H&L Associates of Kansas City, LLC v. Midwestern Indemnity Company, The
Filing
42
MEMORANDUM AND ORDER granting in part and denying in part 10 Motion to Dismiss. Signed by District Judge Eric F. Melgren on 7/25/2013. (cm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
H&L ASSOCIATES OF
KANSAS CITY, LLC,
Plaintiff,
vs.
Case No. 12-CV-2713-EFM-DJW
THE MIDWESTERN INDMENITY
COMPANY,
Defendant.
MEMORANDUM AND ORDER
This case involves an insurance dispute between Plaintiff H&L Associates of Kansas
City, LLC (“H&L Associates”) and Defendant The Midwestern Indemnity Company
(“Midwestern Indemnity”) regarding Plaintiff’s claim for coverage under a commercial property
insurance policy issued by Defendant. Plaintiff asserts four claims against Defendant: breach of
contract (Count I), vexatious refusal (Count II), breach of duty of good faith and fair dealing
(Count III), and willful and wanton misconduct (Count IV). Defendant has moved to dismiss
Counts III and IV of the Complaint (Doc. 10). For the following reasons, the Court grants in part
and denies in part Defendant’s motion.
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I.
Factual and Procedural Background
Plaintiff H&L Associates is a Missouri limited liability company with an office in
Kansas. H&L Associates’s members are citizens of Kansas, Colorado, Florida, and New York.
Defendant Midwestern Indemnity is an insurance company organized under Ohio law with its
principal place of business in Loveland, Ohio.
Plaintiff is the owner of commercial property located in Kansas City, Missouri (the
“Subject Property”). Defendant issued a commercial property insurance policy (the “Insurance
Policy”) effective from October 27, 2011, to October 27, 2012, to Plaintiff for the Subject
Property. On or about April 6, 2012, the roof of the Subject Property collapsed. Plaintiff
subsequently filed a claim with Defendant under the Insurance Policy, which Defendant denied.
On October 30, 2012, Defendant filed suit against Plaintiff in the United States District Court for
the Western District of Missouri, styled The Midwestern Indemnity Company v. H&L Associates
of Kansas City, LLC, No. 12-1315-BP, seeking a declaratory judgment regarding insurance
coverage relating to the property damage and business loss at the Subject Property. That action
was dismissed on January 22, 2013.
Plaintiff initiated this lawsuit on November 7, 2012, asserting four claims against
Defendant. Count I, titled “Breach of Contract,” asserts that Defendant breached the Policy by
“refus[ing] to pay the claim of [Plaintiff] under the Insurance Policy.”1
Count II, titled
“Vexatious Refusal,” claims that “Midwestern Indemnity has refused without just cause or
excuse to pay the full amount of [Plaintiff’s] loss under the Insurance Policy.”2 Count III, titled
“Breach of Duty of Good Faith and Fair Dealing,” claims that Defendant was charged with the
1
Complaint, Doc. 1, p. 7.
2
Id. at p. 8.
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duty of good faith and fair dealing as a party to the Policy and that Plaintiff breached this duty by
denying Plaintiff’s claim, by lulling Plaintiff into a false sense of security regarding its review of
claim-related materials, by filing preemptive litigation against Plaintiff in the Western District of
Missouri on October 30, 2012, and by wrongfully cancelling Plaintiff’s policy. Finally, Count
IV, titled “Willful and Wanton Misconduct,” asserts that Defendant had a duty to make a careful
examination of the Subject Property to verify that it was insurable in its existing condition and
failed to sufficiently inspect the Subject Property with the intent to deprive Plaintiff of its “ability
to pursue an insurance claim in the event of a roof collapse.”3 Defendant has filed a Motion to
Dismiss Counts III and IV (“Breach of Duty of Good Faith and Fair Dealing” and “Willful and
Wanton Misconduct,” respectively) on the basis that these claims are tort claims that are
dependent upon, and cannot be separated from, Plaintiff’s “Breach of Contract” claim.
II.
Legal Standard
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim for relief that is plausible on its face.’ ”4 “[T]he mere
metaphysical possibility that some plaintiff could prove some set of facts in support of the
pleaded claims is insufficient; the complaint must give the court reason to believe that this
plaintiff has a reasonable likelihood of mustering factual support for these claims.”5 “The
court’s function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties
might present at trial, but to assess whether the plaintiff’s complaint alone is legally sufficient to
3
Id. at p. 11.
4
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
5
Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007).
(2007)).
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state a claim for which relief may be granted.”6 In determining whether a claim is facially
plausible, the court must draw on its judicial experience and common sense.7 All well-pleaded
facts in the complaint are assumed to be true and are viewed in the light most favorable to the
plaintiff.8 Allegations that merely state legal conclusions, however, need not be accepted as
true.9
III.
A.
Analysis
Count III- Breach of Duty of Good Faith and Fair Dealing
Defendant contends that Plaintiff is barred from bringing Count III of its Complaint
because Plaintiff cannot assert a tort theory where its tort actions are based on the same conduct
alleged to constitute breach of contract. According to Defendant, Count III is “dependent on and
cannot be separated from its breach of contract claim.”10 In response, Plaintiff asserts that Count
III is not a tort claim but a contract-based claim for breach of the implied duty of good faith and
fair dealing, and thus, is a viable corollary to its breach of contract claim under Kansas law.
1.
Choice of Law
Plaintiff contends that Count III is governed by Kansas law. Defendant argues that
because Kansas and Missouri law is the same, the choice of law issue need not be addressed. In
diversity cases, federal courts apply “the substantive law of the forum state, including its choice
6
Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003).
7
Iqbal, 556 U.S. at 678.
8
See Zinermon v. Burch, 494 U.S. 113, 118 (1990); Swanson v. Bixler, 750 F.2d 810, 813 (10th Cir.
9
See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
10
Defendant’s Suggestions In Support of Motion to Dismiss, Doc. 11, p. 2.
1984).
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of law rules.”11 However, when no conflict of law exists, the Court may simply apply the law of
the forum state.12
Here, an actual conflict exists between Kansas and Missouri law. Although Kansas
courts have not specifically addressed whether a party may bring a contract-based claim for the
breach of duty of good faith and fair dealing in the context of a first-party insurance claim, they
have held that such duty applies in every contract.13 The federal district court for the Eastern
District of Missouri, however, has found that Missouri law does not recognize a claim for
“breach of a covenant of good faith and fair dealing” in the context of a first-party insurance
claim.14 Therefore, the Court will apply Kansas’s choice of law rules when determining whether
Kansas or Missouri law applies to Count III of Plaintiff’s Complaint.
Kansas courts use the First Restatement of Conflict of Laws to resolve choice of law
issues.15 “When the question raised by the contractual dispute goes to the substance of the
obligation, Kansas courts apply the primary rule contained in section 332, lex loci contractus,
which calls for the application of the law of the state where the contract is made.”16 More
specifically, in cases involving insurance policies, Kansas courts have found that the law of the
11
Garcia v. Int’l Elevator Co., 358 F.3d 777, 779 (10th Cir. 2004).
12
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 816 (1985).
13
Howard v. Ferrellgas Partners, L.P., 2011 WL 3299689, at *6 (D. Kan. Aug. 1, 2011) (citing Law v.
Law Co. Bldg. Assocs., 42 Kan. App. 2d 278, 285, 210 P.3d 676, 682 (2009)).
14
Luechtefeld v. Unumprovident Corp., 2006 WL 3257719, at *2 (E.D. Mo. Nov. 9, 2006).
15
Moses v. Halstead, 581 F.3d 1248, 1252 (10th Cir. 2009) (citing ARY Jewelers, LLC v. Krigel, 277
Kan. 464, 481, 85 P.3d 1151, 1161 (2004)).
16
Id. (citing Layne Christensen Co. v. Zurich Canada, 30 Kan. App. 2d 128, 142, 38 P.3d 757, 766-67
(2002)).
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place of contracting will determine “whether [an insured] has a cause of action . . . under the
insurance policy.”17
Kansas courts have generally held that an insurance contract is made where the policy is
delivered.18 Here, the Insurance Policy shows that it was delivered to the insurance broker and
the insured (Plaintiff) in Kansas. Therefore, Kansas is the place of contracting and Kansas law
governs whether Plaintiff has asserted a valid claim for breach of the duty of good faith and fair
dealing against Defendant.
2.
Sufficiency of Plaintiff’s Claim
As noted above, Defendant argues that Plaintiff’s claim for “Breach of Duty of Good
Faith and Fair Dealing” should be barred because Kansas courts do not recognize a bad faith tort
action in the context of a first-party insurance claim. Defendant is correct that Kansas courts do
not recognize such claims in the context of a first-party insurance claim.19 However, in Kansas,
insurance policies are typically considered contracts,20 and Kansas law implies a duty of good
faith and fair dealing in every contract.21 To prevail on such a claim, a plaintiff must (1) “plead a
cause of action for “breach of contract,” not a separate cause of action for “breach of duty of
17
Moses, 581 F.3d at 1252, 1254.
18
Layne Christensen, 30 Kan. App. 2d at 144, 38 P.3d at 767.
19
See Spencer v. Aetna Life & Cas. Ins. Co., 227 Kan. 914, 926, 611 P.2d 149, 158 (1980) (holding that
the tort of bad faith is not recognized in Kansas).
20
Aves By and Through Aves v. Shah, 258 Kan. 506, 511, 906 P.2d 642, 648 (1995) (citing Catholic
Diocese of Dodge City v. Raymer, 251 Kan. 689, 693, 840 P.2d 456 (1992)).
21
Howard, 2011 WL 3299689, at *6 (citing Law v. Law Co. Bldg. Assocs., 42 Kan. App. 2d 278, 285,
210 P.3d 676, 682 (2009)).
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good faith,’ ” and (2) point to a term in the contract that “the defendant[] allegedly violated by
failing to abide by the good faith spirit of that term.”22
In this case, Plaintiff asserts three bases as to Defendant’s breach of the implied duty of
good faith. First, Plaintiff alleges that Defendant
acted in bad faith in denying H&L Associates’ claim, as exhibited by its
numerous violations of applicable state insurance regulations prohibiting (a) claim
denials made without conducting a reasonable investigation based up on all
available information; (b) misrepresentations of pertinent facts and insurance
policy provisions related to the coverage issue; and (c) failures to acknowledge
and act reasonably promptly upon communications with respect to claims arising
under insurance policies.23
Second, Plaintiff alleges that Defendant
also acted in bad faith by representing to H&L Associates on October 4, 2012 that
it would keep H&L Associates advised of its review of claim-related materials,
lulling H&L Associates into a false sense of security with this representation, and
then refusing to engage in any further communication with Plaintiff and, instead,
proceeding to file preemptive litigation against H&L Associates on October 30,
2012.24
And, third, Plaintiff alleges that Defendant acted in bad faith “by wrongfully cancelling the
Insurance Policy on the basis of ‘substantial change in risk’ that was occasioned only by
Midwestern Indemnity’s refusal to properly pay H&L Associates’ [sic] claim under the
Insurance Policy.”25
Of these, only the third basis is sufficient to state a claim for breach of the implied
covenant of good faith and fair dealing.
If Plaintiff can prove that Defendant wrongfully
22
Id. (citing Wayman v. Amoco Oil Co., 923 F. Supp. 1322, 1359 (D. Kan. 1996)).
23
Complaint, Doc. 1, p. 9.
24
Id.
25
Id. at p. 10.
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cancelled the insurance policy, then Plaintiff would be entitled to recover for breach of contract.
With respect to Plaintiff’s first basis, Plaintiff has alleged that Defendant violated various “state
insurance regulations” in the course of investigating Plaintiff’s insurance claim.26 These “state
insurance regulations” are set forth in K.S.A. § 40-2404, which describes unfair methods of
competition in the insurance business. Under Kansas law, the insurance commissioner has the
sole authority to enforce these provisions.27 They do not create a private right of action,28 and
therefore, cannot serve as a basis for Plaintiff’s claim.
With respect to Plaintiff’s second basis—that Defendant acted in bad faith by
representing to Plaintiff that it would keep Plaintiff advised of its review of its claim related
materials and then refusing to communicate with Plaintiff and filing preemptive litigation—these
allegations are not based on the violation of any term in the Insurance Policy. Therefore, they
are not sufficient to state a breach of the duty of good faith and fair dealing claim under Kansas
law. Accordingly, the Court finds that Plaintiff has sufficiently plead a breach of the implied
duty of good faith and fair dealing claim only to the extent that Plaintiff has alleged that
Defendant wrongfully canceled the Insurance Policy.29 The Court grants Defendant’s motions
with respect to the remaining allegations set forth in Count III.
26
Plaintiff’s Memorandum in Opposition to Defendant’s Motion to Dismiss, Doc. 12, p. 5.
27
See Bonnell v. Bank of Am. 284 F. Supp. 2d 1284, 1289 (D. Kan. 2003) (finding that K.S.A. § 40-2404
does not create a private right of action).
28
Id.
29
Notwithstanding the requirement in Howard v. Ferrellgas Partners, L.P., that a claim for breach of the
implied duty of good faith and fair dealing should be plead as a breach of contract claim and “not a separate cause of
action for ‘breach of duty of good faith,’ ” the Court in Howard allowed a claim for breach of implied duty of good
faith to proceed even though the plaintiff plead a separate cause of action for breach of contract. 2011 WL 3299689,
at *6. The court found that the plaintiff adequately plead a separate cause of action for breach of contract and that
his claim for breach of the implied covenant of good faith and fair dealing was appropriate because it “ha[d] its
anchor in Count I.” Id. The Court interprets this to mean that a claim for breach of implied duty of good faith and
fair dealing cannot be plead alone but must be anchored in a breach of contract claim. See also Layne Christensen
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B.
Count IV- Willful and Wanton Misconduct
Defendant also asserts that Count IV is deficient because it is dependent on and cannot be
separated from Plaintiff’s “Breach of Contract” claim. Plaintiff argues in response that its claim
is proper because it is based on an independent legal duty imposed on Defendant to appropriately
examine and approve the insurable condition of the Subject Property before issuing the Insurance
Policy.
1.
Choice of Law
Plaintiff contends that Kansas law applies to Count IV of its Complaint, while Defendant
again argues that because Kansas and Missouri law are the same, the Court need not decide the
choice of law issue. The Court agrees with Defendant that there is no conflict between Kansas
and Missouri law. Both Kansas and Missouri law limit when a party may assert a tort claim in
addition to a breach of contract claim in the context of a first-party insurance dispute.30
Therefore, the Court will apply Kansas law in determining whether to allow Count IV to
proceed.
Co. v. Bro-Tech Corp., 2011 WL 3847076, at *6 (D. Kan. Aug. 29, 2011) (finding that defendant adequately stated a
counterclaim for breach of the implied covenant of good faith and fair dealing in addition to its other counterclaims,
which included a breach of contract claim). Accordingly, Count III will not be dismissed because it states a separate
cause of action for “Breach of Duty of Good Faith and Fair Dealing.” The Court notes however, that its ruling does
not mean that Plaintiff can recover for both its breach of contract and breach of duty of good faith and fair dealing
claims should it prevail on both claims at trial. Lone Star Steakhouse and Saloon, Inc. v. Liberty Mut. Ins. Grp.,
2003 WL 22149669, at *3 (D. Kan. Aug. 14, 2003) (stating that the plaintiff cannot recover twice for the same
harm).
30
Smith v. Hawkeye-Security Ins. Co., 842 F. Supp. 1373, 1375 (D. Kan. 1994) (citing Spencer, 227 Kan.
at 926, 611 P.2d at 928; Isler v. Texas Oil & Gas Corp., 749 F.2d 22, 24 (10th Cir. 1984)); Overcast v. Billings, 11
S.W.3d 62, 68-69 (Mo. 2000); Ryann Spencer Grp., Inc. v. Assurance Co. of Am., 275 S.W.3d 284, 290 (Mo. App.
E.D. 2008).
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2.
Sufficiency of Plaintiff’s Claim
Under Kansas law, “[t]he existence of a contractual relationship bars the assertion of tort
claims covering the same subject matter governed by the contract.”31 However, the existence of
a contractual relationship does not preclude a tort action for violation of an independent duty
imposed by law.32 Plaintiff argues that its claim for “Willful and Wanton Misconduct” is
sufficiently plead because it alleges Defendant had a separate legal duty to examine the property
properly to verify that it was insurable. Specifically, the Complaint alleges that “before it
insured the Subject Property, Midwestern Indemnity was charged with a duty to make a careful
examination of the property and to verify that the property was, in fact, insurable in its existing
condition.”33 Plaintiff argues that because the duty to inspect arose prior to the issuance of the
Insurance Policy, it must give rise to an independent tort claim.
The Court disagrees. The duty to inspect the insured property and the obligation to pay
benefits for properly insured claims arise out of the Insurance Policy. There is no independent
duty or tort, which is evident from Plaintiff’s Complaint. Plaintiff alleges that Defendant’s
conduct “was designed to attempt to conceal what Midwestern Indemnity has now asserted is a
limited scope of coverage under the Insurance Policy and/or provide Midwestern Indemnity a
31
Smith 842 F. Supp. at 1375 (citing Spencer, 227 Kan. at 926, 611 P.2d at 928; Isler v. Texas Oil & Gas
Corp., 749 F.2d 22, 24 (10th Cir. 1984)); see also Graphic Techs. v. Pitney Bowes Inc., 998 F. Supp. 1174, 1179 (D.
Kan. 1998) (“A party may not bring a tort claim based on the same facts alleged in its contract claim if the contract
specifically defines the duties of the parties.”).
32
See, e.g., Malone v. Univ. of Kan. Med. Ctr., 552 P.2d 885, 888 (Kan. 1976) (“Torts can, of course, be
committed by parties to a contract. The question to be determined . . . is whether the actions or omissions
complained of constitute a violation of duties imposed by law . . . .”); Graphic Techs., 998 F. Supp. at 1179 (“A
party may be liable in tort for breaching an independent duty towards another, even where the relationship creating
such duty originates in the parties’ contract.”).
33
Complaint, Doc. 1, p. 10.
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convenient (although specious) basis for denying coverage in the event of a roof collapse.”34
Plaintiff also alleges that Defendant acted with the intent “to deprive “H&L Associates of its
bargained-for coverage and/or the intent to frustrate H&L Associate’s ability to pursue an
insurance claim . . . .”35 These allegations relate to the scope of coverage under the Insurance
Policy and thus arise out of the same facts as Plaintiff’s breach of contract claim. Accordingly,
the Court grants Defendant’s motion with respect to Count IV of Plaintiff’s Complaint.
IT IS ACCORDINGLY ORDERED this 25th day of July 2013, that Defendant The
Midwestern Indemnity Company’s Partial Motion to Dismiss Counts III and IV of Plaintiff’s
Complaint (Doc. 10) is hereby GRANTED IN PART AND DENIED IN PART.
IT IS SO ORDERED.
ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE
34
Id. at p. 11.
35
Id.
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