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B.S.C. Holding, Inc. v. Lexington Insurance Co.

United States District Court, D. Kansas

May 28, 2014

B.S.C. HOLDING, INC., and LYONS SALT COMPANY, Plaintiffs,
v.
LEXINGTON INSURANCE COMPANY, Defendant.

MEMORANDUM AND ORDER

ERIC F. MELGREN, District Judge.

Plaintiffs B.S.C. Holding, Inc., and Lyons Salt Company filed this suit against Defendant Lexington Insurance Company seeking a declaratory judgment and damages for breach of an insurance contract. The Court previously granted Defendant's Motion for Summary Judgment on the basis that Plaintiffs failed to provide timely notice as required by the contract, and Plaintiffs appealed. The Tenth Circuit reversed the Court's decision and remanded with instructions to vacate the summary judgment award. Before the Court is Defendant's Motion for Ruling on Its Remaining Summary Judgment Bases (Doc. 170). Because Defendant's remaining summary judgment bases were not considered by the Court in its summary judgment Order, the Court grants Defendant's motion and addresses two of Defendant's summary judgment bases below.

I. Factual and Procedural Background[1]

A. The Insurance Policies

Plaintiff Lyons Salt Company ("Lyons Salt") operates a salt mine in Lyons, Kansas. Plaintiff B.S.C. Holding, Inc. ("BSC"), is the sole shareholder of Lyons Salt. From 2002 to 2010, Defendant Lexington Insurance Company issued eight consecutive policies of commercial property insurance to Plaintiffs, which named both Lyons Salt and BSC as insured parties under each policy. Plaintiffs claim that Defendant breached six of these policies, with the first policy beginning on May 1, 2004, and the last policy terminating on April 1, 2010 (the "Policies").[2]

The Policies at issue constitute "all risk" insurance policies, which provide:

Subject to the terms, conditions and exclusions hereafter contained, this Policy insures: 1. All real and personal property (including improvements and betterments) and contractors equipment of this Insured or similar property in the Insured's care, custody or control for which the Insured may be held liable against all risks of direct physical loss or damage occurring during the period of this policy as stated in the Schedule and/or Declarations attaching to and forming part of this policy.[3]

Under a section entitled, "Property Excluded, " the Policies exclude coverage of "Water, land or land values" and "Property while Offshore or situated underground unless otherwise endorsed."[4] The Policies also contain the following under a section entitled, "Exclusions":

This policy does not insure against:

....
5. Loss or damage caused by or resulting from moth, vermin, termites or other insects, inherent vice, latent defect, wear, tear or gradual deterioration, contamination, rust, wet or dry rot, mold or dampness of atmosphere, smog or changes in temperature (but not including damage resulting from frozen plumbing and sprinkler system); or loss or damage by settling, shrinkage, cracking, bulging or expansion in building or foundation.
6. Loss or damage caused by backing up of sewers or drains or seepage below ground level but this exclusion shall not apply if the loss to this policy does not exceed $25, 000.00 in any one occurrence.[5]

Additionally, the Policies contain the following under a section entitled, "Conditions":

9. Sue and Labor. In case of an actual or imminent loss or damage, it shall be lawful and necessary for the Insured... to sue, labor and travel for, in and about the defense, safeguard and recovery of the property Insured hereunder.... The expenses so incurred shall be borne by the Insured and the Company proportionately to the extent of their respective interests.
....
12. Suit. No suit, action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the insured of the occurrence which gives rise to the claim, provided, however, that if by the law of the State within which this policy is issued such limitation is invalid, then any such claims shall be void unless commenced within the shortest limit of time permitted by the laws of such state.[6]

The Policies limited Defendant's liability to $7, 500, 000.00 per "occurrence, " which is defined as "any one loss, disaster, casualty, or series of losses, disasters, or casualties, arising out of one event...."[7] The last insurance policy that Defendant issued to Plaintiffs terminated on April 1, 2010. Plaintiffs then obtained coverage from a different insurer.

B. High Closure Rates and Water Inflow Discovered at the Lyons Mine

In October 2004, Plaintiffs discovered higher than expected closure rates at the intersection of Panel 1 and Panel 2B of the Lyons Mine. The "higher than expected" closure rates pertained to the rate that the mine floor and the mine ceiling in Panel 1 and Panel 2B were coming closer together. Plaintiffs observed these abnormally high closure rates again in April and August of 2005, and in September 2005, a consultant to the Lyons Mine, Gary Petersen, advised Lyons Salt of the possibility of water entering the mine. Petersen characterized the water inflow as a worst-case scenario that "could be a huge problem."[8]

On January 17, 2008, Lyons Salt detected an inflow of water near the same area where Plaintiffs previously observed the abnormally high closure rates. Since this time, the rate of water inflow has averaged approximately twenty-two gallons per minute, or 31, 680 gallons per day. Plaintiffs were not aware of the cause of the water inflow when they discovered the intrusion.

After discovering the water inflow, Plaintiffs immediately retained a team of mining experts and engineers to investigate and devise a solution. Plaintiffs considered the water inflow a problem that needed to be fixed, and Petersen was concerned about a total loss of the mine due to catastrophic flooding. In March 2009, there was a possibility that the inflow could be large enough to flood the mine, and Petersen predicted that a catastrophic event was going to occur at the Lyons Mine at some time in the future. Also in 2009 one of Plaintiffs' retained experts and consultants became concerned about a catastrophic flooding event at the Lyons Mine and conveyed that concern to Lyons Salt.

In April 2010, Plaintiffs' team of consultants concluded that an improperly sealed oil well ("the Habinger 3 well") was causing the inflow of water from a nearby aquifer, compromising the mine's structural integrity. Plaintiffs' consultants opined that if the problem was not immediately remedied, an imminent and catastrophic inflow of water would result in total physical loss of the mine. Plaintiffs' consultants recommended installation of a bulkhead to seal off the water inflow, and Plaintiffs expected to complete that installation in October 2012. The catastrophic flooding event anticipated by Plaintiffs' consultants has not yet occurred.

C. Plaintiffs Notify Defendant of the Water Problem and Initiate this Suit

On July 19, 2010, Plaintiffs sent a letter and Notice of Loss to Defendant. The Notice of Loss informed Defendant for the first time that a water inflow issue was detected in January 2008, that an imminent catastrophic flooding event was going to occur at the mine, and that BSC had already spent $2, 500, 000.00 to investigate and remedy the water inflow problem. Upon receiving the Notice of Loss, Defendant appointed an adjuster to investigate Plaintiffs' claim. On October 22, 2010, Defendant sent Plaintiffs a Reservation of Rights Letter, stating that it expected Plaintiffs to minimize the loss, take all steps necessary to protect its property, and prevent further damage.

On December 2, 2010, Plaintiffs submitted a Proof of Loss, in which BSC's President and CEO certified that BSC discovered the alleged loss from water inflow on January 18, 2008. The Proof of Loss itemized $11, 508, 912.00 in expenses that Plaintiffs incurred to investigate and remedy the water inflow problem. The Proof of Loss did not include any entry for the loss of the mine itself, ...


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