Opinion ID: 2628021
Heading Depth: 1
Heading Rank: 1

Heading: Denial of EMCASCO's First Motion to Dismiss

Text: Although EMCASCO raises several issues for our consideration, our ruling on this issue is dispositive of much of this appeal. We therefore analyze and discuss it first. As set out above, EMCASCO moved to dismiss Bryant's third-party negligence and bad faith failure to settle claims shortly after they were filed. On September 12, 2003, Judge Ballinger rejected EMCASCO's argument that the claims were, at best, premature. He ruled that the third-party claims against EMCASCO could be litigated simultaneously with the underlying tort action brought by Nungesser against Bryant, stating the suit against EMCASCO did not qualify as a direct action but rather as an indemnity claim. He also said that questions of fact remained to be resolved. We agree that questions of fact remained at that point regarding the appropriateness of EMCASCO's actions during the negotiations between Fischer and Crockett and between Millsap and Crockett before Nungesser's suit was filed. However, the judge erred. Simply put, an insured's action against his or her insurer for negligent or bad faith failure to settle a case must wait for the liability of the insured to be decided. A defendant in an auto liability case may not sue his or her insurer on such claims until the tort claim against him or her has been reduced to judgment. As an initial matter, we note Nungesser's assertion that EMCASCO failed to meet its burden to designate a record sufficient to establish this error. We disagree. Although neither the motion nor Bryant's response appear in the record on appeal, the record contains a transcript of the hearing on the motion, including the lawyers' arguments and Judge Ballinger's pronouncement that there are factual issues, and that this is not a direct action, it is an independent damage, so to speak, indemnity claim. The hearing transcript adequately illuminates the choice put to the district court and makes the record more than sufficient to address this purely legal question. When entertaining a motion to dismiss for failure to state a claim, the district court is required to assume that the facts alleged by the plaintiff are true. It is then required to draw any reasonable inferences from those facts and determine whether the facts and inferences state a claim, not only on the theory espoused by the plaintiffs, but on any possible theory the court can divine. There are sound reasons for a certain degree of judicial skepticism toward such motions. Under Kansas' notice pleading, a petition is not intended to govern the entire course of the case. Rather, the ultimate legal issues and theories on which the case will be decided are reduced to writing in the pretrial order, typically entered at the close of discovery. Halley v. Barnabe, 271 Kan. 652, 656-57, 24 P.3d 140 (2001); see Bland v. Scott, 279 Kan. 962, 963-64, 112 P.3d 941 (2005). Under this standard of review, we must uphold the district court's decision unless the allegations contained in Bryant's third-party petition against EMCASCO were not legally cognizable. Bryant argues that K.S.A. 60-214 authorized his action against EMCASCO. K.S.A. 60-214, a part of the Kansas Code of Civil Procedure, states in pertinent part: At any time after commencement of the action a defending party, as a third-party plaintiff, may cause a summons and petition to be served upon a person not a party to the action who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff. K.S.A. 60-214(a). Bryant is correct that this statute provides a procedural vehicle for a defendant, acting as a third-party plaintiff, to implead a third-party defendant. Third-party practice is aimed at settling, in a single lawsuit, as many aspects of a controversy as possible. U.S. Fidelity & Guaranty Co. v. Continental Ins. Co., 216 Kan. 5, 11-13, 531 P.2d 9 (1975) (defending party in negligence action could implead his two liability insurers to settle issue of which had duty to provide defense, coverage). However, K.S.A. 60-214 does not create any substantive rights. Alseike v. Miller, 196 Kan. 547, Syl. ¶ 1, 412 P.2d 1007 (1966). It does not answer the question of whether there was a legal basis for Bryant's claim against EMCASCO at the time Judge Ballinger conducted the September 2003 hearing on the motion to dismiss. Kansas has long recognized an insured's action for negligence or bad faith against his or her insurer. See Bollinger v. Nuss, 202 Kan. 326, 332-33, 449 P.2d 502 (1969) (liability may be imposed against insurer for negligence or bad faith in defending, setting claim against insured); Bennett v. Conrady, 180 Kan. 485, Syl. ¶ 3, 305 P.2d 823 (1957) (insurer on liability or indemnity policy liable for full amount of insured's loss, including excess, for negligence or bad faith in defending, settling action against insured); Anderson v. Surety Co., 107 Kan. 375, Syl. ¶ 1, 191 Pac. 583 (1920) (insurer liable for full amount of insured's loss, irrespective of policy limits, if negligent in conducting defense for insured). Although the third-party petition framed the causes of action against EMCASCO in fiduciary duty language, a negligence action sounds in tort, while an action alleging breach of a duty of good faith sounds in contract. See Glenn v. Fleming, 247 Kan. 296, 311-13, 799 P.2d 79 (1990); Spencer v. Aetna Life & Casualty Ins. Co., 227 Kan. 914, 920, 611 P.2d 149 (1980). The key question in this case, and the basis of EMCASCO's argument, is not whether such an action can stand but when  the critical factor is timing. Was it permissible for Bryant's third-party suit against EMCASCO to proceed before the underlying tort action brought by Nungesser against Bryant had concluded? Our review of Kansas case law persuades us that EMCASCO is correct that timing should have doomed the third-party action on EMCASCO's first motion to dismiss. A liability insurer is not properly a party in a tort action arising from an auto accident, and no previous Kansas case has allowed an action against an insurer based on negligence or bad faith to proceed before a judgment has been reached in the underlying suit. Glenn, 247 Kan. 296, 799 P.2d 79 (bad faith claim brought in garnishment action against insurer after judgment received against insured); Bollinger, 202 Kan. 326, 449 P.2d 502 (garnishment proceeding to determine extent of insurer's liability where judgment rendered against insured exceeded policy limits; bad faith and negligence alleged); Bennett, 180 Kan. 485, 305 P.2d 823 (insurer settled with two of five claimants; three others received judgments against insured; insurer voluntarily made appearance, paid in rest of policy limits for court to divide pro rata in partial satisfaction of judgments; bad faith or negligence alleged); Anderson, 107 Kan. 375, 191 P. 583 (insurer failed to defend insured in negligence suit; judgment entered for plaintiff but verdict set aside; insurer refused postjudgment settlement offer for less than policy limit; new trial resulted in verdict exceeding limit; plaintiffs, insured commenced separate action seeking indemnity, claiming negligent failure to settle); Snodgrass v. State Farm Mut. Auto. Ins. Co., 15 Kan.App.2d 153, 804 P.2d 1012, rev. denied 248 Kan. 997 (1991) (prevailing automobile accident victim, as assignee of other driver's claim, brought action against other driver's insurer, alleging wrongful denial of coverage); see also White v. Goodville Mut. Cas. Co., 226 Kan. 191, 596 P.2d 1229 (1979) (where no personal jurisdiction over defendant, plaintiff attempted to sue defendant's insurer; insurer may not be made party to a lawsuit against its insured); King v. American Family Ins. Co., 19 Kan.App.2d 620, 623-24, 874 P.2d 691 (1994) (driver could not file separate action against insurer based upon the same claim; absent statute or insurance contract provision, insurer may not be made original party to lawsuit against its insured). The cases cited by Bryant and Nungesser to support the opposite view, i.e., that an insurer can be brought into an underlying tort suit are distinguishable. They involved joining an insurer to litigate the existence of coverage under an insured's policy. See U.S. Fidelity & Guaranty Co., 216 Kan. 5, 531 P.2d 9 (defending party in negligence action could implead his two liability insurers to settle issue of which had duty to provide defense and coverage); Heshion Motors v. Western Intern. Hotels, 600 S.W.2d 526, 536 (Mo.App.1980) (insurer denied coverage and refused to defend suit; defendant permitted to implead insurer despite no action [until final judgment] provision in policy; the occasion of impleading an insurer arises only in those limited instances where an insurer has disclaimed coverage and refused to defend on behalf of its insured); see also Jordan v. Stephens, 7 F.R.D. 140, 142 (W.D.Mo.1945) (insured may file complaint to join insurer as a third-party defendant and tender insurer as a defendant to satisfy plaintiff's claim where insured refused to defend the defendants or third-party plaintiffs in violation of insured's policy). Coverage is not contested here. The dispute focuses instead on the appropriateness of EMCASCO's presuit response to the Nungesser claim. Our conclusion on the necessary sequence of events is also supported by language in Bryant's EMCASCO insurance policy: A. No legal action may brought against us [EMCASCO] until: 1. We agree in writing that the insured has an obligation to pay; or 2. The amount of that obligation has been finally determined by judgment after trial. B. No person or organization has any right under this policy to bring us into any action to determine liability of an `insured.' It is also consistent with basic insurance law: A claimant cannot bring an action against an insurer seeking damages for the insurer's allegedly wrongful refusal to negotiate in good faith with the claimants where no excess judgment has yet been rendered against the insured. Therefore, a cause of action for the bad-faith [or negligent] failure to settle a claim does not arise until there has been a final determination of the insured's liability and the claimant's damages, including resolution of any appeals.  (Emphasis added.) 44 Am.Jur.2d, Insurance § 1394, p. 622. And it is further supported by cases from other jurisdictions. In Blanchard v. State Farm Mut. Auto. Ins., 575 So.2d 1289, 1291 (Fla.1991), the Florida Supreme Court, in response to a question certified by the Eleventh Circuit Court of Appeals in the uninsured motorist context, settled a split among districts by holding that a cause of action for bad faith failure to settle did not accrue until the conclusion of the underlying litigation. Specifically, the court said: If an uninsured motorist is not liable to the insured for damages arising from an accident, then the insurer has not acted in bad faith in refusing to settle the claim. Thus, an insured's underlying first-party action for insurance benefits against the insurer necessarily must be resolved favorably to the insured before the cause of action for bad faith in settlement negotiations can accrue. It follows that an insured's claim against an uninsured motorist carrier for failing to settle the claim in good faith does not accrue before the conclusion of the underlying litigation for the contractual uninsured motorist insurance benefits. Absent a determination of the existence of liability on the part of the uninsured tortfeasor and the extent of the plaintiff's damages, a cause of action cannot exist for a bad faith failure to settle. 575 So.2d at 1291. In Lexington Ins. Co. v. Royal Ins. Co. of America, 886 F.Supp. 837 (N.D.Fla.1995), the court relied on the Blanchard holding to dismiss a case in which an excess liability insurer had brought a state-court action against the primary liability insurer to recover for bad faith in failure to settle a tort case. The primary insurer moved for summary judgment, and the court held that questions of fact precluded summary judgment. However, the court also held that the excess insurer's claim against the primary insurer could not accrue while an appeal was pending in the underlying tort case; the primary insurer should have sought abatement of the litigation, rather than summary judgment. 886 F.Supp. at 840-42. In Vest v. Travelers Ins. Co., 753 So.2d 1270, 1276 (2000), the Florida Supreme Court held in accord with Blanchard that bringing an action alleging failure to exercise good faith in settlement negotiations is premature until there is a determination of liability and extent of damages owed on the first-party insurance contract. Illinois appellate judges also have weighed in on this issue. In Scroggins v. Allstate Insurance Co., 74 Ill.App.3d 1027, 1032, 30 Ill.Dec. 682, 393 N.E.2d 718 (1979), plaintiff pedestrians brought an action against the driver of a vehicle and his father, seeking damages for injuries allegedly incurred when they were struck by the vehicle. The plaintiffs also included the defendant's automobile liability insurer as a defendant, alleging bad faith in failing to settle their claims. The district court dismissed the insurer from the action, and pedestrians appealed from the dismissal. The appellate court decided that, even if the automobile liability insurer acted in bad faith in refusing to settle claims against insureds within the policy limit, the pedestrians did not have cause of action against insurer on the basis of its breach of duty to negotiate in good faith. That duty was owed to insureds and not to them. While such a claim is assignable, the insureds had not assigned it; and, furthermore, even if plaintiffs' status as potential judgment creditors gave them standing to bring a bad faith claim, they would not have been permitted to pursue such a claim until liability of the defendant had been established. The court stated: Plaintiffs have cited, and we have found, no case in the country permitting a direct action against an insurer by a third party claimant at this stage of litigation, in the absence of statutory or contractual sanction of such an action. Neither have plaintiffs shown that the necessity for such an action outweighs the potential difficulties Allstate has argued are likely to ensue, such as the possibility that insurers will effectively be coerced into settling where their liability has not and may never be established. If plaintiffs do recover an excess judgment against Allstate's insureds, and if they obtain by assignment any claim the insureds might have against Allstate, perhaps then they may have an action against Allstate. But under the case law discussed above, they clearly have no standing to bring such an action now. Scroggins, 74 Ill.App.3d at 1032, 30 Ill.Dec. 682, 393 N.E.2d 718. Other Illinois cases have echoed Scroggins. See Lewis v. Royal Globe Insurance Co., 170 Ill.App.3d 516, 520, 121 Ill.Dec. 78, 524 N.E.2d 1126 (1988) (quoting Richardson v. Economy Fire & Casualty Co., 109 Ill.2d 41, 47, 92 Ill.Dec. 516, 485 N.E.2d 327 [1985]: well-established public policy in Illinois `prohibits an injured party from recovering personal injury damages against an insurance carrier on account of the negligence of its insured prior to obtaining a judgment against the insured'); see also Marchlik v. Coronet Insurance Co., 40 Ill.2d 327, 332-34, 239 N.E.2d 799 (1968) (public policy precludes use of Illinois courts as forum for cases under Wisconsin direct action statutes which would permit suits against automobile liability insurers to be brought before insured's liability is established). We do not intend to be the first and only court in the country to permit an insured to implead his or her insurer to litigate its negligence or bad faith in failing to settle while the underlying liability of the insured is unresolved. Despite all of the water under the bridge in this case since Judge Ballinger's error in September 2003, we cannot declare that error harmless. There is no way to know how or how much the presence of EMCASCO in the case from September 2003 forward altered subsequent events. We therefore reverse the jury's verdict in favor of the Bryant and Nungesser parties and vacate the $2 million judgment and award of attorney fees. The agreements arising out of the mediation are null and void. With the exception of the issue discussed below, we must remand the case to the district court for further proceedings, starting from the place the parties would have been in if Judge Ballinger had granted EMCASCO's first motion to dismiss. This decision renders EMCASCO's arguments on the sufficiency of the evidence to support the jury's verdict and the merit and amount of the fees award moot. It also renders moot Bryant's motion for attorney fees, expenses and costs related to the appeal to this court.