Phico Insurance Company v. Providers Insurance Company

Citations: 888 F.2d 663; 1989 WL 126308Docket: 88-1968

Court: Court of Appeals for the Tenth Circuit; December 13, 1989; Federal Appellate Court

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Phico Insurance Company appeals a district court ruling that denied its motion for summary judgment and granted summary judgment for Providers Insurance Company in a dispute over insurance coverage for a settlement. The case involves a $100,000 reimbursement issue stemming from a claim related to an incident where 15-year-old Kimberly Borland fell from a window at the University of Kansas Medical Center, allegedly due to inadequate supervision.

Providers had issued a claims-made insurance policy to the Medical Center covering accidents from August 1, 1984, to August 1, 1985. This policy required written notice of claims during the policy period. Phico also issued a claims-made policy for the Medical Center, covering from August 1, 1985, to August 1, 1986, with a Prior Acts Coverage Endorsement that excluded coverage if another policy provided applicable coverage.

Following the Borland incident, the Medical Center promptly notified Providers, which opened an investigation and set a reserve for the claim. However, Providers did not inform the Medical Center that a formal claim had not been made, nor did they communicate the necessity for written notice.

A lawsuit was subsequently filed by Borland, leading to a joint contribution of $100,000 from both Providers and Phico to meet the primary insurance limit. Under the Health Care Stabilization Act, the Health Care Stabilization Fund took over the defense, providing coverage for claims exceeding the basic limit. The agreement stipulates that if Phico is found to have coverage and Providers does not, Phico will reimburse Providers, and vice versa.

The district court addressed the responsibility for primary coverage of $200,000 concerning a claim by Kimberly Borland against Medical Center, determining that Providers, an insurance company, was liable, while Phico, the other insurer, was not. The court concluded that Phico had standing to pursue indemnity against Providers despite not being a party to the contract with Medical Center, but emphasized that the terms of the Providers policy were clear: a claim is only made upon written notification of an occurrence, which was not provided. Therefore, the claim falls under the Phico policy. 

On appeal, Phico contested the district court's decision, arguing that it erred in finding that Medical Center’s failure to notify Providers breached the insurance contract and that summary judgment for Providers was unwarranted. Providers countered that Phico lacked standing, being a non-party to the contract and there being no pending claim by Medical Center. The appellate court acknowledged that no substantial factual issues were raised that would impede summary judgment, and reaffirmed the need to apply the relevant law, giving some deference to the district court's interpretation of state law. Ultimately, the court found that Phico is indeed the real party in interest regarding the determination of which insurer is responsible for the claim.

Standing to sue is generally established by demonstrating that a judgment has an adverse effect on the appellant. In this case, Phico claims it will incur a $100,000 injury if deemed responsible for providing $200,000 to the Medical Center regarding the Borland claim. The parties are clearly in opposition and have a significant interest in the matter at hand. According to Article III of the U.S. Constitution, standing is satisfied if a party shows they have suffered an actual or threatened injury that is traceable to the challenged action and likely to be addressed by a favorable ruling. 

The court identifies two key inquiries for analyzing standing: (1) whether Phico alleges that the Providers' refusal to recognize coverage for the Medical Center’s claim has or will cause it injury, and (2) whether Phico's interest is within the zone of interests protected by law. The district court affirmed that Phico is the real party in interest and rejected Providers' argument that Phico could not recover due to not being a party to the contract with the Medical Center. Kansas law allows for the shifting of economic loss between tortfeasors for public policy reasons, supporting Phico's standing to pursue indemnity against Providers.

Phico also cites a precedent case, United Services Automobile Association v. Royal Globe Insurance Co., where standing was upheld despite one party not being a direct beneficiary of the rental contract involved. The court rejected Royal Globe's challenge to United's standing, reaffirming that a third party can bring an action to enforce a contract under certain conditions, even when not a direct beneficiary.

The action in question is a declaratory judgment suit concerning the rights and responsibilities of USAA and Royal related to the duty to defend and indemnify Friloux in a Texas lawsuit. The court determined that USAA has standing to bring this suit, as the matter involves definite interests and adverse stakes for both parties. 

Providers contended that a prior agreement among the involved insurance parties had definitively settled all potential coverage claims, arguing that contributions made to the defense of the Medical Center did not create any subrogation interests. Providers maintained there was no basis for reopening the settled coverage issue through judicial means. 

However, the court rejected Providers' arguments, affirming that Phico had standing to pursue the declaratory judgment action. The Borland lawsuit against Medical Center was ongoing post the expiration of Providers' policy and during Phico's coverage period. Medical Center had not notified Providers of the claim within the policy timeframe; Providers denied coverage based on this lack of timely claim. Medical Center subsequently sought defense from Phico, which initially provided it but later withdrew, asserting the claim was pre-existing.

The declaratory judgment action initiated by Phico allowed Medical Center and the Fund to intervene, but they were dismissed after Phico and Providers reached a settlement. This settlement aimed to avoid allegations of bad faith while allowing Phico to litigate the liability for the $200,000 coverage. The court concluded that Phico had standing to pursue the case, but agreed with Phico's argument that the failure of Medical Center to provide written notification of the claim constituted a breach of Providers' insurance contract, making Phico's policy coverage exclusive for the Borland accident claim.

Courts adhere to the principle that they will not create contracts through judicial interpretation, enforcing them solely based on their explicit language. In the current case, the district court highlighted the necessity of written notice of occurrences as mandated by the insurance policy. Despite telephone communication from the medical center to Providers, there was no documented evidence of written notification to Providers during the policy period.

An exception exists under the doctrine of waiver, which was acknowledged by Providers' counsel during oral arguments, indicating that if the dispute were between Providers and its insured, the Medical Center, regarding the Borland claim, it would not be in court, suggesting Providers' liability. However, this acknowledgment was not presented to the district court or documented in the appeal record.

The law supports implied waiver through actions and conduct, as seen in various cases where insurers waived strict compliance with written notice requirements due to their own actions, such as investigating claims or failing to provide necessary forms. The intent behind requiring prompt written notice is to enable insurers to conduct timely investigations to assess their liabilities and protect against fraudulent or invalid claims.

Policy provisions regarding notice of claim or occurrence should be interpreted in favor of the insured. Courts generally hold that if the insured provides timely and adequate notice without a written submission or strict adherence to policy terms, the insurer must demonstrate actual prejudice to deny coverage, unless an express forfeiture clause exists. In the analyzed case, although a 'condition precedent' was present in the Providers' policy, no forfeiture clause was included. Kansas law disapproves of forfeiture in insurance policies unless clearly stated. A relevant case established that failure to comply with notification terms does not exempt the surety from liability if no actual loss or prejudice occurs. 

The rationale extends to instances where an insurer cannot rely on exclusions if they had prior notice of the relevant circumstances, suggesting that conduct can lead to estoppel from denying coverage. Thus, under Kansas law, if the insured provides timely oral notice of a claim and the insurer investigates based on that notice, the insurer must prove actual prejudice to deny coverage. In this instance, Providers did not demonstrate actual prejudice. The decision is reversed and remanded for further proceedings aligned with this interpretation.