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holding that manufacturer acted reasonably and in good faith in making repairs in order to avoid an imminent lawsuit, and that manufacturer was thus "legally obligated to pay" for the repairs, for which it was entitled to reimbursement from the insurer
Summary of this case from Lexicon, Inc. v. Ace American Insurance CompanyOpinion
Case No. 00-4013-JPO
March 1, 2002
MEMORANDUM AND ORDER
I. Introduction.
This declaratory judgment action was brought by Potomac Insurance of Illinois ("Potomac") against its insured, Ray Anderson Company, Inc. ("Ray Anderson"), to determine coverage under a commercial general liability ("CGL") policy. In turn, Ray Anderson asserted a counterclaim for amounts claimed to be due from Potomac under the CGL policy. A bench trial was held on January 8, 2002. The court, having thoroughly considered the evidence and the parties' arguments, is now prepared to issue its findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a). As explained below, the court finds against Potomac and awards Ray Anderson $37,655.
II. Findings of Fact. Installation of the Windows and the Initial Lawsuit.
Ray Anderson distributes windows manufactured by Pella Corporation ("Pella"). In the summer of 1995, Ray Anderson sold a number of Pella windows to Ralph Dean Construction, a general contractor, to be installed in the home of Jonson and Rebekah Huang in Topeka, Kansas. Pella manufactured the windows in Iowa, shipped them to Ray Anderson in Topeka, and employees of Ray Anderson assembled the individual window units into composites. A subcontractor of Ralph Dean Construction then installed the windows in the Huangs' home.
Later in 1995, the Huangs began complaining that the windows leaked water and moisture, damaging their home. In response to the Huangs' complaints, Ron Willis, who was an employee of Ray Anderson at the time and who is now Ray Anderson's president, recommended that a number of mullions in the windows be replaced. After receiving continued complaints from the Huangs regarding leaks in and around the windows, Ray Anderson repaired and recaulked a number of the windows, a process which was begun in February of 1996 and was completed no earlier than March 29, 1996 (the "winter 1996 repair project").
After the winter 1996 repair project, the Huangs continued to experience leaks from some of the windows. The leaks came from both windows that were, and windows that were not, involved in the winter 1996 repair project. On May 5, 1996, Ray Anderson confirmed that some of the windows were continuing to leak water. Ray Anderson determined that most of the initial windows were leaking, and that the water that had penetrated into the house in and around those windows had physically damaged the Huangs' home and its contents.
On that date, at least one of the windows was reopened and recaulked in an effort to repair a leak. However, following a May 7, 1996 — rainstorm, that particular window leaked worse than ever.
In late May of 1996, the Huangs demanded that several of the original windows be replaced with new windows (the "first replacement windows"). Ray Anderson agreed to replace those original windows, and Ray Anderson and Pella provided the first replacement windows at no cost to the Huangs. Ray Anderson employees caulked and assembled the first replacement windows into composites. Installation of the first replacement windows began on or about July 22, 1996, and was completed sometime between October of 1996 and early 1997.
On September 24, 1997, the Huangs filed a civil action against Pella and Ray Anderson in the District Court of Shawnee County, Kansas (the "initial lawsuit"). The petition generally alleged that Pella and Ray Anderson sold windows to the Huangs, that those windows were installed in the Huangs' home, that the windows leaked, that Ray Anderson had attempted to fix the leakage problem by recaulking around the window seals and replacing the defective windows, and that Pella and Ray Anderson had failed to satisfactorily complete the replacement of the defective windows and related repairs.
In September of 1998, the initial lawsuit was settled. The settlement agreement provided, in relevant part:
Jonson Huang and Rebekah Huang, do hereby release and forever discharge Ray Anderson Company, Inc. d/b/a Pella Windows of Kansas, Pella Corporation, Inc. and Cincinnati Insurance Companies and any and all of its insureds from any and all claims and causes of action of every kind that are set forth in a civil matter pending in the District Court of Shawnee County, Kansas, being Case No. 97 CV 1196.
* * * *
1. This Release applies to all claims . . . resulting from the occurrence described above.
* * * *
5. Ray Anderson . . . shall, at no cost to Jonson and Rebekah Huang: clean or arrange the cleaning of the windows in the Huang home; clean or arrange the cleaning of the ducts in the Huang home; and repair or arrange the repair of, by painting, the remaining damage to the Huang home that resulted from the original Pella windows that were installed and the subsequent replacement of those windows. These services shall be performed by competent subcontractors who normally provide these types of services and shall be completed to the satisfaction of Jonson and Rebekah Huang. Cincinnati Insurance will reimburse Ray Anderson Company for the costs of this work.
(Emphasis added.)
No evidence has been presented to suggest that the Huangs experienced any leakage problems for approximately a year and a half before the parties settled the initial lawsuit — that is, from the time Ray Anderson finished replacing the original units with the first replacement windows (between October of 1996 and early 1997) through the time the parties settled the initial lawsuit in September of 1998.
The Late — 1998 Rainstorm.
Within months after Ray Anderson and the Huangs settled the initial lawsuit, the Huangs began to again experience problems with window leaks. Two repair tickets from Ray Anderson's computer system reflect that they were logged into the system on October 19, 1998, and again on October 27, 1998. Vernon Jarboe, Ray Anderson's former president, testified he was reasonably certain the Huangs' renewed complaints arose following a heavy rainstorm in October or November of 1998. He could not recall the precise date of the rainstorm, and he recalled several other storms. However, he recalled one specific rainstorm involving four to five inches of rain that had "a lot of wind" that came from a different direction than most other rainstorms (the "late — 1998 rainstorm").
After the late — 1998 rainstorm, Ray Anderson undertook an investigation in an attempt to determine what caused the leaks so that Ray Anderson could fix them. A number of the original windows had leaked, as had several of the first replacement windows. Ray Anderson's investigation revealed a number of factors that Ray Anderson believed may have contributed to the leaking windows.
The Huangs' home was unusually designed. The exterior windows were mounted flush with the exterior stucco surface, rather than being recessed with awnings, as is the case in most homes. Also, the Huangs' home has no gutters. Because of this design, pouring rain would cascade down the exterior of the home, including the windows; this does not occur with most homes, which typically have recessed windows, awnings, and gutters. In addition to the home's unusual design, it sits atop a big hill and is the brunt of all the elements.
The windows' aluminum cladding seemingly could not withstand the cascading water. As stated previously, Pella manufactured the windows, shipped them to Ray Anderson, and Ray Anderson assembled the windows into composites. What Ray Anderson received from Pella were individual window units consisting of the actual glass window panes, the sash, and the frame. During the manufacturing process, Pella covered the wood portion of these individual window units ( i.e., the sash and the frame) with an aluminum shell called cladding. During Ray Anderson's investigation following the late — 1998 rainstorm, Ray Anderson determined that rainwater had worked its way in and around the aluminum cladding. This cladding had proven to be waterproof in hundreds of other homes, but it apparently was not waterproof as used in the Huangs' home. When the water worked its way around the cladding, it caused some of the wood underneath to gradually rot. As the wood continued to rot, the cladding increasingly loosened. After the late — 1998 rainstorm, Ray Anderson added toe beading — that is, a small line of caulk between the glass and the cladding — on the windows to prevent water from working its way around the cladding.
Another factor that Ray Anderson believed contributed to the leaking windows was insufficient caulking. After Ray Anderson received the windows from Pella, the former's employees put the individual window units together by using mullions to make composites. In doing so, Ray Anderson caulked between the windows and the mullions. Jarboe testified that Ray Anderson also added additional caulking in this case behind the mullion cover as a precautionary measure. During Ray Anderson's investigation following the late — 1998 rainstorm, Ray Anderson determined that the caulking behind the mullion covers was inadequate in some locations.
In November and December of 1998, the Huangs demanded that Ray Anderson pay for sanding and refinishing their wood floors, painting their damaged walls, and cleaning their ducts. Ray Anderson had these repairs completed, and Ray Anderson claims that its cost to repair the damage to the interior of the Huangs' home caused by the leaky windows is covered under its CGL policy. In addition, in 1998 and 1999, Ray Anderson caused, directed, or undertook additional repairs to the windows, including removing and replacing at least one original window, and repairing most of the first replacement windows. All of the windows were repaired or replaced at the expense of Ray Anderson and/or Pella. The cost to repair or replace the windows, however, is not included in Ray Anderson's claim for insurance coverage.
Ray Anderson's CGL Policy.
Before October 1, 1997, Ray Anderson purchased CGL coverage from another insurance company. Thus, Potomac was not involved in the settlement of the Huangs' initial lawsuit against Ray Anderson.
Potomac issued the CGL policy to Ray Anderson with an effective period of October 1, 1997, through October 1, 1999. Ray Anderson presented a claim to Potomac for amounts spent to repair the physical damage to the interior of the Huangs' home. Those expenses totaled $37,655. The terms of the CGL policy are undisputed. The court will discuss the relevant provisions of the CGL policy in the conclusions of law below.
Ray Anderson's Claim with Potomac.
Ron Willis advised his insurance agent, Steve Wanamaker, that Ray Anderson had undertaken or was undertaking repairs to the Huangs' home. In November of 1998, Wanamaker faxed a claim form to CGU, Potomac's parent company. The claim was assigned to a claims representative, Kimberly Griffin, who called Jarboe and asked him to set up an appointment with the Huangs to view the damage. Jarboe attempted to set up this appointment, but the Huangs were unwilling to allow Potomac to inspect the damage. Therefore, Jarboe informed Griffin that the Huangs denied her request.
On November 24, 1998, Griffin sent a reservation of rights letter to Jarboe, requesting copies of Ray Anderson's file regarding the Huangs, as well as other documents ( e.g., Ray Anderson's contracts with Pella and Dean Construction) and photographs of the Huangs' home, in order to allow Potomac to investigate the loss. On January 6, 1999, Griffin sent another letter requesting these materials from Ray Anderson.
On January 22, 1999, Jarboe sent Griffin a letter regarding Ray Anderson's "ongoing" repair costs. Griffin testified that, around that time, she received a voice mail message from Jarboe advising her that Ray Anderson was withdrawing its claim. On February 8, 1999, Griffin sent Jarboe a letter confirming this but, once again, requesting information concerning the claim.
On August 18, 1999, Stephen Weir, Ray Anderson's attorney, sent Potomac a letter. That letter provided an itemized statement detailing Ray Anderson's expenses to perform repairs at the Huangs' home after the late — 1998 storm.
On September 14, 1999, Jarboe sent Wanamaker a letter itemizing Ray Anderson's costs and the upcoming timeline for completing the repairs. Griffin received a copy of this letter and, on September 20, 1999, once again she sent Jarboe a letter requesting information necessary for Potomac to investigate Ray Anderson's claim.
On September 29, 1999, Weir sent Griffin a letter advising Potomac that Ray Anderson was "merely mitigating damages." In this letter, Weir requested that Griffin contact him to obtain any information that she needed. On October 28, 1999, Griffin sent Weir a letter requesting the information she had formerly requested from Jarboe. On November 1, 1999, Weir responded to Griffin, advising her that Ray Anderson's "file" actually contained boxes of information. Weir suggested that, rather than copying all of these records, he would be willing to meet with a representative of Potomac, go through all of the records, and copy those that Potomac wanted. Before this time, Griffin had no idea that Ray Anderson's file was so voluminous. On December 8, 1999, Griffin, Weir, Jarboe, and Willis met at Weir's office in Topeka to review the materials in the boxes containing Ray Anderson's "file" regarding the Huangs. Griffin obtained copies of all of the documents that she wanted, and Jarboe answered all of the questions that Griffin asked him during that meeting.
At trial, Jarboe explained why he did not respond directly to Griffin's requests for information. Apparently, Jarboe had been in contact with Wanamaker, and Jarboe thought Wanamaker was handling Griffin's requests. Jarboe and Wanamaker had several in-person meetings regarding Ray Anderson's claims for the repairs to the Huangs' home. Wanamaker had handled Ray Anderson's claim with the insurance company that was Ray Anderson's CGL insurer at the time the initial lawsuit settled. Therefore, Jarboe believed Wanamaker was handling Ray Anderson's claim with Potomac. Quite simply, whether justified or not, Jarboe viewed Wanamaker as Ray Anderson's liaison with Potomac.
Ray Anderson had completed the repairs to the Huangs' home without Potomac's consent or authorization before the December 8, 1999-meeting at Weir's law office. Griffin testified that, from September of 1999 to December of 1999, she knew Ray Anderson was making repairs to the Huangs' home. Jarboe had advised Griffin that the first lawsuit between the parties involved $230,000 worth of repairs, and he was concerned that, if Ray Anderson did not undertake the necessary repairs to the Huangs' home as soon as possible, they would have another lawsuit of the same magnitude as the first. Griffin testified that the fact that Ray Anderson undertook those repairs prejudiced Potomac's ability to investigate and determine what caused the leaks following the late — 1998 storm.
III. Conclusions of Law. A. General Principles.
The construction of an insurance contract is a question of law to be determined by the court. United States Fid. Guar. Co. v. Morrison Grain Co., 734 F. Supp. 437, 442 (D.Kan. 1990), aff'd, 999 F.2d 489 (10th Cir. 1993); Wing Mah v. United States Fire Ins. Co., 218 Kan. 583, 586, 545 P.2d 366, 369 (1976). If the relevant facts are admitted, the court may decide whether they come within the terms of the contract. United States Fid. Guar., 734 F. Supp. at 442; Wing Mah, 218 Kan. at 586, 545 P.2d at 369. An insurance contract, like any other contract, must be construed to give effect to the parties' intent. Westchester Fire Ins. Co. v. City of Pittsburgh, 768 F. Supp. 1463, 1467 (D.Kan. 1991), aff'd sub nom., 987 F.2d 1516 (10th Cir. 1993); Catholic Diocese v. Raymer, 251 Kan. 689, 693, 840 P.2d 456, 459 (1992). If the insurance contract is unambiguous, the court must enforce the contract according to its terms. American Media, Inc. v. Home Indem. Co., 232 Kan. 737, 740, 658 P.2d 1015, 1019 (1983). However, if the contract is ambiguous, the construction most favorable to the insured prevails. Id. at 740, 658 P.2d at 1018.
B. Coverage.
As the insured, Ray Anderson has the burden of proving that its loss falls within the scope of the CGL policy. ERA Franchise Sys., Inc. v. Northern Ins. Co., 32 F. Supp.2d 1254, 1259 (D.Kan. 1998), aff'd, 208 F.3d 225 (10th Cir. 2000) (table); Brumley v. Lee, 265 Kan. 810, 816, 963 P.2d 1224, 1228 (1998). The CGL policy provides:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . "property damage" to which this insurance applies. . . .
b. This insurance applies to . . . "property damage" only if:
(1) The . . . "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and
(2) The . . . "property damage" occurs during the policy period.
(Emphasis added.)
In this case, the Huangs' home is tangible property that undisputedly suffered physical injury. Furthermore, that property damage occurred during the policy period in late 1998. Thus, in analyzing whether coverage exists under the CGL policy, the court must address two main issues: (1) whether the property damage was caused by an "occurrence"; and (2) whether Ray Anderson was legally obligated to pay for the repairs to the Huangs' home.
Property Damage Caused by an "Occurrence."
The CGL policy covers property damage caused by an "occurrence." "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The term "accident" is not defined in the CGL policy and, therefore, "'it must be interpreted in its usual, ordinary, and popular sense.'" ERA, 32 F. Supp.2d at 1259 (quoting Brumley, 265 Kan. at 822, 963 P.2d at 1232). Under Kansas law, an "accident," within the meaning of a liability insurance policy, is defined as an "undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force." Harris v. Richards, 254 Kan. 549, 553, 867 P.2d 325, 328 (1994) (quotation omitted); accord Hodgson v. Bremen Farmers' Mut. Ins. Co., 27 Kan. App. 2d 231, 234, 3 P.3d 1281, 1284 (1999) (quoting Harris).
Potomac argues that Ray Anderson's faulty workmanship is not an "occurrence" within the meaning of the CGL policy. The court agrees. Faulty workmanship is not an "accident" because it is not an "undesigned, sudden, and unexpected event." But, the faulty workmanship itself, standing alone, did not cause the property damage. The Huangs' home had been just fine, and had not suffered any interior property damage, even though it contained Ray Anderson's faulty workmanship, for more than a year and a half. However, there is a distinction between regarding faulty workmanship ( i.e., negligence) itself as an "accident" on the one hand, and deciding on the other hand whether the faulty workmanship ( i.e., negligence) caused an "accident." See, e.g., United States Fid. Guar. Co. v. Dealers Leasing, Inc., 137 F. Supp.2d 1257, 1263 (D.Kan. 2001) ("This court does not believe that . . . negligent behavior . . . fits the generally accepted definition of 'accident.' Instead, the events that often result from the negligent behavior fit the ordinary meaning of 'accident.'"). Thus, the court must decide whether Ray Anderson's faulty workmanship caused an "accident."
Potomac argues that a rainstorm is not an "occurrence" within the meaning of the CGL policy. Again, the court agrees. A rainstorm itself is not an occurrence, unless perhaps, it is an absolutely extraordinary one. See, e.g., City of Aurora v. Trinity Universal Ins. Co., 326 F.2d 905 (10th Cir. 1964) (holding that damage caused by a sewer backup as a result of a heavy, but not unprecedented, rainfall was not caused by an accident); Albuquerque Gravel Prods. Co. v. American Emp. Ins. Co., 282 F.2d 218 (10th Cir. 1960) (holding that flood damage was not caused by an accident because floods were not unprecedented, unpredictable, or unforeseeable). There is nothing unprecedented, unpredictable, or unforeseeable about a heavy, windy, rainstorm in Kansas such as the late — 1998 storm.
However, there is something unprecedented, unpredictable, and unforeseen about leaking windows. Leaking windows are "of an afflictive or unfortunate character," and, in this case, were "accompanied by a manifestation of force" in the form of a heavy rainstorm. Ray Anderson undoubtedly expected rainstorms, even heavy ones from time to time. Nevertheless, Ray Anderson obviously expected, as do most people, that its windows would be watertight during those storms and protect the interior of its customers' homes from moisture and corresponding property damage. Ray Anderson does not expect the Pella windows it distributes to leak simply because it rains. Thus, the court concludes that the actual physical act of the windows leaking was an accident and, therefore, an "occurrence" within the meaning of the CGL policy.
This conclusion is consistent with the most on-point case the court has been able to locate, which held that windows that leak because of faulty workmanship are an accident and, therefore, an occurrence within the meaning of a CGL policy. See Kalchthaler v. Keller Constr. Co., 591 N.W.2d 169, 173 (Wis.Ct.App. 1999) ("[T]here is no question that an event occurred: the windows leaked. This is an accident.").
This conclusion is also consistent with the only recent case in this jurisdiction to address whether damage caused by faulty workmanship constitutes an "occurrence" within the meaning of a CGL policy. Kansas state courts have not addressed this issue. However, very recently, in Fidelity Deposit Co. v. Hartford Casualty Ins. Co., No. 01-2015-JWL, slip op. (D.Kan. Feb. 27, 2002) (Lungstrum, C.J.) (doc. 46), the court considered whether damage caused by faulty workmanship constitutes an "occurrence" within the meaning of a CGL policy. Id., slip op. at 8-14. The insured had defectively constructed a facility, resulting in cracked walls and other structural damage. Id., slip op. at 3. The insurer argued this damage was not an "occurrence" because it was a "natural and probable consequence" of the insured's negligent workmanship. Id., slip op. at 9. The court synthesized Kansas case law and rejected this argument, concluding that "the Kansas Supreme Court would find that the damage that occurs as a result of faulty or negligent workmanship constitutes an 'occurrence' as long as the insured did not intend for the damage to occur." Id., slip op. at 12 (emphasis added).
In the case at bar, Ray Anderson clearly did not intend for the interior of the Huangs' home to suffer property damage. Therefore, the damage that occurred as a result of its faulty workmanship constitutes an "occurrence."
This result is also consistent with the plain language of the CGL policy. As a logical corollary to the fact that the CGL policy provides coverage for property damage that is caused by an "accident" ( i.e., an undesigned, sudden, and unexpected event), it excludes coverage for property damage that is "expected or intended from the standpoint of the insured." The CGL policy does not contain any language that excludes from the definition of an "occurrence" accidents that are caused by faulty workmanship. Nor does it contain a general overriding exclusion for property damage arising from the insured's faulty workmanship. See, e.g., Arnold v. Adventure Line Mfg., 209 Kan. 80, 84, 495 P.2d 1007, 1011 (1972) ("That liability which is not clearly excluded from coverage under a general comprehensive liability insurance contract is presumed to have been included.").
As a practical matter, a CGL policy's numerous exclusions may operate in conjunction to effectively exclude coverage for many types of damages arising from the insured's faulty workmanship. See 9 Lee R. Russ Thomas F. Segalla, Couch on Insurance § 129:12, at 129-23 (3d ed. 1997) ("The standard form commercial general liability policy contains a variety of provisions which operate together to exclude the insured's faulty workmanship from coverage."). However, absent an applicable exclusion, the CGL policy otherwise provides coverage for "sums that the insured becomes legally obligated to pay," regardless of whether those sums arise from an insured's faulty workmanship.
It is significant that the CGL policy defines the contours of precisely what is excluded when property damage occurs as a result of the insured's faulty workmanship. For example, exclusions (j)(5), (j)(6), (k), (l), and (m), and the corresponding definitions of "your product," "your work," "products-completed operations hazard," and "impaired property," set forth an elaborate scheme excluding from coverage, among other things, work in progress and the insured's cost to repair or replace its own defective products ( e.g., the Pella windows in this case). To hold that all property damage arising from an insured's faulty workmanship is excluded from the definition of being an "occurrence" would render all of these highly detailed exclusions meaningless. Thus, simply because the damages to the Huangs' home arose from Ray Anderson's faulty workmanship does not necessarily prevent those damages from being considered an "occurrence." Rather, leaky windows are, quite simply, an accident within the common sense meaning of the word and, therefore, are an "occurrence" within the meaning of the CGL policy. The court will determine the significance of the fact that these leaks arose from Ray Anderson's faulty workmanship in the context of its analysis of the CGL policy's exclusions.
This court also wishes to acknowledge the fact that this case presents a unique set of facts beyond those ordinarily involved in faulty workmanship cases because of the degree of predictability involved. In this case, the damages that are the subject of Ray Anderson's claim against Potomac were caused by the original windows and the first replacement windows. At the time the original windows were installed, Ray Anderson would have regarded leaks from those windows as an undesigned, sudden, and unexpected event — that is, an accident. However, Ray Anderson installed the first replacement windows after the Huangs had experienced problems with the original windows leaking, and further leaks were not necessarily unexpected. By that time, Ray Anderson was aware of a heightened risk that the windows might leak.
In this regard, the court finds instructive an Eighth Circuit case addressing CGL coverage for recurrent incidents of property damage, Carter Lake v. Aetna Casualty Surety Co., 604 F.2d 1052 (8th Cir. 1979). A city's sewage pump overloaded, shut off, backed up, and flooded one of its resident's basements with raw sewage. This occurred five more times before the city finally installed an alarm system as a mechanism to protect against further backups. The resident sued the city and prevailed, and the city then sued its CGL carrier. The Eighth Circuit held that the first backup was an "occurrence" within the meaning of the city's CGL policy, but the city "expected" the five subsequent backups and, therefore, they were not covered under the terms of the CGL policy. Id. at 1059. In reaching this conclusion, the court defined "expected" in terms of whether the insured "knew or should have known that there was a substantial probability that certain consequences [would] result from his actions." Id. at 1058-59. Similar to Judge Lungstrum's recent rejection of the "natural and probable consequence" test to negligent acts in Fidelity Deposit Co., the Eighth Circuit in Carter Lake rejected the "reasonable foreseeability" standard because "[t]he reasonable expectation of an insured in securing a comprehensive general liability policy is that it will cover some negligent acts." Id. at 1058. In Carter Lake, the city did nothing and "took the calculated risk" that additional sewer backups would not occur. Id. at 1059. However, once the city was aware of the "likelihood of recurrence, it could not ignore the problem" and look to its CGL insurer for liability that it incurred by virtue of its inaction. Id.
In this case, unlike the insured in Carter Lake, Ray Anderson took proactive measures to repair and replace the leaky windows in a sincere attempt to avoid recurrent incidents of the same nature. Once Ray Anderson became aware of problems with window leaks at the Huangs home in 1995 and 1996, Ray Anderson did not take the calculated risk of sitting idly by, knowing fully well that the windows would continue to leak and cause additional damage to the Huangs' home. Instead, Ray Anderson undertook the winter 1996 repair project, later installed the first replacement windows at the Huangs' behest and, most recently, performed additional repairs and replacements. Jarboe specifically testified that he did not expect or believe the first replacement windows would leak after they were installed. The court is persuaded that Ray Anderson's belief that it had fixed the windows so that they would not leak was justified, genuine, reasonable, and in good faith. Thus, unlike the insured in Carter Lake, which expected (in the sense that there was a substantial probability) similar incidents would recur because it chose to do nothing, in this case Ray Anderson fully hoped and expected that its remedial efforts would prevent subsequent incidents of the same nature.
In sum, the leaks — both from the original windows and the first replacement windows — were an "accident" in the sense that they were an "undesigned, sudden, and unexpected event . . . of an afflictive or unfortunate character," and were "accompanied by a manifestation of force" in the form of a heavy rainstorm. Therefore, the property damage to the Huangs' home was caused by an "occurrence" within the meaning of the CGL policy.
2. Ray Anderson's Legal Obligation to Pay for the Repairs
Having determined that the damage to the Huangs' home was caused by an "occurrence," the court will next address Potomac's arguments that Ray Anderson was not "legally obligated to pay" for the repairs to the Huangs' home. In this regard, Ray Anderson raises three arguments: (1) the settlement from the initial lawsuit released Ray Anderson from further liability to the Huangs; (2) the Huangs did not file a lawsuit against Ray Anderson within the applicable two-year statute of limitations; and (3) Ray Anderson has no legal obligation to pay for repairs necessitated by Pella's defective installation of the aluminum cladding.
These arguments arise in the context of Ray Anderson's decision to proactively settle the Huangs' claim rather than awaiting a lawsuit that more than likely would have been imminent if Ray Anderson had failed to make the repairs requested by the Huangs. In Kansas, a judgment does not need to be entered against an insured before the insured may be regarded, under a liability policy, as "legally obligated to pay" a certain sum. Rather, "well-settled Kansas law . . . allows an insured to recover amounts paid to settle a covered claim if the settlement is reasonable in amount and made in good faith." Peoples Mortgage Corp. v. Kansas Bankers Sur. Trust Co., 176 F. Supp.2d 1199, 1206 (D.Kan. 2001) (rejecting an insurer's argument that an insured was not legally obligated to pay a sum because it voluntarily agreed to settle a claim) (citing Glenn v. Fleming, 247 Kan. 296, 318, 799 P.2d 79, 93 (1990)). The insured bears the initial burden to prove a prima facie case by producing evidence of the good faith and reasonableness of its settlement. Id. The insurer bears the ultimate burden of persuasion to show the settlement was unreasonable or made in bad faith. Id.
This case presents unique circumstances insofar as the court has been unable to locate another Kansas case in which the insured proactively settled a third-party claim before the third party even filed a lawsuit. However, neither Kansas case law, nor the CGL policy in this case, requires that a third-party lawsuit be brought against the insured as a condition precedent to the insurer's obligation to pay. In fact, the CGL policy expressly contemplates coverage outside of the context of a lawsuit. It defines "suit" in terms of civil litigation and alternative dispute resolution procedures. However, it requires Ray Anderson to notify Potomac in writing "[i]f a claim is made or 'suit' is brought"; thus, it distinguishes between a "claim" and a "suit." It requires Ray Anderson to send Potomac "copies of demands, notices, summonses or legal papers received in connection with the claim or 'suit'"; in this sentence, "demands" corresponds to the term "claim" and "summonses or legal papers" corresponds to the term "suit." It requires Ray Anderson to cooperate "in the investigation or settlement of the claim or defense against the 'suit.'" Further, the CGL policy imposes on Potomac the duty to defend "against any 'suit.'" Yet, despite extensive use of the term "suit" throughout the CGL policy, it nevertheless states that Potomac "will pay those sums that the insured becomes legally obligated to pay"; this provision of the policy does not impose the filing of a third-party lawsuit against the insured as a condition precedent to Potomac's obligation to pay a claim.
If the reasonableness of the settlement amount is not established in prior litigation, the "court can entertain evidence about . . . reasonableness." Williams v. American Family Mut. Ins. Co., 101 F. Supp.2d 1337, 1340-41 (D.Kan. 2000), aff'd, 6 Fed. Appx. 756 (10th Cir. 2001). In terms of the insured's prima facie case to establish the reasonableness of the settlement amount, the Supreme Court of Kansas has explained:
[T]he proof requires, at a minimum, enough information for the district court to make an independent evaluation of the reasonableness of the settlement. The test requires that plaintiffs do more than ask the district court to take on faith that the amount of the settlement is reasonable.Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 841, 934 P.2d 65, 87 (1997). In evaluating reasonableness, courts should consider:
The releasing person's damages; the merits of the releasing person's liability theory; the merits of the released person's defense theory; the released person's relative faults; the risks and expenses of continued litigation; the released person's ability to pay; any evidence of bad faith, collusion, or fraud; the extent of the releasing person's investigation and preparation of the case; and the interests of the parties not being released.Id. (quotations omitted). Thus, the court will analyze the reasonableness of the amount Ray Anderson paid to repair the Huangs' home in light of these factors.
The first factor is the amount of the damages. In some homes, $37,655 might seem to be a large sum simply to repair property damage caused by leaky windows. However, the Huangs' home was a relatively new, unique home worth approximately $1 million. The parties do not dispute and the court has no doubt that $37,655 in repairs was warranted. As earlier indicated, the initial lawsuit involved a far greater sum.
The second factor is the merits of the Huangs' liability theory. If the Huangs had brought a lawsuit against Ray Anderson, the Huangs likely would have prevailed on a negligence theory. The evidence demonstrated that Ray Anderson's deficient caulking caused, to some degree, the window leaks.
The third factor is the merits of Ray Anderson's defense theory. The court will consider, in this context, two of Potomac's arguments that Ray Anderson was not legally obligated to pay for the repairs to the Huangs' home. First, as mentioned previously, Potomac argues the settlement from the initial lawsuit released Ray Anderson from further liability to the Huangs. The petition in the initial lawsuit generally alleged that Pella and Ray Anderson sold windows to the Huangs, that those windows were installed in the Huangs' home, that the windows leaked, that Ray Anderson attempted to fix the leakage problem by recaulking around the window seals and replacing the defective windows, and that Pella and Ray Anderson had failed to satisfactorily complete the replacement of the defective windows and related repairs. The settlement released Ray Anderson from claims "set forth in [this] civil matter" and all claims "resulting from [this] occurrence."
Thus, the plain language of this settlement agreement unambiguously released Ray Anderson only from the Huangs' allegations in the initial lawsuit — that is, damages which had, at that time, resulted from window leaks. This is further supported by language in the settlement requiring Ray Anderson to repair "remaining" damage that "resulted" from the original windows. Nothing in the settlement agreement purports to release Ray Anderson from future claims that had not yet arisen. Thus, this defense theory was weak at best.
At trial, Potomac objected to the introduction of parol evidence regarding the parties' intent relating to this release. Out of an abundance of caution, the court took this objection under advisement and received parol evidence. Because the court concludes that the contract is unambiguous as written, Potomac's objection is sustained. The court disregards any extrinsic evidence presented during trial regarding the meaning of the settlement agreement.
Potomac's second defense theory was that the Huangs failed to file a lawsuit against Ray Anderson within the two-year statute of limitations. This argument is highly speculative because the Huangs did not need to institute a lawsuit against Ray Anderson given the fact that Ray Anderson made the requested repairs well within the two-year statute of limitations. Thus, the court must predict what would have occurred if Ray Anderson had not taken a proactive approach to settle the Huangs' complaints. It seems more likely than not that the Huangs would have timely filed another lawsuit against Ray Anderson well within the two-year statute of limitations. The Huangs had already sued Ray Anderson once. Further, the Huangs were represented in this initial lawsuit by a competent, reputable attorney. The court is unwilling to infer that this attorney would have waited two years before filing a lawsuit. Thus, Ray Anderson probably would not have had a meritorious defense based on the statute of limitations.
The fourth factor the court must consider is Ray Anderson's relative fault. If the Huangs had brought a lawsuit, it would have triggered Potomac's duty to defend, and Potomac would likely have caused Pella to be joined as a defendant for comparative fault purposes in an attempt to reduce Ray Anderson's proportionate share of liability. The evidence demonstrated Potomac probably would have succeeded, to some degree, because Jarboe testified that both Pella's faulty aluminum cladding and Ray Anderson's deficient caulking caused the window leaks. In addition, Potomac introduced an e-mail from Jarboe to Pella indicating that Ray Anderson believed Pella's aluminum cladding was entirely to blame.
In fact, Potomac initially included Pella among the defendants in this lawsuit. However, the court dismissed Potomac's claims against Pella as nonjusticiable for failing to present a case or controversy.
In other words, the e-mail suggests Jarboe believed Pella was 100% at fault. However, the court certainly does not view this e-mail as conclusive evidence that Pella's relative fault was 100%. Rather, the e-mail appears to be "positioning" correspondence in which, early on, Ray Anderson attempted to get Pella to pay for the repairs. This e-mail is most appropriately regarded as persuasive evidence tending to indicate that Pella was at least partially at fault. Thus, based on the evidence presented to the court at trial, the court estimates a jury would likely have awarded the Huangs their full damages ($37,655), but would have apportioned liability equally (50/50) between Pella and Ray Anderson, thus resulting in an approximately $18,828 judgment against Ray Anderson.
The fifth factor the court must consider is the risks and expenses of continued litigation. The expenses associated with taking this case to trial would probably have met or exceeded any judgment against Ray Anderson. The present lawsuit involved a relatively simple, one-day bench trial, and Ray Anderson's attorneys' fees are estimated at approximately $25,000. If these issues had proceeded to a trial on the merits via a comparative fault lawsuit brought by the Huangs against Ray Anderson and Pella, Ray Anderson (or Potomac) undoubtedly would have incurred even greater attorneys' fees. In addition, Ray Anderson (or Potomac) likely would have hired an expert to testify regarding causation. Quite simply, there was not enough money at stake in this case to justify the cost of taking it to trial and prove causation. Indeed, it is reasonable to infer that this consideration was the impetus behind the parties' settlement of the initial lawsuit, which involved similar issues.
The sixth factor the court must consider is the released person's ability to pay. In this case, Ray Anderson had the monetary resources to fund the repairs. In fact, Jarboe acknowledged to Pella that Ray Anderson might be "left out to dry" but that it "had to take that chance." This is not a case in which, absent coverage under the CGL policy, the Huangs would have been forced to proceed against a judgment-proof debtor.
The remaining factors are not particularly relevant. There is no evidence of bad faith, collusion, or fraud. Nor did the Huangs sign any releases of liability.
In sum, Ray Anderson met its initial burden of proving a prima facie case by producing evidence that it acted reasonably and in good faith. Thus, the burden shifted to Potomac to rebut Ray Anderson's prima facie case with evidence tending to indicate that Ray Anderson acted unreasonably or in bad faith. The only argument Potomac advances in this respect is that Ray Anderson paid for the repairs to the Huangs' home not because it believed it was liable, but rather because it was a good business decision to do so. However, a good business decision is not necessarily inconsistent with a legal obligation. The court is unwilling to infer that Ray Anderson acted unreasonably or in bad faith simply because it also may have been motivated by business concerns. Ray Anderson may have made a business decision to appease its dissatisfied customers. But, Ray Anderson was also likely motivated, to some degree, by a legitimate fear that another lawsuit was imminent if Ray Anderson failed to make the requested repairs. In addition, as discussed previously, Ray Anderson probably would have been held liable, at least in part, for the repairs to the Huangs' home.
The court therefore concludes that Ray Anderson must be regarded as having been "legally obligated to pay" for the repairs because it acted reasonably and in good faith in making the repairs. Thus, Ray Anderson is entitled to reimbursement from Potomac, unless Potomac can establish that coverage under the CGL policy is excluded on some other basis.
C. Policy Exclusions.
As the insurer, Potomac has the burden to establish that a policy exclusion applies to the circumstances of this particular case. Marquis v. State Farm Fire Cas. Co., 265 Kan. 317, 327, 961 P.2d 1213, 1220-21 (1998). Policy exclusions generally require a "narrow construction on the theory that the insurer, having affirmatively expressed coverage through broad promises, assumes the duty to define any limitations on that coverage in clear and explicit terms." Id. at 317, 961 P.2d at 1220 (citing Catholic Diocese v. Raymer, 251 Kan. 689, 695, 840 P.2d 456, 460 (1992)). When the insured intends to restrict coverage, "it must use clear and unambiguous language in doing so, otherwise the insurance policy will be construed in favor of the insured." Id. (citing Farm Bureau Mut. Ins. Co. v. Old Hickory Cas. Ins. Co., 248 Kan. 657, 659, 810 P.2d 283, 286 (1991)). In this case, exclusions (j)(6), (k), (l), and (m) arguably apply.
1. "Your Work."
Exclusion (j)(6) excludes coverage for property damage to that particular part of any property that must be repaired because "your work" was incorrectly performed on it. "Your work" is defined as "[w]ork or operations performed by you . . . and [m]aterials, parts or equipment furnished in connection with such work or operations." At first glance, this exclusion would seem to apply. However, it does not apply to property damage included in the "products-completed operations hazard" (PCOH). The PCOH includes property damage arising out of "your product" or "your work" except: (1) products that are still in the insured's physical possession; and (2) work that has not yet been completed or abandoned. The windows were no longer in Ray Anderson's possession. Ray Anderson had completed its work on the windows. Therefore, the property damage to the Huangs' home was included in the PCOH. Thus, exclusion (j)(6) does not apply in this case.
2. "Your Product" and "Your Work."
Exclusion (k) excludes coverage for "'property damage' to 'your product' arising out of it or any part of it." "Your product" is defined as "[a]ny . . . products . . . sold, handled, [or] distributed" by the insured. In this case, Ray Anderson sold, handled, and distributed the windows, and the property damage to the Huangs' home arose from those windows. However, by its plain language, exclusion (k) excludes coverage only for property damage to the insured's product arising out of the insured's product; it does not exclude coverage for property damage to a third party's property arising out of the insured's product. See, e.g., Hartzell Indus. v. Federal Ins. Co., 168 F. Supp.2d 789, 798 (S.D.Ohio 2001) (interpreting a nearly identical "your product" exclusion in another CGL policy); Fisher v. American Family Mut. Ins. Co., 579 N.W.2d 599, 605-06 (N.D. 1998) (citing case law and explaining the distinction between coverage for the cost to repair the insured's own work product and coverage for the cost to repair damage to a third party's property caused by the insured's product or work).
Similarly, exclusion (l) excludes coverage for property damage "to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" As stated previously, "your work" is defined as "[w]ork or operations performed by you . . . and [m]aterials, parts or equipment furnished in connection with such work or operations." In this case, Ray Anderson performed work and operations in the sense that it assembled the individual window units that it received from Pella into composites. Further, the individual Pella window units are materials and parts furnished in connection with Ray Anderson's work. The property damage to the Huangs' home arose out of this work and, as stated previously, the work is included in the PCOH. However, as with exclusion (k), by its plain language exclusion (l) excludes coverage only for property damage to the insured's work arising out of the insured's work. It does not exclude coverage for property damage to a third party's property arising out of the insured's work.
Indeed, it appears well accepted that these two exclusions, which are commonly collectively referred to as the "work product exclusion," do not apply to exclude coverage for "damage to the property of others caused by the insured's faulty workmanship or defective product." 9 Russ Segalla, supra, § 129:13, at 129-25 (citing an abundance of case law to support this principle); see, e.g., Hartford Cas. Co. v. Cruse, 938 F.2d 601, 603-04 (5th Cir. 1991) (distinguishing between coverage for the insured's cost to repair its own work product, and coverage for the cost to repair other property); Missouri Terrazzo Co. v. Iowa Nat'l Mut. Ins. Co., 740 F.2d 647, 650 (8th Cir. 1984) (affirming the district court's decision that similar "your product" and "your work" exclusions "did not bar coverage for injury to property other than that of the insured").
In American Mercury Ins. Group v. Urban, Case No. 00-2122-DJW, 2001 WL 1723734 (D.Kan. May 23, 2001), the Hon. David J. Waxse, U.S. Magistrate Judge, interpreted similar "your product" and "your work" exclusions. In American Mercury, Judge Waxse concluded that these exclusions precluded coverage. Id. at *10-*11. However, American Mercury involved different facts than this case, as Judge Waxse construed the insured's claim solely as a loss of use claim based on the conclusion that there was no physical injury to property other than the insured's work itself. Id. at *11. By comparison, in this case, there was, in fact, physical injury to property other than Ray Anderson's work product.
Nevertheless, to the extent the opinion in the instant case might be read as inconsistent with American Mercury, the undersigned magistrate judge respectfully disagrees with Judge Waxse's reasoning in American Mercury because it does not comport with a literal interpretation of the "your product" and "your work" exclusions. Further, the portions of Judge Waxse's opinion in American Mercury dealing with the "your product" and "your work" exclusions can arguably be regarded as dicta in light of the fact that coverage was also excluded in that case on the basis of the "impaired property" exclusion. Id. at *11-*12.
Thus, the "your products" and "your work" exclusions only preclude Ray Anderson from recovering for property damage to its own defective work product ( i.e., the windows themselves). As earlier indicated, Ray Anderson does not attempt to recover for its costs to repair and replace the windows themselves. Rather, Ray Anderson seeks to recover for property damage to a third party's property — that is, the interior of the Huangs' home — arising from Ray Anderson's windows. By their plain terms, exclusions (k) and (l) do not preclude recovery for this property damage. Therefore, neither exclusion applies in this case.
3. "Impaired Property."
Exclusion (m) excludes coverage for certain property damage to impaired property. The CGL policy defines "impaired property" as:
tangible property, other than "your product" or "your work", that cannot be used or is less useful because:
a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by:
a. The repair, replacement, adjustment, or removal of "your product" or "your work"; or
b. Your fulfilling the terms of the contract or agreement.
(Emphasis added.)
The Huangs' home does not satisfy the definition of "impaired property." In order to be regarded as "impaired property," it must be capable of being "restored to use by" either: (a) the repair or replacement of the windows; or (b) Ray Anderson fulfilling the terms of a contract or agreement. With respect to alternative (b), Potomac failed to produce any evidence of a contract or agreement that Ray Anderson failed to fulfill. With respect to alternative (a), the Huangs' home clearly could not have been restored to its prior condition simply by repairing or replacing the windows. Ray Anderson did, in fact, repair and replace the windows at its own expense. However, property damage to the interior of the Huangs' home remained. Therefore, exclusion (m) does not apply in this case.
Accordingly, the court finds that none of the exclusions in the CGL policy apply to exclude coverage in this case.
D. Ray Anderson's Alleged Breach of the Cooperation and Voluntary Payments Provisions.
Potomac contends that Ray Anderson is barred from recovering based on a breach of the CGL policy's cooperation and voluntary payment provisions. The CGL policy provides that, in the event of an occurrence, offense, claim or suit:
c. You and any other involved insured must:
(1) Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or "suit";
(2) Authorize us to obtain records and other information.
(3) Cooperate with us in the investigation or settlement of the claim or defense against the "suit"; and
(4) Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.
d. No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense other than for first aid without our consent.
Thus, Ray Anderson had a duty to cooperate with Potomac in its investigation of the claim. Furthermore, Ray Anderson had a duty not to make any voluntary payments without Potomac's consent.
During trial, the parties presented extensive evidence allegedly relevant to Potomac's argument that coverage is barred in this case because of Ray Anderson's breach of the cooperation provision of the CGL policy. The court will repeat the comments that it made to the parties during oral arguments regarding this issue:
I'm not terribly impressed with the conduct of either the insured or the insurer in this case. I mean, the record could lead one to the inference — I'm not sure if I ultimately would draw that, but folks were writing letters for use as exhibits and not truly meaning the things stated in the exhibits. Surely Mr. Jarboe could have been more proactive about responding to the clear and unequivocal requests made by Ms. Griffin. On the other hand, I think it's fairly obvious that Ms. Griffin could have been more proactive in seeking a practical solution to the problem.
(Tr. at 207.) Quite simply, both Potomac and Ray Anderson dropped the ball.
More important than determining who was to blame for Potomac's lack of involvement, however, is the fact that an insurer is not relieved of its obligation to indemnify based on an insured's breach of cooperation and/or voluntary payment provisions unless the breach substantially prejudiced the insurer's ability to defend itself. Cessna Aircraft Co. v. Hartford Accident Indem. Co., 900 F. Supp. 1489, 1516-18 (D.Kan. 1995). The insurer bears the burden of demonstrating this prejudice. Creek v. Harder Constr., Inc., 25 Kan. App. 2d 232, 239, 961 P.2d 1240, 1245 (1998).
In this case, Potomac failed to prove that it was prejudiced by Ray Anderson's alleged breach of the cooperation or voluntary payment provisions. The court is not convinced that Ray Anderson breached the cooperation provision. As stated previously, both parties dropped the ball.
Potomac requested only two things from Ray Anderson: (1) access to the Huangs' home; and (2) a copy of Ray Anderson's file. Ray Anderson did not have authority to grant Potomac's first request — that is, access to the Huangs' home. With respect to Potomac's second request, Potomac eventually had an opportunity to review Ray Anderson's entire file. Despite Griffin's conclusory testimony to the contrary, the court fails to see how Potomac suffered any actual prejudice by Ray Anderson's arguably belated production of this file. Potomac had access to this information before it instituted the present lawsuit to litigate the issues of coverage.
With respect to Ray Anderson breach of the voluntary payment provision, Griffin testified that the fact that Ray Anderson undertook the repairs prejudiced Potomac's ability to investigate or determine what caused the window leaks following the late — 1998 storm. The court is unpersuaded by this testimony. Here, a distinction must be drawn between Ray Anderson's voluntary payment to repair and replace the windows, and Ray Anderson's voluntary payment to repair the interior of the Huangs' home. Ray Anderson did not need to wait for Potomac's consent before it voluntarily paid to repair and replace the windows because these expenses are not covered by the CGL policy. On the other hand, Ray Anderson should ideally have waited for Potomac's consent before it paid for the repairs to the interior of the Huangs' home because these expenses are covered by the CGL policy. Thus, the court must focus its inquiry on whether Potomac was substantially prejudiced by Ray Anderson's voluntary payment to repair the interior of the Huangs' home.
Potomac failed to offer any explanation regarding the manner and extent to which it was prejudiced by Ray Anderson's voluntary payment to repair the interior of the Huangs' home. The court fails to see, and Potomac has failed to explain how an examination of the interior of the Huangs' home would have been helpful in determining whether the damage was caused by faulty cladding or insufficient caulking. The only thing that would have been apparent from such an examination is the fact that the property damage was caused by window leaks. Rather, an examination of the windows would have been necessary to determine the cause of the leaks.
In sum, there is no nexus between Potomac's claim of prejudice and Ray Anderson's allegedly wrongful voluntary payment. Further, Griffin was aware that Ray Anderson was undertaking ongoing repairs at the Huangs' home, yet did nothing except send letters until all of the work was complete. Thus, Potomac has failed to prove that it was prejudiced by Ray Anderson's breach of the voluntary payments provision. Therefore, coverage is not barred on this basis.
Accordingly, the court concludes that the property damage to the Huangs' home resulting from the late — 1998 storm was covered by the CGL policy. Ray Anderson is entitled to reimbursement from Potomac in the amount of $37,655.
E. Attorneys' Fees Interest.
The parties shall proceed as follows with respect to Ray Anderson's claim for attorneys' fees and interest. With respect to attorneys' fees, the parties shall consult consistent with the spirit of D. Kan. Rule 54.2 and attempt to reach an agreement regarding the amount of attorneys' fees. Then, pursuant to Fed.R.Civ.P. 54(d)(2), within 14 days after entry of judgment, one of the following two alternatives shall occur. If the parties are able to reach an agreement regarding attorneys' fees, they shall file an appropriate stipulation and submit a proposed order. On the other hand, if the parties are unable to reach an agreement regarding attorneys' fees, Ray Anderson shall file a motion for attorneys' fees. This motion shall be accompanied by a statement of consultation as described in D. Kan. Rule 54.2, and a memorandum in support of the motion that includes appropriate time records, affidavits, and other evidence. Potomac's response shall be due 11 days thereafter, and Ray Anderson's reply shall be due 5 days thereafter.
Under Kansas law, an insured is entitled to attorneys' fees incurred in defending an insurer's declaratory judgment action if the insured prevails on the issue of whether a claim is covered by the policy. Farm Bureau Mut. Ins. Co. v. Kurtenbach ex rel. Kurtenbach, 265 Kan. 465, 482, 961 P.2d 53, 64 (1998); Pennsylvania Nat'l Mut. Ins. Co. v. City of Pittsburgh, 794 F. Supp. 353, 355 (D.Kan. 1992), aff'd, 987 F.2d 1516, 1520-21 (10th Cir. 1993). In addition, the CGL policy in this case provides that Potomac will pay "[a]ll reasonable expenses incurred by the insured at our request[.]" See Guaranty Nat'l Ins. Co. v. McGuire, 173 F. Supp.2d 1107, 1115-16 (D.Kan. 2001) (collecting Kansas federal and state case law in which courts have held that similar language in insurance policies requires attorneys' fees to be awarded in declaratory judgment actions in which the insured has prevailed). In this case, Ray Anderson is entitled to attorneys' fees because it has prevailed in defending the issue of coverage raised by Potomac in this declaratory judgment action.
It is not quite as clear whether Ray Anderson is entitled to prejudgment interest. Nor is it clear from the record the date from which such interest should begin to accrue. Accordingly, if Ray Anderson wises to pursue this claim, then Ray Anderson shall file a motion to amend the court's judgment pursuant to Fed.R.Civ.P. 59(e) within 10 days after entry of judgment. See, e.g., Centennial Mgmt. Servcs., Inc. v. Axa Re Vie, 196 F.R.D. 603, 606 (D.Kan. 2000) (holding that a motion for prejudgment interest is properly construed as a Rule 59(e) motion to amend the judgment) (citing Capstick v. Allstate Ins. Co., 998 F.2d 810, 812-13 (10th Cir. 1993), and Adams-Arapahoe Joint Sch. Dist. No. 28-J v. Continental Ins. Co., 891 F.2d 772, 780 (10th Cir. 1989)). Ray Anderson should note that "[t]his time limit is mandatory and the district court is prohibited from extending it." Id. at 607 (citing Fed.R.Civ.P. 6(b), and Weitz v. Lovelace Health Sys., Inc., 214 F.3d 1175, 1179 (10th Cir. 2000)).
IV. Conclusion and Order.
In consideration of the foregoing,
IT IS HEREBY ORDERED:
1. For the reasons stated above, the court finds in favor of Ray Anderson.
2. Accordingly, the clerk shall enter judgment pursuant to Fed.R.Civ.P. 58 against Potomac Insurance of Illinois, Inc. and in favor of Ray Anderson Company, Inc., in the amount of $37,655.
3. The clerk shall fax and mail copies of this memorandum and order to all counsel of record.