reached Defendant’s
remaining summary judgment bases because they were not addressed by the Court in its
summary judgment Order. According to the U.S. Supreme Court, “[i]t is the general rule, of
course, that a federal appellate court does not consider an issue not passed upon below.”9
Moreover, the Tenth Circuit has made clear that it is a “requirement that an issue be ‘presented
to, considered [and] decided by the trial court’ ” to be considered on appeal.10 Because this
Court did not reach Defendant’s remaining summary judgment bases in its original order
granting summary judgment, Defendant did not consider them in its response to Plaintiffs’
appeal brief, and the Tenth Circuit properly did not consider them in its decision. The Court
therefore finds that the remaining bases set forth in Defendant’s Motion for Summary Judgment
are ripe for decision and sets forth its ruling on two of these bases below.
9
Singleton v. Wulff, 428 U.S. 106, 120 (1976).
10
Lyons v. Jefferson Bank & Trust, 994 F.2d 716, 721 (10th Cir. 1993) (quoting Cavic v. Pioneer Astro
Indus., 825 F.2d 1421, 1425 (10th Cir. 1987)).
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III.
Defendant’s Motion for Summary Judgment
A.
Legal Standard
Summary judgment is appropriate if the moving party demonstrates that there is no
genuine issue as to any material fact, and the movant is entitled to judgment as a matter of law.11
A fact is “material” when it is essential to the claim, and issues of fact are “genuine” if the
proffered evidence permits a reasonable jury to decide the issue in either party’s favor.12 The
movant bears the initial burden of proof, and must show the lack of evidence on an essential
element of the claim.13 If the movant carries this initial burden, the nonmovant that bears the
burden of persuasion at trial may not simply rest on its pleading but must instead “set forth
specific facts” that would be admissible in evidence in the event of trial from which a rational
trier of fact could find for the nonmovant.14 These facts must be clearly identified through
affidavits, deposition transcripts, or incorporated exhibits—conclusory allegations alone cannot
survive a motion for summary judgment.15
The Court views all evidence and reasonable
inferences in the light most favorable to the party opposing summary judgment.16
B.
Plaintiff’s Claims Are Time Barred Pursuant to the Policies.
Defendant argues that summary judgment is appropriate because the suit-limitation
provision in the Policies bars Plaintiffs’ claims. That provision states:
11
Fed. R. Civ. P. 56(c).
12
Haynes v. Level 3 Commc’ns, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006).
13
Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986)).
14
Id. (citing Fed. R. Civ. P. 56(e)).
15
Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197 (10th Cir. 2000) (citing Adler v. Wal-Mart
Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998)).
16
LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).
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Conditions
12. Suit.
No suit, action, or proceeding for 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 next after discovery by the insured of the
occurrence which gives rise to the claim, provided, however, that if by the laws of
the State within which this policy is issued such limitation is invalid, then any
such claims shall be void unless commenced within the shortest limit of time
permitted by the laws of such state.17
Before determining whether this provision bars Plaintiffs’ claims, the Court must first determine
whether it is valid and enforceable under Kansas law.
Kansas law requires an action upon a contract to be brought within five years.18
However, the Kansas Supreme Court recently looked at the issue of whether the parties may
contractually limit the time to file suit. In Pfeifer v. Federal Express Corp.,19 the plaintiff was a
former employee who entered into an employment agreement that required her to file suit within
six months of termination from employment.20 The plaintiff, however, filed suit fifteen months
after she was terminated, alleging that her termination was in retaliation for exercising her rights
under the Kansas Workers Compensation Act.21 The Kansas Supreme Court held that parties are
not prohibited from entering into agreements shortening the statute of limitations period provided
by statute.22 Ultimately, the court invalidated the suit limitation provision in the employment
17
Policy, Doc. 139-7, p. 62.
18
K.S.A. § 60-511(1) (2012).
19
297 Kan. 547, 304 P.3d 1226 (2013).
20
Id. at 549, 304 P.3d at 1229.
21
Id.
22
Id. at 554, 304 P.3d at 1231.
-9-
contract because it impaired Kansas’s “strongly held public policy interest” of worker’s
compensation and retaliatory action.23
In Infinity Energy Resources v. St. Paul Fire & Marine Insurance Co.,24 the District of
Kansas interpreted the Kansas Supreme Court’s decision in Pfeifer to allow parties to
contractually limit the time to file suit, even when the statute of limitations allows for a greater
period of time, unless the contract violates an articulated public policy.25 The Court found that
this interpretation comports with previous decisions from the District of Kansas, which have held
that Kansas law does not prohibit parties from contractually limiting the timely filing of suits.26
Specifically, the court in Infinity found that a suit limitation provision in a first party insurance
contract requiring the insured to file suit “within two years after the date . . . damage occurred to
the property” effectively barred the insured’s claim because it did not file suit until three years
after the damage occurred.27
Here, the Policies are not incompatible, irreconcilable, or in opposition with Kansas law
or public policy. The workers compensation public policy concerns that were present in Pfeifer
are not present here. Therefore, the one year limitation provision in the Policies is valid and
23
Id. at 559, 304 P.3d at 1234.
24
2013 WL 3792899 (D. Kan. July 19, 2013).
25
Id. at *7.
26
Id. at *8 (citing Sibley v. Sprint Nextel Corp., 2008 WL 2949564 n.7 (D. Kan. July 30, 2008); Hahner
Foreman & Harness, Inc., v. AMCA Int’l Corp., 1995 WL 643814, at *2 (D. Kan. Oct. 27, 1995); Coates v. Metro.
Life Ins. Co., 515 F. Supp. 647, 649 (D. Kan. 1981)).
27
Id.
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enforceable. Plaintiffs were required to bring suit within twelve months of “discovery of the
occurrence which gives rise to the claim.”28
The Policies define the term “occurrence” as “any one loss, disaster, casualty, or series of
losses, disasters, or casualties arising out of one event.”29 The Policies do not define the term
“loss,” “disaster,” or “casualty.” But, as the Court stated in its previous Memorandum and Order,
“[t]he fact that an insurance policy does not define each term within it does not somehow make
an undefined term unambiguous; ambiguity arises only if language at issue is subject to two or
more reasonable interpretations and its proper meaning uncertain.”30 Black’s Law Dictionary
defines the term “loss” as “[a]n undesirable outcome of a risk; the disappearance or dimunition
of value, [usually] in an unexpected or relatively unpredictable way.”31 “Disaster” is defined as
“a calamity; a catastrophic emergency.”32 And, “casualty” is defined as a “thing injured, lost, or
destroyed.”33
The undisputed facts show that Plaintiffs discovered the “occurrence” giving rise to the
claim on January 18, 2008.34 At this time, Plaintiffs discovered water inflow at the same place
28
Policy, Doc. 139-7, p. 62
29
Policy, Doc. 139-7, p. 49.
30
Memorandum and Order, Doc. 156, p. 11 (citing Newcap Ins. Co. v. Emp’rs Reinsurance Corp., 295 F.
Supp. 2d 1229, 1240 (D. Kan. 2003) (citation omitted)).
31
BLACK’S LAW DICTIONARY, loss (elec. 9th ed. 2009).
32
BLACK’S LAW DICTIONARY, disaster (elec. 9th ed. 2009).
33
BLACK’S LAW DICTIONARY, casualty (elec. 9th ed. 2009).
34
In its previous Memorandum and Order, the Court analyzed the notice condition, which applied to
“every loss, damage, or occurrence which may give rise to a claim under this policy.” Policy, Doc. 139-7, p. 61
(emphasis added). The Court found that Plaintiffs first learned of an occurrence on January 18, 2008, when they
discovered the water inflow problem. The Tenth Circuit did not address this finding in its decision. Although the
notice condition differs from the suit limitation provision, the question of when Plaintiffs discovered the
“occurrence” applies to both provisions. Therefore, part of the Court’s reasoning from its prior Memorandum and
Order is applicable and set forth here.
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they previously observed abnormally high closure rates. Upon discovering the water inflow in
January 2008, Petersen’s speculation from 2005 about how water inflow was a worst-case
scenario became an actual concern that catastrophic flooding would result in total loss of the
Lyons Mine. Plaintiffs characterized the January 2008 flooding event as a problem that needed
to be fixed immediately, and they immediately retained experts and began initiating remedial
measures.
The Court’s finding that Plaintiffs first discovered the “occurrence” giving rise to its
claim in January 2008 comports with Plaintiffs’ characterization of the event. Plaintiffs’ Notice
of Loss and Proof of Loss identify the claimed “loss” as the water inflow discovered in January
2008. And, in their attempt to recover under the Policies sue-and-labor provision, Plaintiffs
argue that the water inflow constitutes an event of “loss or damage.” The Policies make no
distinction between the meaning of the term “loss” throughout their provisions. Accordingly, if
an event constitutes a “loss” sufficient to invoke the sue-and-labor provision, the same event is
sufficient to constitute an “occurrence” and evoke the Policies suit limitation provision.
Furthermore, the Court finds that Plaintiffs’ observations and speculations from 2004 and
2005 informed the knowledge that they obtained in 2008. In 2004 and 2005, Plaintiffs observed
abnormally high closure rates at Panels 1 and 2B and speculated about flooding as a result.
When Plaintiffs discovered flooding in the same area, Plaintiffs correlated this problem with the
high closure rates observed in 2004 and 2005. Thus, Plaintiffs’ discovery of the water inflow
also constituted Plaintiffs’ discovery that the abnormally high closure rates were part of the same
series of losses, disasters, or casualties.
Plaintiffs argue that they complied with the suit limitation provision because the clock
did not begin to run until April 2010 when they discovered the cause of the water inflow.
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According to Plaintiffs, the term “occurrence” requires knowledge of both (1) the loss or series
of losses, and (2) the causal event out of which it arises. Plaintiffs argue that they are in
compliance with the suit limitation provision because the clock began to run in April 2010 and
Plaintiffs gave notice to Defendant less than four months later, in July 2010. Furthermore, the
clock was equitably tolled until Plaintiffs filed suit on May 5, 2011.
The Court finds that the term “occurrence” does not require knowledge of the causal
event out of which the loss arises.
knowledge.
Nothing in the definition of the term requires such
Furthermore, the cases Plaintiffs cite in support of this interpretation are
unpersuasive, as they either support a finding that Plaintiffs violated the suit limitation provision
or are distinguishable from this case.
Plaintiffs cite Gaylord v. Nationwide Mutual Insurance Co.,35 in which the court found
that the suit limitation period began to run when the damage becomes “appreciable.”36 Here, the
undisputed facts show that in January 2008 the water inflow was “appreciable” because Plaintiffs
immediately retained experts and began initiating remedial measures. Thus, even if the Court
applied the standard set forth in Gaylord, Plaintiffs still violated the suit limitation provision
because they did not file suit within one year of discovering the water inflow.
Plaintiffs also rely on Parker v. Worcester Insurance Co.,37 in which the court held that
the suit limitation period began to run from the time the insured’s expert advised her that there
was a substantial structural flaw in her home.38 Following Parker, Plaintiffs are also in violation
35
776 F. Supp. 2d 1101 (E.D. Cal. 2011).
36
Id. at 1114.
37
247 F.3d 1 (1st Cir. 2001).
38
Id. at 5.
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of the twelve month suit limitation provision because the clock began to run in January 2008
when they discovered the water inflow. That discovery confirmed that there was a significant
problem with the structural integrity of the mine that could result in total loss.
Finally, Plaintiffs cite Myers v. Cigna Property and Casualty Insurance Co.,39 in which
the court found that the insured did not violate the suit limitation provision because the twelve
month limitation period did not begin to run until the insurer’s liability accrued, which was after
the insured determined the cause of the loss.40 The court in Myers applied New York law, which
regards more generic language—such as policy provisions foreclosing suit a certain period “after
loss or damage”—as triggering the limitations period to the time when the claim accrues.41 The
phrase at issue in the insurance policy in Myers stated that “with respect to any claim or loss to
insured property, any suit against us must be commenced within one year of the date of the loss
or damage.”42 Here, however, the suit limitation is much more specific, and therefore, the Court
declines to follow New York law holding that a suit limitations provision only begins to run after
the cause of the loss is determined and the claim becomes due and payable.
Plaintiffs also argue that the suit limitation provision was tolled from the time they gave
Defendant notice to the time they filed suit. Plaintiffs cite to no Kansas authority supporting
their position that a court would equitably toll a suit limitation provision in an insurance contract.
Furthermore, even if Kansas law did allow such tolling, the suit limitation period in this case
would have expired before Plaintiffs’ asserted tolling period even began. Here, the undisputed
39
953 F. Supp. 551 (S.D.N.Y. 1997).
40
Id. at 556.
41
Id. at 555.
42
Id. at 553.
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facts show that the twelve month limitation period began to run in January 2008, when Plaintiffs
discovered the water inflow into the mine, and expired no later than January 2009. Thus, the
Court cannot toll the suit limitation period because it expired more than year before Plaintiffs
gave Defendant notice of its claim.
For these reasons, the Court rejects Plaintiffs’ argument that it did not violate the suit
limitation provision because it did not discover the cause of the water inflow until April 2010.
Plaintiffs’ discovery on January 18, 2008, triggered the Policies’ suit limitation provision.
Because Plaintiffs did not file suit before January 18, 2009, their claims are time barred, and the
Court grants summary judgment in Defendant’s favor.
C.
The Mine Is Excluded from Coverage under the Policies.
In the alternative, Defendant argues that the Policies’ exclusions bar any coverage for the
Lyons Mine itself. The Policies contain the following language with regard to what they insure:
Subject to the terms, conditions and exclusions hereinafter contained, this Policy
insures:
1.
All real and personal property (including improvements and betterments)
and contractors equipment of this Insured or similar property in the Insured’s
care, custody or control for which the Insured may be held liable against all risks
of direct physical loss or damage occurring during the period of this policy as
stated in the Schedule and/or Declarations attaching to and forming part of this
policy . . . .43
The Policies list the following categories of Property that are excluded: “8. Water, land or land
values;” and “9. Property while Offshore or situated underground unless otherwise endorsed.”44
Under Kansas law, the terms of an insurance policy are to be construed according to the
following rules of construction:
43
Policy, Doc. 139-7, p.57.
44
Policy, Doc. 139-7, p. 60.
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The language of an insurance policy, like any other contract, must, if possible, be
construed in such way as to give effect to the intention of the parties. In
construing a policy of insurance, a court should consider the instrument as a
whole and endeavor to ascertain the intention of the parties from the language
used, taking into account the situation of the parties, the nature of the subject
matter, and the purpose to be accomplished.
Because the insurer prepares its own contracts, it has a duty to make the meaning
clear. If the insurer intends to restrict or limit coverage under the policy, it must
use clear and unambiguous language; otherwise, the policy will be liberally
construed in favor of the insured. If an insurance policy's language is clear and
unambiguous, it must be taken in its plain, ordinary, and popular sense. In such
case, there is no need for judicial interpretation or the application of rules of
liberal construction. The court shall not make another contract for the parties and
must enforce the contract as made.
...
Whether a written instrument is ambiguous is a question of law to be decided by
the courts. Courts should not strain to create an ambiguity where, in common
sense, there is not one. The test in determining whether an insurance contract is
ambiguous is not what the insurer intends the language to mean, but what a
reasonably prudent insured would understand the language to mean.45
As explained below, the Court finds the language of the Policies’ exclusions to be clear and
unambiguous. Because the Lyons Mine is both “land” and “property situated underground,” it is
excluded from coverage.
1. The “Land” Exclusion
Defendant contends that with regard to any damage or loss that the mine itself has
incurred, such loss or damage is excluded under the “land” exclusion. Plaintiffs claim that the
mine is not “land” but fail to state what they consider it to be. Regardless, the definition of
“mine” set forth in the Mine Safety and Health Act,46 defines a “coal or other mine” as “(A) an
45
Am. Family Mut. Ins. Co. v. Wilkins, 285 Kan. 1054, 1058-59, 179 P.3d 1104, 1109-10 (2008) (citing
O'Bryan v. Columbia Ins. Group, 274 Kan. 572, 575-76, 56 P.3d 789 (2002)).
46
30 U.S.C. §§ 801 et seq.
-16-
area of land from which minerals are extracted in nonliquid form . . . and (C) lands, excavations,
underground passageways, shafts, slopes, tunnels . . .”47 This definition supports a finding that
the mine is land and thus excluded by the “land” exclusion contained in the policies.
Furthermore, the fact that the Policies insure real property but then exclude “land” from
coverage does not create an ambiguity. In Horning Wire Corp. v. Home Indemnity Co.,48 the
Seventh Circuit affirmed summary judgment based on an exclusion in an insurance contract that
stated “[i]nsurance shall not apply . . . to land, growing crops and standing timber.”49 The
insured argued that this exclusion created an ambiguity because the insurance contract insured
against risk of direct physical loss “to all real property.”50 The Seventh Circuit disagreed,
finding that the two provisions could be read together such that land was excluded from coverage
but other real property, such as the buildings, were covered.51
Applying the Seventh Circuit’s reasoning from Horning Wire here, the Court finds that
the Policies are not ambiguous even though they cover “real property” but exclude “land” from
coverage. These provisions can be read together such that land is excluded from coverage but
other types of real property are covered under the Policies. Therefore, because the mine is
“land,” it is excluded from coverage under the Policies.
47
30 U.S.C. § 802 (emphasis added).
48
8 F.3d 587 (7th Cir. 1993).
49
Id. at 589.
50
Id. at 589-90.
51
Id. at 590.
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2. The “Property Situated Underground” Exclusion
Defendant also argues that the Lyons Mine is excluded from coverage based on the
“property situated underground” exclusion because it is located underground and not “otherwise
endorsed” under the Policies. In response, Plaintiffs argue that this exclusion does not apply
because the mine is an “improvement” or “betterment,” which the exclusion does not cover, and
that the exclusion only applies to personal property. According to Plaintiffs, the phrases “while
offshore” and “situated underground” contain temporal and spatial modifiers that signal that the
exclusion only applies to property that is capable of being moved or placed—not fixed real
property or improvements.
The Court disagrees with Plaintiffs’ construction. The plain language of the exclusion
refers to “property” in general. Thus, all property, regardless of whether it is classified as “real”
or “personal” or an “improvement” or “betterment,” is subject to the exclusion. A court will not
make another contract for the parties and will enforce the contract as made.52 If the parties
intended for the exclusion to only apply to specific types of property, then the Policies would
have expressly provided as such. The mine is “property situated underground” and is not
otherwise endorsed by the Policies. Therefore, this exclusion applies to the mine itself.
3. A Reasonably Prudent Insured Would Understand the Language of the
Policies Excludes the Mine from Coverage.
Plaintiffs also argue that the mine is not excluded from coverage because a reasonably
prudent insured would believe the mine itself is covered property. However, Plaintiffs’ evidence
does not support this assertion, and in fact, suggests the opposite. Plaintiffs claim that Peter
52
Am Family Mut. Ins. Co., 285 Kan. at 1059, 179 P.3d at 1109.
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Powell, owner of the Lyons Mine, testified that he believed the Policies covered the mine.
Powell’s testimony states:
Q. And that you didn’t – there was nothing that said the mine has a value of, let’s
say, 10 million dollars or 15 million dollars or 5 million dollars? There was no–
A. Well, it’s—um, it’s kind of a peculiar question. But I guess there wasn’t a
specific line item, but there was totals and understandings of values of property.
Q. Do you have – what – what do you value the mine at itself, not the equipment
inside of it, but just the mine?
A. I consider replacement value to be about 80 million dollars. I think it’s been
appraised by the bank by as much as 45 million dollars.53
The Policies have an overall limit of $7.5 million dollars and a real property sublimit of
$3,675,239. Powell testified that he valued the mine at eighty million dollars and that it had been
appraised at forty-five million dollars. If the mine is covered property, as Plaintiffs’ assert, then
it would be severely underinsured. In addition, the 2008 Statement of Values referenced in the
Policy, which provides values for insured property under the Policy, shows a total value as of
April 1, 2007, of $13,513,017.00. However, while the Statement of Values contains entries for
various buildings and equipment, it does not contain an entry for the mine itself. This indicates
that while the Policies were intended to cover equipment and buildings, they were never intended
to cover the mine itself.
The Policies also contain an Occurrence Limit of Liability Endorsement that provides the
following:
2. The premium for this policy is based on the Statement of Values provided to
the Insurer(s) by or on behalf of the Insured and kept on file by the Insurer(s). In
the event of loss under the policy, the liability of the Insurer(s) shall be limited to
the least of the following:
53
Powell Deposition, Doc. 143-7, p. 7.
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a.) The actual adjusted amount of loss, less applicable deductible(s);
b.) As respects each location insured by this Policy, 100 percent of the total
combined stated values for all categories of covered property (e.g. building,
contents) and other covered exposures (e.g., business income, extra expense,
rental loss), shown for that location on the latest statement of values or other
documentation on file with the insurer.54
This language shows that the premium is based on the values set forth in the Statement of Values
and that Defendant’s liability is limited to “100 percent of the total combined stated values for all
categories of property.”55
There is no stated value for the mine itself, again supporting
Defendant’s argument that the parties did not intend for the mine to be covered property.
Plaintiffs also claim that the evidence shows that Defendant “paid multiple claims for
damage to the mine shafts.”56 But, again, Plaintiffs’ cited testimony does not support their
assertion. The cited testimony shows that the claims made in 2006 and 2009 were for damage to
the skip hoist, which is equipment used to raise and lower items from the surface into the mine,
and buckets. The claims were not for damage to the mine itself.
In conclusion, the Court finds the language of the Policies to be unambiguous and that the
“land” and “property situated underground” exclusions exclude the mine from coverage.
Plaintiffs’ claims are barred to the extent they seek to recover for damage to the Lyons Mine
itself.
To the extent Plaintiffs seek to recover for loss or damage to its equipment or
operations,57 the “land” and “property situated underground” exclusions do not apply.
54
Policy, Doc. 139-7, p. 49.
55
Policy, Doc. 139-7, p. 49.
56
Plaintiffs’ Memorandum in Opposition to Lexington’s Motion for Summary Judgment, Doc. 140, p.
71.
57
According to the Pretrial Order, Plaintiffs are seeking to recover for loss or damage to more than just
the mine itself. It states that Plaintiffs are seeking to recover for “loss or damage to, risk of direct physical loss or
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IT IS THEREFORE ORDERED that Defendant Lexington Insurance Company’s
Motion for Ruling on Its Remaining Summary Judgment Bases (Doc. 170) is GRANTED.
IT IS FURTHER ORDERED that Defendant’s Motion for Summary Judgment (Doc.
138) is GRANTED.
IT IS SO ORDERED.
Dated this 27th day of May, 2014.
ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE
damage to, and/or to defend safeguard, preserve, and protect against actual or imminent loss to . . . the Lyons Salt
Mine, the other insured property and equipment located at the Lyons Salt Mine, the continued business operations of
the Lyons Salt Mine, and all other interests at the Lyons Salt Mine insured under one or more of the Policies.”
Pretrial Order, Doc. 135, p. 9.
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