Lone Star Steakhouse & Saloon v. Liberty Mut. Ins.

343 F.Supp.2d 989

LONE STAR STEAKHOUSE AND SALOON, INC. and Lone Star Steakhouse and Saloon of Michigan, Inc., Plaintiffs, v. LIBERTY MUTUAL INSURANCE GROUP and Liberty Mutual Fire Insurance Company, Defendants.

No. 02-1185-WEB.

United States District Court, D. Kansas.

October 19, 2004.

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Brian C. Henderson, Gary Davis, Crowe & Dunlevy, Oklahoma City, OK, Martin W. Bauer, Martin, Pringle, Oliver, Wallace & Bauer, LLP, Wichita, KS, for plaintiffs.

Michael F. Schmidt, Harvey Kruse, P.C., Troy, MI, Patrick J. Murphy, Wallace, Saunders, Austin, Brown & Enochs, Chartered, Wichita, KS, for Defendants.

Memorandum and Order

WESLEY E. BROWN, Senior District Judge.

This matter is before the court on defendant Liberty Mutual's¹ Motion for Summary Judgment, and upon motions in limine filed by both sides. The court finds that oral argument would not assist in deciding the issues presented.

I. Background.

Lone Star operates a restaurant in Battle Creek, Michigan. As part of the construction of the restaurant, Lone Star built and maintained a storage basin on its property to handle storm water runoff. Battle Creek Hospitality, Inc. ("BCH") operated a Holiday Inn Express on the property next to the restaurant. In 1998, BCH filed suit against Lone Star alleging that overflow from Lone Star's water basin damaged Battle Creek's property ("the 1998 case"). The 1998 case was eventually settled for $95,000. Defendant Liberty Mutual, which had issued a commercial general liability insurance policy to Lone Star, paid the full amount of this settlement. Shortly after settlement of the 1998 case, BCH filed a second action against Lone Star ("the 2000 case") alleging additional flooding incidents and seeking damages in excess of $6,000,000. Liberty Mutual provided a defense for Lone Star but eventually sent reservation-of-rights letters to Lone Star indicating there were questions about coverage under the policy. Liberty Mutual subsequently denied coverage for the BCH 2000 claims. Lone Star then settled the 2000 case with BCH for $890,000.

Lone Star filed the instant action claiming that Liberty Mutual's failure to contribute to the settlement of the 2000 case was a breach of its contract of Commercial General Liability Insurance. Lone Star further claims Liberty Mutual breached an implied covenant of good faith and fair dealing by applying exclusions not contained in the policy, by knowingly misconstruing policy provisions, by not attempting in good faith to effectuate a prompt and fair settlement of the claims in the 2000 case once liability had become reasonably clear, and by forcing Lone Star to retain counsel to secure benefits to which Liberty Mutual knew Lone Star was entitled under the policy.

Defendant Liberty Mutual now moves for summary judgment on three grounds, all of which stem from its contention that Lone Star was aware of the inadequacy of its drainage system but failed to take steps to halt the ongoing flooding of the neighboring property. First, Liberty Mutual argues there was no "occurrence" within the meaning of the policy. Second, it contends coverage is barred by an exclusion for property damage "expected or intended" by the insured. And third, it argues Lone Star's claim is barred under the "loss in progress" or "known loss" doctrine.

This dispute is between citizens of different states and the amount in controversy exceeds $75,000. Accordingly, the court has subject matter jurisdiction of the action pursuant to 28 U.S.C. § 1332(a)(1).

II. Facts.

The court finds the following facts are uncontroverted for purposes of summary judgment. In keeping with the standards governing summary judgment, any facts in the parties' briefs not properly supported by the record have been excluded from the following statement. Also, any matters as to which the record discloses a genuine dispute of fact have been construed in the plaintiff's favor for purposes of determining whether the defendant is entitled to judgment as a matter of law.²

1. Lone Star retained Wolfgang Doerschlag Architects (hereinafter referred to as "WDA") to provide consulting engineering services for the restaurant construction.

2. Lone Star was advised by correspondence of January 8, 1997 from WDA of four options for controlling storm water runoff from its property. One of the options involved installation of a water detention basin. Def. Exh. 6.

3. On February 25, 1997, the City of Battle Creek Building Inspection Division noted upon reviewing the Lone Star site plan that the drainage pattern in the Lone Star parking lot, from south to north, "could allow runoff to flow north beyond the [Lone Star] property line and onto the adjacent hotel property during heavy rainfall. A berm or curb should be used to deflect the flow into the proposed channel." Def. Exh. 7.

4. The WDA drainage plan of March 4, 1997, included installation of a detention basin at the rear — or north — end of the Lone Star property to collect the storm water where it was supposed to infiltrate into the soil. The Plan stated:

The design of this site proposes the construction of a 5700 s.f. building with a 38,717 s.f. parking lot. The water will sheet flow to a detention basin at the rear of the lot where the water will infiltrate into the soil. This basin has 6144 c.f. of storage at 2' of depth. These calculations show that we need 3837 c.f. of storage for a 100 year storm. Therefore, we have more than adequately designed for a 100 year storm. Also, we have improved drainage in both our immediate vicinity and in the "Christy Drain" watershed. We have eliminated any drainage problems the hotel site to the north of us was experiencing because the water is contained on our site and no longer sheet flows directly toward their building. The already over-full "Christy Drain" will not have to accommodate our 1.43 acres as, again, we are containing 100% of our runoff on-site where the water will infiltrate into the soil.

Def. Exh. 8.

Lone Star had just closed its purchase of the property and had not done any work on it at the time of the aforementioned proposal by WDA. The reference above to drainage problems therefore relates to the condition of the property prior to improvements by Lone Star.

5. City of Battle Creek engineer Robert D. Tarbell reviewed the WDA Drainage Plan and prepared a "Drainage Review" memorandum of March 4, 1997, noting that because the plan did not provide for any off-site discharge of storm water, the on-site retention basin "must be sized to contain 100% of the run-off." Tarbell calculated that the required volume for a 100-year, 24-hour storm would be 19,985 c.f. and that the volume provided by the WDA Plan of only 6,144 c.f. was "inadequate."

At the time of this plan, there was no City of Battle Creek regulation or policy requiring retention of all rainfall for a 100-year storm. Def. Exh. 22.

Lone Star was not aware of Tarbell's memorandum until approximately October 1998, after the filing of the 1998 lawsuit. Pl. Exh. C at Pp. 61-62. Liberty Mutual received a copy of the memorandum in November 1998. Pl. Exh. D.

6. On July 15, 1997, Battle Creek Hospitality ("BCH") complained that water from Lone Star's parking lot was flowing over the retention pond and onto BCH's property. It further claimed the Lone Star parking lot was with a slope toward the BCH property, resulting in excess water coming down onto the BCH lot. Def. Exh. 10.

7. On September 18, 1997, WDA reported to Lone Star that during an inspection on September 10, 1997, there was standing water in the detention basin and in the area between the basin and the BCH hotel building. The engineer making the report attributed the poor drainage to existing conditions which were further heightened by the development of the Lone Star property. He that noted a number of pre-development conditions indicated poor drainage on the hotel property, including the slope of the Lone Star property (prior to development), the presence of non-absorbent clay under the topsoil, that fact that the existing drains and storm pipe around the hotel were filled with sediment and were no longer in use, and the drainage of water into the area from the hotel roof. He stated that although the Lone Star drainage plan was designed according to code and was approved by the city and the hotel, "the overall drainage design appears to be contributing to the standing water at the hotel." Def. Exh. 11.

WDA proposed a temporary solution to the problem that involved extending the detention basin onto the BCH property and piping from the extension to an existing catch basin attached to the city system. Id. 8. In a letter dated February 20, 1998, concerning BCH's complaint, Lone Star representative Karon Perrill stated that Brent Allison (an agent of Lone Star) had recently visited the site and reviewed the drainage situation. Perrill conceded that "the area is an absolute mess and the drainage needs to be remedied," but said the problem was that runoff from the BCH lot and surrounding property was flowing into Lone Star's lot and causing its detention pond — which was designed only to handle runoff from Lone Star's property — to overflow. She said that Lone Star was not willing to spend any more money on the site and requested that Raxit Shah [the owner of the BCH property] take the necessary steps to remedy the drainage problems on his site. Def. Exh. 12.

9. On July 23, 1998, BCH sent correspondence to Lone Star complaining that since construction of the Lone Star restaurant and water detention basin, water had been flowing from Lone Star's property onto BCH's property, damaging the hotel's property, rooms, and business. Def. Exh. 13.

10. On July 27, 1998, Karon Perrill of Lone Star responded to BCH, again asserting that water from the hotel and other surrounding property was draining into Lone Star's detention basin and that the basin was designed to drain only Lone Star's...