Central Power Sys. & Scvs., Inc. v. Universal Underwriters Ins. Co.

No. 108,875

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

CENTRAL POWER SYSTEMS & SERVICES, INC.,
Appellee,

v.

UNIVERSAL UNDERWRITERS INSURANCE COMPANY and
ZURICH AMERICAN INSURANCE COMPANY,
Appellants.


SYLLABUS BY THE COURT

1.
Under Kansas rules for choosing which state's law applies in a contract dispute,
the law of the state where the contract was made applies when determining the parties'
substantial obligations, while the law of the state where the contract is to be performed
applies on questions regarding the manner of contract performance.

2.
In a general-liability insurance contract, the insurer's duty to defend against claims
covered by the policy goes to the substance of the insurer's contractual obligations and is
therefore determined under the law of the state where the contract was made.

3.
On the facts of this case and under the applicable law of Missouri, the insurer had
a duty to defend against negligence and negligent-misrepresentation claims in the
underlying lawsuit.



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Appeal from Johnson District Court; GERALD T. ELLIOTT, judge. Opinion filed February 21,
2014. Affirmed.

Jennifer M. Hill, of McDonald, Tinker, Skaer, Quinn & Herrington, P.A., of Wichita, for
appellants.

Christopher J. Sherman and Tyler Peters, of Payne & Jones, Chartered, of Overland Park, for
appellee.

Before LEBEN, P.J., BUSER and ATCHESON, JJ.

LEBEN, J.: Universal Underwriters Insurance Company ("Universal
Underwriters") and Zurich American Insurance Company ("Zurich"), collectively "the
insurers," appeal the district court's determination that the insurers had the duty to defend
an insured against claims made against the insured in a lawsuit. The district court held
that the insurers were obligated to defend Central Power Systems & Services, Inc.
("Central Power") in litigation instigated by a customer of Central Power. That customer
had alleged that Central Power had been negligent and had made negligent
misrepresentations regarding the way products Central Power provided would operate.
Applying Missouri law, the district court found that the claims asserted against Central
Power for negligence and negligent misrepresentation triggered the insurers' duty to
defend under the insurance coverage provided to Central Power.

The insurers contend that the district court erred in three ways: (1) by applying
Missouri law; (2) by finding the policy covered negligence and negligent-
misrepresentation litigation; and (3) by finding no exclusion in the policy that
extinguished the insurers' duty to defend Central Power on these claims. But we find no
error:


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 Missouri law applies because the insurance contract was made in Missouri when
the last act needed for creation of the insurance contract—delivery of the
insurance policy—took place at Central Power's Missouri business location.
 Under Missouri law, claims for negligence and negligent misrepresentation have
been held covered under similar insurance policies.
 Under Missouri law, exclusions apply only when their language clearly and
unambiguously precludes coverage, and no exclusion cited here by the insurers
does so.
Because the court below appropriately applied Missouri law, and because the plain
language of the policy covers and does not exclude coverage for negligence and negligent
misrepresentation, we affirm the district court.

FACTUAL AND PROCEDURAL BACKGROUND

As part of a single insurance policy, Central Power purchased general-liability
coverage (Part 950), personal umbrella coverage (Part 970), and general umbrella
coverage (Part 980) from the insurers in July 2005. The contracts were finalized when
Universal mailed the policies to Central Power's principal place of business in Missouri.

This dispute arose when Central Power was sued in the United States District
Court for the District of Kansas by Eagle Well Service, Inc. ("Eagle Well") in April 2008.
Eagle Well and Central Power had formed a contract under which Central Power was to
furnish Eagle Well with 10 oil-rig engines and 10 oil-rig transmissions. Eagle Well
alleged that Central Power had told them that the engines and transmissions would be
operational without any additional components.

But the engines could not operate without a wiring harness. Central Power
attempted to fashion a wiring harness for the engines, but the first attempt failed,
apparently based on miscommunication: The wiring harness produced did not fit the


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engine because the wrong measurements had either been requested by or submitted to
Central Power. Eagle Well then found a third party to make wiring harnesses that would
meet their needs; to install the wiring harnesses, Eagle Well had to uninstall the engines
from the rigs.

In the suit against Central Power, Eagle Well alleged damages in the form of lost
profits for the time it took to make the engines independently operational, as well as
money to cover the costs of purchasing the wiring harnesses from the third party and
attaching those harnesses to the engines.

Eagle Well's lawsuit against Central Power alleged five theories of recovery,
including breach of contract, fraudulent inducement, negligence, and negligent
misrepresentation. The United States District Court for the District of Kansas granted
Central Power summary judgment on the fraudulent-inducement claim, finding no
intentional fraud in Central Power's dealings with Eagle Well. Eagle Well Service, Inc. v.
Central Power Systems & Services, Inc., No. 08-2184-CM, 2009 WL 2776851, at *2-3
(D. Kan. 2009) (unpublished opinion). The case proceeded on the remaining theories.
Shortly before trial, in April 2011, Eagle Well and Central Power reached a settlement
and stipulated to dismissal of the lawsuit.

After Eagle Well had filed its lawsuit, Central Power contacted the insurers asking
that they provide the defense to Eagle Well's lawsuit and coverage for Central Power's
losses (potential damage awards against it in the Eagle Well lawsuit) under the policy.
After a year-long investigation, Zurich refused to defend or to indemnify Central Power
under the policy.

In August 2009, Central Power filed a petition for declaratory relief in the district
court seeking a judgment that it was owed a defense under its policy with the insurers.
The parties stipulated to the facts, and the district court, applying Missouri law,


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concluded that Eagle Well's negligent-misrepresentation and negligence claims were
covered by the policy, thus triggering the insurers' duty to defend Central Power in the
Eagle Well lawsuit.

Central Power brought its claims jointly against both Zurich and Universal
Underwriters. The record before us does not explain the relationship between these
insurers, but we recognize that Zurich is the parent company of Universal Underwriters.
See Automax Hyundai South v. Zurich American Ins., 720 F.3d 798, 801 (10th Cir. 2013).
The parties stipulated in the district court that the policy was issued by Universal
Underwriters, but the insurers agreed in their section of the pretrial order in this case that
both insurers shared the insurance obligations arising under the policy. On appeal, the
insurers contend that the district court was wrong to apply Missouri law and that even if
Missouri law applies, they did not owe Central Power a defense against the claims made
by Eagle Well.

ANALYSIS

To resolve this dispute, we must determine (1) which state's law applies and
(2) whether the insurers owed Central Power a defense and indemnification for losses
under the insurance policy. In making these determinations, we review the matter
independently, without any required deference to the district court, because the parties
presented the facts at trial by a list of agreed facts and several written exhibits. Which
state's law applies presents a legal question; we must resolve that question independently,
without any required deference to the district court. Foundation Property Investments v.
CTP, 37 Kan. App. 2d 890, 894, 159 P.3d 1042 (2007), aff'd 286 Kan. 597, 186 P.3d 766
(2008). As to the merits of the case, the district court heard no testimony, so we are in as
good a position as it was to determine both the factual and legal disputes presented. See
Rucker v. DeLay, 295 Kan. 826, 830, 289 P.3d 1166 (2012); American States Ins. Co. v.
Hartford Accident & Indemnity Co., 218 Kan. 563, Syl. ¶ 4, 545 P.2d 399 (1976).


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Accordingly, we also resolve the merits of the case without any required deference to the
district court.

I. Missouri Law Applies When Determining Whether Insurers Have the Duty to Defend
Under an Insurance Contract Made in Missouri.

We apply Kansas choice-of-law rules to determine which state's law applies. ARY
Jewelers v. Krigel, 277 Kan. 464, Syl. ¶ 11, 85 P.3d 1151 (2004). In deciding which
state's law to apply to a contract dispute, Kansas courts apply the Restatement (First) of
Conflict of Laws (1934). ARY Jewelers, 227 Kan. 464, Syl. ¶ 10.

Under this approach, the law of the place where the contract was made generally
governs "the nature and extent of the duty" of each party to the contract. Restatement
(First) of Conflict of Laws § 332(f). But if the dispute involves the manner, method, or
legality of the acts required for performance, the law of the place where the contract was
to be performed applies. Restatement (First) of Conflict of Laws §§ 358(a) and (d),
360(1), 361. This appeal centers on whether the insurers had a duty to defend Central
Power in the Eagle Well lawsuit, so resolving the choice-of-law dispute depends on
whether an insurer's duty to defend presents an issue of contract interpretation or contract
performance.

Our court has conflicting precedents on this issue. In Layne Christensen Co. v.
Zurich Canada, 30 Kan. App. 2d 128, 143, 38 P.3d 757 (2002), our court concluded that
the law of the place of contract formation applied when determining whether an insurer
owed its insured coverage under an insurance policy. But in an earlier case, Aselco, Inc.
v. Hartford Ins. Group, 28 Kan. App. 2d 839, 848, 21 P.3d 1011, rev. denied 272 Kan.
1417 (2001), the same three-judge panel had said that determining whether the insurer
had a duty to defend under a policy was an issue of contract performance and that the law
of the place of performance should apply.


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In our view, the second decision, Layne Christensen, is better reasoned, and we
follow its rule. We reach this decision for three reasons.

First, this rule best comports with the tests outlined in the First Restatement.
Whether a duty to defend exists goes to the heart of the insurance contract, and
substantive questions about the meaning of the parties' contractual agreement are
determined by the law of the place of contract formation under the First Restatement. The
Restatement's authors recognized that there would be potential uncertainty between
applying the law of the place of contract formation and applying the law of the place of
performance: An official comment to the Restatement conceded that "there is no logical
line which separates questions of the obligation of the contract . . . from questions of
performance." Restatement (First) of Conflict of Laws § 358, comment b. But here we
are dealing with the most basic of substantive questions—did insurers have any duty at
all under the contract to provide a defense? The comments to the First Restatement
strongly suggest that such a basic substantive question should be governed by the law of
the place of contracting: Even when performance is involved, the comment suggests that
"regulation of the substance of the obligation" generally is determined by the place of
contracting, and the law of the place of performance "is not applicable to the point where
the substantial obligation of the parties is materially altered." Restatement (First) of
Conflict of Laws § 358, comment b; see Richman, Reynolds & Whytock, Understanding
Conflict of Laws § 66[a] (4th ed. 2013).

In a similar case, the United States District Court for the District of Kansas held
that a dispute about the existence of the duty to defend under an insurance policy was so
fundamental that it had to be determined under the law of the place of contracting:

"Here, the dispute between the parties exists as to whether [the insurer] had any
duty at all to defend [the insureds], not whether it performed that duty but perhaps did so


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inadequately. Accordingly, the existence of the duty to defend must be resolved by the
law of Kansas, as the place where the contract of insurance was formed." Collective
Brands, Inc. v. National Union Fire Ins. Co. of Pittsburgh, P.A., No. 11-4097-JTM, 2013
WL 66071, at *12 (D. Kan. 2013) (unpublished opinion).

In our case, Zurich and Universal Underwriters did not perform at all under any
duty to defend Central Power against the Eagle Well lawsuit. So what's at issue is mostly
whether they were obligated to perform at all, not some specific aspect of how the
insurers should have carried out their duty to defend. That's the very substance of the
contractual obligation, which the First Restatement determines under the law of the place
of contracting.

Second, applying the law of the place of contract formation to determine whether
an insurer has a duty to defend should yield more consistent results when events that
might trigger the duty to defend occur in different states. Central Power offers a useful
hypothetical—a tourist bus crash in which 75 people are injured or killed, but in which
suits are filed in many states (since the tourists came from different states). If the law of
the place of contract performance applied to determining whether an insurer had a duty to
defend, an insurer could feasibly be required to defend in some locations, but not others,
under the same policy for litigation arising from the same incident. Both the insurer and
the insured should be able to know what the policy provides for when it is entered into;
that's possible in this hypothetical situation by applying the law of the place of contract
formation. By contrast, applying the law of the place of performance would lead to
inconsistent results; it also would either prevent the parties from knowing the extent of
the contractual obligation at the outset or require that they investigate the law of all states
where a suit might conceivably be filed.

Third, we note that the federal trial and appellate courts handling Kansas cases
have noted the tension between Aselco and Layne Christensen and have chosen to follow


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Layne Christensen. Moses v. Halstead, 581 F.3d 1248, 1253-54 (10th Cir. 2009)
(concluding that the analysis in Layne Christensen better reflected the First Restatement);
Collective Brands, 2013 WL 66071, at *10-12 (same). We also note that, on matters of
Kansas state law, federal courts must abide by the rulings of the Kansas Supreme Court,
but the decisions of the Kansas Court of Appeals are not binding on the federal court.
Schrock v. Wyeth, Inc., 727 F.3d 1273, 1280 n.1 (10th Cir. 2013). The federal courts'
choice to follow the Layne Christensen decision supports our decision to do so, and
having consistency between the interpretations of the state and federal courts on this
point of Kansas law is beneficial in allowing private parties to guide their conduct.

Because the law where the contract was made applies, we must now determine
where the insurance contract was made. For choice-of-law purposes, Kansas law
considers a contract to be made in the place in which the last act required for contract
formation occurs. Wilkinson v. Shoney's, Inc., 269 Kan. 194, 210, 4 P.3d 1149 (2000).
Central Power argues that an insurance contract is made at the place where the policy is
delivered to the insured, citing Layne Christensen. Indeed, in that case our court noted
that Kansas courts "have repeatedly held the contract is made where the policy is
delivered." 30 Kan. App. 2d at 144 (citing cases). In our case, the insurers have not
disputed this point; their argument about the choice-of-law question was primarily that
the law of the place of performance, Kansas, should apply. We do not have the entire
insurance contract in our record, but the declaration section indicates that the policy was
to be mailed to Central Power at its Liberty, Missouri, address. Given this record and the
arguments made, we conclude that the last act necessary to make this policy effective was
delivery and that delivery occurred in Missouri. Accordingly, the contract is deemed to
have been made in Missouri, and we will apply Missouri law to determine the substantial
obligations of the parties under the insurance contract.



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II. Under Missouri Law, the Insurers Had a Duty to Defend Central Power in the Eagle
Well Lawsuit.

Having determined that Missouri law applies, we turn to determination of the
insurers' duties under the policy. Under Missouri law, an insurer's duty to defend exists
when either the claims made in the underlying lawsuit or the reasonably discoverable
facts show the potential for some type of liability the insurance company has agreed to
protect the insured from. Stark Liquidation v. Florists' Mut. Ins., 243 S.W.3d 385, 392
(Mo. App. 2007); Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 83 (Mo.
App. 2005); see Jerry & Richmond, Understanding Insurance Law § 111[c], pp. 798-806
(5th ed. 2012). The presence of some claims falling outside the scope of the policy does
not eliminate the insurer's duty to defend the insured so long as at least one claim
potentially falls within the policy's scope. Truck Ins. Exchange, 162 S.W.3d at 79; see
Stark Liquidation, 243 S.W.3d at 392.

Central Power and the insurers have addressed three potentially applicable
coverage provisions (each set forth in what the policy calls a "Part" of the policy)—
Parts 950, 970, and 980. Part 950 provides the general liability coverage, Part 970
provides personal umbrella coverage, and Part 980 provides general umbrella coverage.
Umbrella coverage in an insurance policy insures risks that either are not covered at all in
an underlying insurance policy or are covered only up to a specific dollar limit. 15 Couch
on Insurance 3d § 220:32 (1999).

As the parties have framed the case on appeal, we need only determine whether
the insurers had a duty to defend under at least one of these coverages. The district court
awarded Central Power its costs of defending the Eagle Well lawsuit, as well as its costs
in prosecuting this lawsuit over the insurance coverage. The insurers agreed in the district
court that the amounts awarded were reasonable, and the insurers have made no


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suggestion on appeal that an award of these amounts would be in error so long as there
was coverage under at least one part.

We will focus on Part 950, which provides the general underlying liability
coverage, and Part 980, which provides the general umbrella coverage. Although we
don't have the full policy (not even all the declaration pages are included in the court
record), the declaration pages we have for the personal umbrella policy appear to list as
"insureds" only specific individuals, not Central Power itself. The Eagle Well lawsuit was
brought only against Central Power; none of its individual officers or agents were named
as parties to that lawsuit.

We turn, then, to the language of those coverage provisions. We will first look to
see whether the coverage provisions are broad enough to trigger a duty to defend the
claims made in the Eagle Well lawsuit. If so, we will then look to see whether any of the
policy exclusions from coverage eliminate the duty to defend that otherwise would exist.

The separate parts of the policy have slightly different language, but each part
requires at least three things for there to be coverage: there must be "damages" because of
an "injury" that was caused by an "occurrence." Each is a defined term under the policy.
The insurers agree that Eagle Well's lawsuit sought damages but contend that the lawsuit
claims didn't allege either an injury or an occurrence as those terms are defined under the
policy.

Parts 950 and 980 each have their own sections for definition of terms, but the
definition of "injury" in each part includes "damage to or loss of use of tangible
property." Eagle Well alleged that its oil-rig engines couldn't be used without the proper
wiring harness. Engines are tangible property (i.e., property with a physical existence),
and Eagle Well alleged that it lost the use of the engines until proper wiring harnesses
were installed.


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Thus, the loss of use of the engines appears to qualify as an "injury" under the
policy language. Even so, the insurers make one other argument that there was no injury
as defined under the policy. The insurers first suggest that Eagle Well suffered only
economic losses (i.e., lost profits from the inability to use the oil-well rigs but no damage
to the rigs themselves). Then, citing primarily Kansas caselaw, the insurers argue that
purely economic damages do not constitute an injury under a liability insurance policy.
But our case is governed by Missouri law, and purely economic damages resulting from
the loss of use of tangible property have been found to constitute an injury under
Missouri liability policies with similar language. E.g., Stark Liquidation, 243 S.W.3d at
393; American States Ins. v. Kempker Const. Co., 71 S.W.3d 232, 238 (Mo. App. 2002).
So Eagle Well made claims that would constitute an injury under the policy.

We next consider whether the injury resulted from an occurrence. Each part of the
policy defines occurrence to mean an "accident" that results in an injury "neither intended
nor expected from the standpoint of a reasonably prudent person." The insurers argue that
under the plain meaning of the term "accident," there wasn't one—Central Power didn't
accidentally damage the engines or the wiring harnesses.

But Eagle Well's claims included ones for negligence (i.e., the failure to exercise
ordinary care), specifically negligence in the work performed and negligent
misrepresentation about the work that needed to be done. In Missouri, "'when a "liability
policy defines occurrence as meaning accident, Missouri courts consider this to mean
injury caused by the negligence of the insured."'" Assurance Co. of America v. Secura
Ins. Co., 384 S.W.3d 224, 235 (Mo. App. 2012) (quoting Stark Liquidation, 243 S.W.3d
at 393 [citing cases]). Similarly, negligent-misrepresentation claims are deemed
occurrences under such policies. Stark Liquidation, 243 S.W.3d at 393; American States
Ins., 71 S.W.3d at 236-38.



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The insurers argue that Eagle Well's claim was primarily one for breach of
contract, which would not be covered. But as we have already noted, even if some claims
aren't covered, an insurer's duty to defend is triggered if at least one claim is within the
scope of coverage. Truck Ins. Exchange, 162 S.W.3d at 79. Under well-established
Missouri law, the negligence and negligent-misrepresentation claims were within the
scope of coverage here unless some specific exclusion provides otherwise.

We turn next to the insurers' argument that coverage for the claims made in the
Eagle Well lawsuit was specifically excluded. An exclusion provision in an insurance
contract may limit the coverage otherwise available, West v. Jacobs, 790 S.W.2d 475,
478 (Mo. App. 1990), but exclusion provisions are construed in favor of providing
coverage. Stark Liquidation, 243 S.W.3d at 394. An exclusion must be clear and
unambiguous to be enforced. Todd v. Missouri United School Ins. Council, 223 S.W.3d
156, 163 (Mo. 2007); Stark Liquidation, 243 S.W.3d at 394.

We find no exclusion that clearly and unambiguously eliminates the coverage
otherwise provided by Parts 950 and 980:
 Both Parts 950 and 980 have an exclusion for "liability assumed under any
contract or agreement" (with some additional caveats). As Central Power
points out, such exclusions are generally held to apply only to situations in
which the insured (here Central Power) agrees to assume the contractual
obligations of another party, not to exclude claims related to Central
Power's own obligations. See Ferrell v. West Bend Mut. Ins. Co., 393 F.3d
786, 795 (8th Cir. 2005) (citing Am. Fam. Mut. Ins. Co. v. American Girl,
Inc., 268 Wis. 2d 16, 48-49, 673 N.W.2d 65 [2004]); Lapeka, Inc. v.
Security Nat. Ins. Co., Inc., 814 F. Supp. 1540, 1550 (D. Kan. 1993); 30
Noce, Mo. Prac., Insurance Law and Practice § 12:11 (2d ed. 2009).
Moreover, the claims for which coverage is available under the policy are
not contract claims—they are the claims for negligence and negligent


14
misrepresentation. Central Power didn't "assume" liability for such claims
under a contract. Rather, the negligence and negligent-misrepresentation
claims are separate, noncontractual claims, and those claims triggered a
duty to defend.
 Both Parts 950 and 980 have an exclusion for any injury "caused by any
dishonest, fraudulent or criminal acts" of the insured. The insurers argue
that even negligent misrepresentation should be considered a dishonest or
fraudulent act covered by the exclusion. But the federal court granted
summary judgment in Central Power's favor on the only explicit fraud
claim (fraudulent inducement) Eagle Well made against it. Eagle Well
Service, Inc. v. Central Power Systems & Services, Inc., No. 08-2184-CM,
2009 WL 2776851, at *2-3 (D. Kan. 2009) (unpublished opinion). Given
the mandate that we consider policy exclusions in favor of providing
coverage, we conclude that this exclusion does not prevent coverage for
merely negligent acts.
 Both Parts 950 and 980 have an exclusion for damages caused by the "loss
of use of property not physically damaged" if caused by the insured's
failure to perform under a contract or the failure of the insured's product "to
meet the quality warranted or the level of performance represented." If only
some of Eagle Well's claims (ones for breach of contract) were considered,
this exclusion might apply. But Eagle Well's negligent-misrepresentation
claim alleged that Central Power failed to mention that wiring harnesses
would be needed, not that the engines provided by Central Power failed to
work. And Central Power claimed in the Eagle Well litigation that it had
provided all it was required to provide under the contract. Eagle Well's
negligent-misrepresentation claim was not excluded by this provision.
 Part 980 has an exclusion for claims "arising out of any manufacturer's
warranty." The insurers argue that this exclusion precludes coverage even
for a negligent-misrepresentation claim, but we see no logic to that


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argument. Breach-of-warranty claims differ from negligence claims,
including negligent misrepresentation. This exclusion does not clearly and
unambiguously exclude negligence-based claims from coverage.
 Part 980 has a final exclusion for hazards arising from completed products.
Under this provision, there is no coverage for damages "resulting from" the
product itself; from any "representations or warranties made with respect to
fitness, durability, performance or use" of the product; and from "providing
or failure to provide warning or instructions" for the product. Once again,
because of the negligent and negligent-misrepresentation claims Eagle Well
made (i.e., that Central Power failed to say that wiring harnesses were
needed), any damages arising from that claim would not be covered by this
exclusion. The damages wouldn't result from the product Central Power
provided (the engines); they would result from the lack of a product Central
Power did not provide (wiring harnesses). See Stark Liquidation, 243
S.W.3d at 396-98. In any case, an exclusion found only in Part 980
wouldn't change the outcome here: Coverage would still exist under Part
950, and the insurers' duty to defend would still have been triggered even if
this exclusion to umbrella coverage under Part 980 were to apply.

The district court's judgment is affirmed.