Creek v. Harder Constr.
Case Date: 06/26/1998
Court: Court of Appeals
Docket No: 77325
25 Kan. App. 2d 232 No. 77,325 ALAN D. CREEK and REBECCA CREEK, Appellants, v. HARDER CONSTRUCTION, INC. Defendant, and MARYLAND CASUALTY COMPANY, Garnishee/Appellee. SYLLABUS BY THE COURT 1. The failure of an insured to give its insurer a timely notice of loss will not relieve the insurer from liability owed to a third party unless the insurer can show that it was prejudiced in its ability to defend against such liability. 2. When an insured fails to give its insurer a timely notice of loss and to inform its insurer of a suit and a default judgment taken against the insured and this delay prejudices the insurer's ability to defend against such liability, the insurer should be relieved of liability owed to a third party. Appeal from Johnson District Court; JAMES FRANKLIN DAVIS, judge. Opinion filed June 26, 1998. Affirmed. Karl Kuckelman and Brian C. Behrens, of Wallace, Saunders, Austin, Brown and Enochs, Chartered, of Overland Park, for appellants. Douglas M. Greenwald, of McAnany, Van Cleave & Phillips, P.A., of Kansas City, for garnishee/appellee. Before GREEN, P.J., ELLIOTT, J., and JANICE D. RUSSELL, District Judge, assigned. GREEN, J.: Alan D. Creek and Rebecca Creek appeal from a judgment of the trial court denying their garnishment against the garnishee, Maryland Casualty Company (Maryland Casualty). The Creeks maintain that Maryland Casualty was required to pay a judgment previously entered against its insured, Harder Construction, Inc. (Harder). The Creeks argue that the trial court erred in determining that Maryland Casualty was relieved from liability because of Harder's noncooperation. We disagree and affirm. The Creeks entered into a contract with Harder for the construction and sale of a new home. Badger Roofing, a subcontractor, installed the roof. On September 8, 1987, the Creeks purchased the finished house from Harder. Scott Harder, Harder's previous owner, testified that the Creeks experienced some problems with the roof early in their occupancy and that Badger Roofing made repairs. However, after a big storm in May 1990, the roof leaked, causing interior damage. In September 1990, the Creeks sued Harder for breach of contract, negligence, and defective construction. On May 31, 1991, the Creeks were granted a default judgment in the amount of $10,350.25. During a debtor's examination held in August 1991, the Creeks discovered that Harder had a comprehensive general liability insurance policy with Maryland Casualty. The policy was in effect from February 1, 1987, to February 1, 1988. On August 5, 1991, counsel for the Creeks notified Maryland Casualty of the claim, suit, and judgment. In response, on August 16, 1991, Maryland Casualty mailed two letters to Harder, a reservation of rights and defenses under the policy and a letter requesting information about the claim and loss. On December 10, 1991, Maryland Casualty mailed a second reservation of rights letter. Scott Harder testified that Harder received the three letters but did not respond to them. On August 20, 1991, the Creeks offered to set aside the default judgment and to have a trial on the merits. Maryland Casualty declined the offer, contending that it had already been prejudiced by breach of several policy provisions, including those requiring notice and cooperation. Next, the Creeks initiated the instant garnishment action against Maryland Casualty to recover the amount of the default judgment. Maryland Casualty denied that it owed any debt to Harder, and both parties filed motions for summary judgment. The trial court granted the Creeks partial summary judgment on the issue of policy coverage but denied the parties' motions on the issue of Maryland Casualty's liability, finding that there were material questions of fact as to the policy defenses asserted by Maryland Casualty. After an evidentiary hearing, the trial court concluded that Maryland Casualty had been prejudiced by Harder's failure to provide notice of the claim and of the corresponding suit, and by Harder's failure to cooperate. The Creeks first argue that the trial court's judgment regarding Harder's breach of the notice provision of the insurance policy is not supported by substantial competent evidence. Our standard of review of the trial court's findings of fact and conclusions of law is well settled:
The insurance policy between Harder and Maryland Casualty required Harder's cooperation as a condition precedent to the payment of any claims by Maryland Casualty. "The purpose of cooperation clauses is to protect the insurer's interest and prevent collusion between the insured and the injured person." Watson v. Jones, 227 Kan. 862, 866-67, 610 P.2d 619 (1980). The notice provision of the insurance policy stated:
The trial court ruled that Harder had violated the above contractual provisions and that such violations had caused Maryland Casualty "substantial prejudice." The trial court stated:
The Creeks challenge the trial court's finding that Maryland Casualty lost the opportunity to conduct its own investigation of the loss, to appraise the damages, and to determine responsibility for the damages. Specifically, the Creeks contend that Maryland Casualty had the opportunity to investigate, to set aside the default judgment, and to defend the claim after the Creeks notified the company of the loss in August 1991, but declined to do so. The Creeks argue that Maryland Casualty's failure to pursue these opportunities prevents it from claiming that it was prejudiced. For support, the Creeks cite Cessna Aircraft Co. v. Hartford Acc. & Indem. Co., 900 F. Supp. 1489 (D. Kan. 1995); Hunt v. Kling Motor Co., 841 F. Supp. 1098 (D. Kan. 1994); and Home Life Ins. Co. v. Clay, 11 Kan. App. 2d 280, 719 P.2d 756, rev. denied 239 Kan. 693 (1986). In Home Life, Home Life Insurance Company sued its former employee for forging checks belonging to the company and depositing them in his own bank account. Home Life also sued the employee's bank (Bank) for conversion. The Bank filed a third-party claim against Reliance Insurance Company, one of its bonding companies. Finding that the Bank had failed to comply with policy provisions requiring that it give notice of loss "as soon as practicable," the trial court granted the bonding company summary judgment. 11 Kan. App. 2d at 284. The Bank appealed and argued that there was no evidence that the bonding company had been prejudiced by the untimely notice. Citing and discussing several cases, the Home Life court stated:
Similarly, in Cessna, the trial court denied summary judgment. Citing Home Life, the court reiterated the above principles and stated:
Home Life and Cessna merely hold that an insurer must demonstrate prejudice in order to escape liability based upon its insured's failure to comply with notice requirements. This is undisputed. Significantly, neither Home Life nor Cessna analyzes what facts are sufficient to demonstrate prejudice. Although arguably on point, the Creeks' third case, Kling Motor, does not support the Creeks' position. In Kling Motor, the plaintiff, Steven Hunt, obtained a default judgment against Kling Motor. After the judgment was obtained, Hunt's counsel notified Kling Motor's insurance company, Universal Underwriters Insurance Co. (Universal), that Kling Motor had been named as a defendant in a lawsuit, that a default judgment had been taken, and that Hunt would look to Universal to satisfy any monetary judgment entered against Kling Motor. The letter further advised Universal of a pending hearing to determine the amount of damages. Thereafter, the plaintiff served Universal with an order of garnishment. Universal denied that it owed anything to Kling Motor and argued that no coverage existed because Universal had been substantially prejudiced by Kling Motor's breach of the insurance policy's provisions requiring the insured to give timely notice to the insurer of any claim, lawsuit, or occurrence. Agreeing that Universal had been substantially prejudiced by Kling Motor's breach of its duty to timely notify Universal of any claim, the Kling Motor court reasoned:
Hunt argued that Universal was not prejudiced because it received notice before the court assessed damages. Mirroring the Creeks' arguments in the instant case, Hunt reasoned that Universal could have appeared at the damages hearing, contested damages, and petitioned the court to set aside the default judgment. 841 F. Supp. at 1104. The Kling Motor court found this argument unpersuasive and emphasized that there was no guarantee that a court would set aside the judgment. For support, the court cited Kimble v. Aetna Cas. and Sur. Co., 767 S.W.2d 846 (Tex. Ct. App. 1989) (prejudice resulted to the insurer by the change in its position brought about by the insured's failure to forward suit papers until after default judgment had been rendered, even though the option to file a motion for new trial was still available to the insurer), and Reisman v. Delgado, 117 Ill. App. 3d 331, 453 N.E. 2d 902 (1983) (an insurer is prejudiced when it does not receive notice of a lawsuit until after entry of a default judgment even where the insurer receives notice within time to seek post-judgment relief, particularly where the judgment appears to be valid and no good cause is shown for granting relief from the judgment). Because Harder failed to give Maryland Casualty notice of the loss and to inform it of the suit and default judgment taken against Harder and because this delay prejudiced Maryland Casualty's ability to defend against the Creeks' suit, Maryland Casualty has shown that it should be relieved of liability under the Creeks' judgment and garnishment. The Creeks also argue that Maryland Casualty failed to demonstrate that it was substantially prejudiced by Harder's breach of the insurance contract's cooperation clause. The Creeks cite Watson, 227 Kan. 862, and Boone v. Lowry, 8 Kan. App. 2d 293, 657 P.2d 64, rev. denied 232 Kan. 875 (1983). The Boone court, citing Watson and Jameson v. Farmers Mutual Automobile Ins. Co., 181 Kan. 120, 309 P.2d 394 (1957), stated that in Kansas a breach of a cooperation clause will not relieve an insurer of liability unless the breach causes substantial prejudice to the insurer's ability to defend itself and that the insurer bears the burden of demonstrating such prejudice. 8 Kan. App. 2d at 299. The cooperation provision of the insurance policy stated:
The Creeks argue that Harder's failure to respond to Maryland Casualty's letters requesting information and its reservation of rights letters is insufficient to demonstrate that Harder failed to cooperate and that Maryland Casualty suffered substantial prejudice. The trial court rejected this argument and found that Harder's breach of the cooperation clause coupled with its breach of the notice provisions resulted in substantial prejudice to Maryland Casualty. Distinguishing Watson and Boone, the trial court stated:
We agree with the trial court. Because the trial court's determination that Harder's lack of cooperation prejudiced Maryland Casualty is supported by substantial evidence, the Creeks' argument fails. See Watson, 227 Kan. at 870. Affirmed. |