IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 85,794
ATCHISON, TOPEKA & SANTA FE RAILWAY CO.,
Appellee,
v.
STONEWALL INSURANCE COMPANY, et al.,
Appellants.
SYLLABUS BY THE COURT
1. Interpretation of an insurance policy is a question of law.
2. We construe insurance policies in a way that will give effect to the intention of the parties. Absent ambiguity, we enforce the policy as made.
3. All pertinent provisions of an insurance policy must be considered together, rather than in isolation, and given effect.
4. Primary insurance coverage is insurance coverage under which liability attaches immediately upon the happening of the occurrence that gives rise to liability. An excess insurance policy is one that provides that the insurer is liable for the excess above and beyond that which may be collected on primary insurance.
5. For a State's substantive law to be applied in a constitutionally permissible manner, that State must have a significant contact or significant aggregation of contacts creating state interests, such that the choice of its law is neither arbitrary nor fundamentally unfair.
6. No choice of law question is presented when the law of the involved states do not differ on substantive issues.
7. Under the facts of this case, Santa Fe's self-insured retentions constitute primary coverage for noise-induced hearing loss claims, and as such are other insurance under the excess policies, and require Santa Fe to exhaust the self-insured retentions before it can seek recovery under those policies.
8. Where an insured fails to give to its insurer timely notice of a lawsuit against the insured, the insurer is required to show that it was prejudiced by such failure in order to escape liability under the policy.
Appeal from Shawnee district court; NANCY E. PARRISH, judge. Opinion filed May 30, 2003. Affirmed in part, reversed in part, and remanded.
Douglas R. Richmond, of Armstrong & Teasdale, LLP. of Kansas City, Missouri, argued the cause, and William A. Larson and Timothy A. Shultz, of Gehrt & Roberts, Chartered, of Topeka, and Richard W. Bryan and Erin N. McGonagle, of Jackson & Campbell, P.C., of Washington, D.C., were on the briefs for appellants American Home Assurance Company, Audubon Indemnity Company, Granite State Insurance Company, Insurance Company of Pennsylvania, Landmark Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, and Union Atlantique D'Assurance, S.A.
Hal D. Meltzer, of Baker Sterchi Cowden & Rice, of Kansas City, Missouri, and Michael F. Sommerville, of Centrulo & Capone, LLP, of Boston, Massachusetts, were on the brief for appellant Stonewall Insurance Company.
Eric I. Unrein, of Davis Unrein McCallister Biggs and Head, of Topeka, and Eric C. Young, of Dunham Boman and Leskera, of Belleville, Illinois, were on the briefs for appellants Employers Insurance of Wausau and Nationwide Mutual Insurance Company.
Stephen W. Cavanaugh, and Todd D. Powell, of Fisher, Cavanaugh, Smith & Lemon, P.A., of Topeka, and Joseph S. Crociata, Stuart Peacock, and Michelle Oshman, of Bonner, Kiernan, Trebach & Crociata, of Washington, D.C., were on the briefs for appellants Fireman's Fund Insurance Company and National Surety Corporation.
David V. Goodsir, of Freeborn & Peters, of Chicago, Illinois, argued the cause, and Weston W. Marsh, of the same firm, and Steve R. Fabert, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, were with him on the briefs for appellee The Atchison, Topeka, & Santa Fe Railway Company.
Karen R. Glickstein, of Shughart Thomson & Kilroy, of Kansas City, Missouri, and Laura A. Foggan, and Elizabeth A. Eastwood, of Wiley Rein & Fielding LLP, of Washington, D.C., were on the brief for amicus curiae Complex Insurance Claims Litigation Association.
The opinion of the court was delivered by
ALLEGRUCCI, J.: This is a declaratory judgment action, which was filed by the Atchison, Topeka and Santa Fe Railway Company (Santa Fe) initially against approximately 120 insurance companies that issued excess liability policies to Santa Fe between 1945 and 1986. Appellants are some of the defendant insurance companies: American Home Assurance Company, Audubon Indemnity Company, Granite State Insurance Company, Insurance Company of the State of Pennsylvania, Landmark Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, Union Atlantique D'Assurance, S.A., Nationwide Mutual Insurance Company, Employers Insurance of Wausau, a Mutual Company, Stonewall Insurance Company, Fireman's Fund Insurance Company, and National Surety Corporation (collectively known as Insurers).
Santa Fe sought declarations that the Insurers must indemnify it for settlements of several thousand claims and lawsuits by employees who alleged hearing losses due to excessive noise in the workplace. In 1995, the district court, ruling on cross-motions it had directed the parties to file before completion of discovery, entered judgment in favor of Santa Fe. Insurers appealed the 1995 decision, and this court reversed and remanded. Atchison, Topeka & Santa Fe Railway Co. v. Stonewall Insurance Co., 1997 WL 1048134.
On remand, the parties developed the factual record. Subsequently, ruling on the parties' motions and cross-motions for partial summary judgment, the district court concluded that Kansas law applied to all issues and that the declaratory judgment sought by Santa Fe would be entered in its favor. Insurers appealed. Insurers' motion for transfer to this court was granted pursuant to K.S.A. 20-3017.
The district court's decisions that, taken together, constitute the final declaratory judgment in this case are on choice of law, which were made on November 3, 1999, March 12, 1999, and December 14, 1998, and on all substantive issues, which were made on July 24, 2000. Each memorandum decision and order was the district court's ruling on a motion or motions for partial summary judgment or summary judgment. In each memorandum decision and order, the district court set out a statement of uncontroverted facts.
Although Insurers assert in several instances (trigger of coverage, nonfortuity and known loss) that disputed facts preclude summary judgment, in fact, their substantive arguments challenge the district court's application of law to facts rather than the district court's findings of fact. Insurers' contentions involving facts are discussed along with the issues. The trial court's findings of fact relevant to the discussion of the issues are as follows:
1. As of March 1998, Santa Fe has paid in excess of $28 million in connection with more than 3,800 claims that have been filed by its employees. The employees allege that they sustained noise-induced hearing loss (NIHL) from continuous exposure to excessive noise while employed by Santa Fe.
2. Noise is an obvious and unavoidable by-product of Santa Fe's normal railroad operations.
3. NIHL is an injury that occurs contemporaneously with unprotected exposure to excessive noise.
4. NIHL injuries continue progressively throughout the course of unprotected exposure until the exposure to excessive noise is interrupted.
5. The NIHL claimants alleged that their work environment involved a network of multiple excessive noise sources and that they were exposed to on a daily basis in different ways to noises from a variety of sources. The claimants, whether engineers, carmen, or maintenance-of-way workers, were mobile employees, changing locations and job assignments in the course of their work.
6. Santa Fe purchased millions of dollars of comprehensive general liability insurance policies throughout the years, and Santa Fe also maintained a variable level of Self-Insured Retention (SIR).
7. From at least 1945 to 1986, Santa Fe maintained a program of excess insurance coverage purchased from Insurers to protect it from "liability incurred as a result of its operations."
8. Santa Fe's self-insured retentions underlying its excess policies ranged from $1,000,000 for the period from 1956 to 1971, to $7,000,000 for the period from 1984 to 1986. In 1991, the coverage grew to $10,000,000. The self-insured coverage currently is $25,000,000.
9. In each year of coverage, Santa Fe purchased several layers of insurance.
10. Each layer has upper and lower coverage limits and each layer is composed of separate, multiple policies issued by different insurance companies.
11. Total premiums on the International Surplus Lines Insurance Company (ISLIC) policies decrease as each successive layer of coverage is reached. For the period of March 17, 1982, to March 17, 1983, the premium ranged from $170,000 for a $1,700,000 coverage of the first $10,000,000 that exceeded Santa Fe's $5,250,000 Self-Insured Retentions, to a $5,000 premium for a $5,000,000 coverage of the $50,000,000 excess over the $150,250,000 that was covered by higher layers.
12. Under the excess policies, Insurers agree, subject to all terms and conditions of their policies, to indemnify the assured for certain losses up to the limits of the policies incurred as a result of an "occurrence."
13. On December 29, 1994, Santa Fe filed its original petition for declaratory relief against the defendant insurance companies that issued general liability insurance policies for the years 1945-1986 to Santa Fe, seeking coverage for claims brought by employees of the railroad for NIHL.
14. Santa Fe is not seeking reimbursement from any policy after 1986, after which time Santa Fe began to reinsure itself and after which time the NIHL occurrence ceased.
15. Each of the pre-1974 insurance policies at issue in this case contains standard language in which the insurers agreed, subject to terms and conditions of the policies, to indemnify Santa Fe for "any and all sums" of damages arising out of an "accident or accidents" in excess of a certain amount. While the coverage limits varied from year to year, the indemnification and limits policy language was otherwise substantially similar and provided:
"To indemnify the Assured for any and all sums which the Assured shall become liable to pay, and shall pay, to any person or persons as compensation for injury or damage to persons (whether such injury or damage be fatal or nonfatal) and injury or damage to property (excluding property of the Assured or in its custody or control) arising out of any accident or accidents caused by or growing out of the Assured's Railroad operations in the United States of America and all operations incidental thereto."
16. The pre-1974 Santa Fe policies define the term "Ultimate Net Loss" with wording substantially similar to the following definition:
"the sum actually paid in cash in the settlement of losses for which the Assured is liable, after making proper deductions for all recoveries, salvages, and other insurances, and shall include all loss and legal expenses (excluding salaries of employees and office expenses) incurred in investigation, adjustment or litigation."
17. Each pre-1974 Santa Fe policy contains an "other insurance" provision. These clauses are substantially similar and provide:
"This insurance does not cover any loss or damage which at the time of the happening of such loss or damage is insured by any other existing policy or policies of valid and collectible insurance except in respect of any excess beyond the amount which would have been payable under such other existing policy or policies had this insurance not been effected."
18. Some of the pre-1974 policies define "occurrence" to mean "one or more accidents or series of accidents arising out of or resulting from one event."
19. The post-1974 Santa Fe policies at issue in this case contain the following indemnity provision, or one that is substantially similar:
"Liability: this Policy also indemnifies the Assured for any and all sums which the Assured shall become legally liable or obligated by contract (subject to Section IV-C2 hereof ) to pay to any person or persons as compensation or damages for injury or damage to any person or persons (whether such injury or damages be fatal or non-fatal) and for injury or damage to property (excluding property covered under Section I-A hereof) arising out of any occurrence or occurrences caused by or growing out of the Assured's operations and/or any operations incidental thereto during the term hereof; and to indemnify the Assured for legal, investigation, and other expenses as set forth in the definition of the Ultimate Net Loss in Section V-A hereof."
20. The post-1974 Santa Fe policies also provided for a retention. While the amount of the retention varied from year to year, the policy language was otherwise substantially similar and provided:
"Retention: Underwriters shall not be liable hereunder unless the Ultimate Net Loss amounts to $3,000,000 any one occurrence involving coverages as described in Sections I-A and I-B hereof and then only for the sum in excess of $3,000,000 Ultimate Net Loss subject to the limit of $5,000,000 Ultimate Net Loss; but, there is no limit to the number of occurrences for which claims can be made, provided such occurrences take place during the term hereof."
21. The post-1974 Santa Fe policies define "Ultimate Net Loss" as
"sums actually borne by the Assured after making deductions for all recoveries, all salvages and all collectible claims upon other insurances except as respects insurances procured in accordance with Section IV-A-7, and shall include all direct wrecking and salvaging expense and Assured's additional expenses arising from the settlement of claims including investigation and adjustment expenses as well as including all legal expenses incurred with the written consent of the Underwriters, other than the Assured's usual and ordinary fixed operating and office expenses."
22. The post-1974 policies typically defined "occurrence" as
"[O]ne or more accidents or disasters and/or series of accidents or disasters arising out of or resulting from one event.
. . . .
"Each 'occurrence' shall be deemed to commence on the first happening of any material damage not within the period of any previous 'occurrence.'"
23. Some pre-1974 Santa Fe policies and post-1974 Santa Fe Policies provide as follows:
"Underwriters agree that in the event of a claim for damages for bodily injury or property damage being made by any Assured hereunder against any other Assured hereunder, this Policy shall cover such other Assured against whom claim is made in the same manner as though separate Policies shall have been issued to each Assured, but in no event shall there be imposed more than one deductible as set forth in Condition 4 in respect to one occurrence." (Emphasis added.)
24. Certain policies contain "other insurance" clauses which typically state:
"Notwithstanding anything to the contrary contained herein, it is further understood and agreed that where there is any other valid and collectible insurance providing coverages, as described in Section I-A and I-B hereof, this insurance shall be considered as excess insurance over and above such other insurance in effect at the time of the loss or damage except that permission is hereby granted for excess insurance over the limits of liability expressed in this Policy without prejudice to this insurance, and the existence of such insurance, if any, shall not reduce any liability under this Policy."
25. Each Santa Fe insurance policy at issue contains a notice clause. A typical "notice" provision is contained in International Surplus Lines Insurance Company (ISLIC) Policy Number 2298 (3/17/81 to 3/17/82). The pertinent language of that "notice" clause states:
"Written notice of each occurrence or accident shall be given by or on behalf of the Assured to the Underwriters as soon as practicable through Rollins Burdick Hunter Co., who are hereby authorized to instruct Messrs. Mendes & Mount, to assess the loss on behalf of Underwriters after notice has been received by an Executive Officer or the Manager of Insurance located at the Insured's Corporate Headquarters, 224 South Michigan Avenue, Chicago, Illinois 60604."
The other policies at issue have substantially similar language.
26. Each policy also contains the following clause or a substantially similar one:
"SECTION IX. PRECEDENCE OF THIS FORM
"The exact terms and conditions of this manuscript form are to be regarded as substituted for those of the certificate, cover note or policy to which it is attached and forms a part, wherever and insofar as such terms and conditions may conflict."
27. Some of the alleged policies produced by the insurers include jackets or cover notes which contain the following language or substantially similar language:
"Notice of Loss, Participation in Defense by the Company
"Notice of an occurrence which appears likely to involve this policy shall be given by or on behalf of the insured to the company or any of its authorized agents as soon as practicable. The company at its own option may, but is not required to, participate in the investigation, settlement or defense of any claim or suit against the insured."
Santa Fe disputes that the "jacket" language constitutes part of the policy.
28. Lexington Insurance Company, Fireman's Fund and National Surety Corporation, Nationwide Mutual, and Stonewall each first received notice of Santa Fe's NIHL claims in July 1989.
29. Insurers have no facts which demonstrate prejudice by the timing of the notice they received of the NIHL claims.
30. Insurers took no action to negotiate, defend, or prevent NIHL claims against Santa Fe.
31. Santa Fe's pay-outs for NIHL claims are among the lowest in the industry.
32. Of the 10 claims that Santa Fe settled from August 1965 through June 1971, nine pertained to traumatic hearing loss and only one pertained to NIHL.
33. In December 1976, E. B. Hill, a former Santa Fe engineer, filed a lawsuit against Santa Fe alleging NIHL.
34. By the time Santa Fe gave Insurers notice, Santa Fe had received notice of 247 NIHL claims (in addition to the claims noted above).
35. Steve Hanks, attorney with the law firm of Helm, Pletcher, Hogan, Bowen & Saunders, handled over 100 NIHL lawsuits and 25 claims against Santa Fe. Hanks testified in his deposition in this case:
"Q: Okay. In the noise-induced hearing loss cases, I take it from your affidavit that your belief or feeling or legal position is that the negligence was Santa Fe's failure to have a timely hearing conservation program; is that correct?
"A: It was and is our position.
"Q: Okay. Causation. What's the causation of the claims?
"A: Well, as a result of Santa Fe's failure to have a timely and appropriate hearing conservation program, the employees suffered noise-induced hearing loss while working for the railroad. I don't know exactly what you are asking.
. . . .
"Q: I'm asking you, you told me the elements of a FELA cause of action are negligence, causation, and damages. Negligence we've talked about. What do you mean by causation?
"A: Well, when you have an industry, any industry that generates noise in the process of work, then it is incumbent on the industry to provide a hearing conservation program for their employees who are working, to ensure that they do not suffer damage to their hearing.
"The railroad failed to do that. Had the railroad instituted a timely and appropriate hearing conservation program, our clients would not have suffered noise-induced hearing loss.
. . . .
"A: See, what I want to make sure you understand, because you keep talking about causation, in a FELA case, you have to prove that the defendant was negligent, you have to prove that the defendant's negligence caused the harm and then you have to prove the extent of the harm.
"So in the hearing loss cases, it didn't do us any good to prove that noise -- put it this way: Just proving that their hearing had been damaged by noise did not even get us to the jury, because that did not establish causation.
"Causation that you are required to establish under the FELA is that the defendant's negligence caused, in whole or in part, damage to the plaintiffs and it was the negligence--it was the fact that their negligence caused the harm that we had to prove. The simple fact that there was noise out there doesn't establish negligence."
36. John Fabry, an attorney at the law firm of Jones and Granger, handled NIHL cases against Santa Fe. Jones and Granger filed over 1,000 claims against Santa Fe, approximately 230 of those being lawsuits. Fabry testified in his deposition regarding the Jones and Granger cases:
"Q: Can you elaborate for me as well as you can what the theory of liability has been in noise-induced hearing loss cases?
"A: There was sufficient information available for the railroad to recognize that a hazard existed to their employees and sufficient information to protect them against that hazard by way of implementing a hearing conservation program, and the railroad simply failed to do that. That failure to implement the program caused hearing loss in individual claimants, and, therefore, they were entitled to recover damages from the railroad under the FELA."
37. Plaintiff asserts that an adequate hearing conservation program requires six system-wide components: (1) noise exposure monitoring; (2) employee notification of monitoring results; (3) annual audiometric testing for affected employees; (4) availability of adequate hearing protection devices; (5) a NIHL training program; and (6) feasible administrative and engineering controls to reduce exposure to potentially hazardous noise levels as measured by appropriate testing and monitoring. Defendants controvert this fact only to state that another element is necessary to have an adequate hearing conservation program: proper management at all (including local) levels.
In addition to its Findings of Fact, the district court mentioned the following facts:
A. Counsel for an insurer conceded at oral argument on summary judgment motions that self-insurance is not insurance. (NOTE: That insurer is not among the appellants. The concession may merely have been with regard to a definition of insurance, as discussed in Issue 4.)
B. Santa Fe purchased no commercial insurance policies for the years 1952 through 1956.
C. Counsel for Santa Fe stipulated at oral argument before the district court
"that the occurrence (and thus the liability) started no earlier than 1966 (the date of Dr. Glorig's report on NIHL) and ended no later than 1984 or 1985 . . . . If the occurrence (i.e. the failure to timely implement a Hearing Conservation Program) spanned 1966 through 1984 or 1985, none of the years in which Santa Fe was totally self-insured would be triggered, i.e. 1952-56, years before 1940, or years after 1986. Likewise the legal liability that Santa Fe incurred for failure to timely adopt a Hearing Conservation Program were the years 1966 through 1984 or 1985. There should have been no negligence prior to 1966 nor after 1984 or 1985 (when an HCP was implemented)."
The factual findings relevant to the district court's decisions on nonfortuity and known loss are as follows:
"1. December 22, 1970, Dr. Forrest H. Kendall of the Old Wesport Medical Association wrote a letter to Mr. F.W. Walters, Administration, Santa Fe RR advising that a Santa Fe employee to whom he had recently administered an audiogram had a rather severe type of hearing loss in both ears, the type of hearing loss associated with acoustic trauma. Dr. Kendall further advised:
'I am impressed by the number of railroad employees I see, both from your railroad and other railroads, for which my office does business, with the hearing loss associated apparently with noise exposure at work. It is our recommendation that anyone who is associated with working in an area where they cannot hear a co-worker speak at normal voice within [illegible] feet, is indeed in an area of too great a noise exposure. These people should all wear a type of protective device to reduce the possibility of acoustic trauma and irreversible hearing loss.'
"However, as Santa Fe points out, 'acoustic trauma' is not necessarily noise-induced hearing loss (NIHL)."
2. During the period of August 1965 through June 1971, Santa Fe settled at least 10 employee claims involving hearing loss. However, 9 of the 10 claims pertain to traumatic hearing loss--not NIHL.
"3. July of 1971, MTS Associates, Inc. advised Santa Fe's Director of Safety, D.D. Baird:
'Hearing conservation programs are now a necessity in almost all industry. Even more for the railroads, since their compensation problems do not have the monetary limits imposed in Workmen's Compensation in the various states.
'Both you and Dr. Hanson certainly have a knowledge of the problems. There remains no doubt that noise induced hearing loss is the number one, non-fatal, hazard in industry today. Experience in the railroad industry shows that large numbers of your personnel, particularly in the shops and operating groups, are in the various exposure patterns. The risk proabilities [sic] of hearing impairment are significant.
'In order to reduce future liability and the human problems related to this hearing impairment, we must prevent the hearing loss from occurring. A complete controlled, continuing, valid hearing conservation program provided in the proposal presented to Mr. McMillan is designed to meet these requirements.'
"Santa Fe admits that quotation is accurate but argues that the letter was a marketing letter to Santa Fe and should not be used to infer that Santa Fe had knowledge that MTS Associates, Inc.'s statements were true and accurate.
"4. July 14, 1971, one of Santa Fe's attorneys wrote to Dr. Hanson, Santa Fe's Medical Director, the following:
'Since our recent telephone conversation, I contacted General Claim Agent Harrington to [illegible] claims we have had involving hearing loss by employees. He checked with Messrs. Eschenburg and Ketring, and [illegible] forwarded to me a summary of claims involving hearing loss for the three Grand Divisions over the past five years. Attached are copies of their reports.
'As you can see, relatively few of the claims are based on an overall high noise level [illegible]. I suspect you are correct, however, that [illegible] the type of claim we can expect to see more of in the future, especially if and when federal standards are set.'
"5. On September 7, 1972, the Kansas Department of Labor conducted a sound level survey at one Santa Fe location and found that the noise levels exceeded the permissible standards for the following area in one tie gang: Rail Lifter and Tie Pusher, Tie Handler, Tie Inserter Operator and Helper, Dual Hydraspiker, Air Compressor and Jack Hammer Operators and Helpers. Since the tie gang was soon to be disbanded no further action was taken on the complaint.
"6. In response to the September 7, 1972 citation, Santa Fe conducted its own noise survey and confirmed that the noise levels did in fact exceed the permissible 90dba [decibels] for eight hours.
"7. There were several noise-related complaints at various Santa Fe sites that resulted in some type of citations by an outside agency that were resolved by Santa Fe or by agreement between the agency and Santa Fe. Some of the noise-related complaints were due to violations of city noise ordinances and were not based on impermissible employee noise exposure levels.
"8. November 1, 1974, Mr. Shaver (In 1973, Mr. Shaver was assigned by Mr. Cena, Santa Fe's Vice President of Operations, to oversee and coordinate all noise related matters) sent Mr. Cena a 4 page letter in which he discussed the proposed OSHA regulations for noise levels and further advised:
'OSHA printed its proposed new noise standard in the October 24, 1974 Federal Register (Volume 39, No. 207). While most of the requirements mentioned in my February letter now appear in the OSHA proposal, there are some very important changes that may greatly affect the railroads. All of this, of course, depends on the long-pending decision of who will ultimately wind up with jurisdiction over the railroads, the DOT or the DOL. Should FRA end up with jurisdiction, they might possibly interpret the regulations differently, but I am convinced that the ground rules will remain essentially the same.
'While 90dba is still the time weighted, eight-hour exposure, OSHA is now concerned about the 85-90 dba range. This range is important to us because noise levels in most locomotive cabs fall between those values. Previously, we felt safe if we kept locomotive cab noise levels below 90 dba. However, should the new regulation be adopted in its present form, we could be subjected to a whole host of requirements that would be almost impossible to comply with. . . .
'We have three major areas that would be affected by these regulations: trainmen and enginemen, Maintenance of Way and shops. Identifying trainmen and enginemen who are subjected to an eight-hour time-weighted exposure of 85dba would be extremely difficult. Most freight and passenger runs today are not a duration that would expose the crew to over 85dba for an eight-hour period. However, there are many runs that do and the problem of determining which employees fall into which category would be next to impossible. The only way we could be certain that we comply would be to identify and test ALL enginemen and trainmen. In order to avoid getting into this in the first place, I suggest that we see what can be done to reduce the noise level in locomotive cabs below 85dba. If this can be done, we would eliminate a large part of our employee population who would other