THE ATCHISON, TOPEKA & SANTA FE    )
RAILWAY COMPANY,                   )
                                   )
                    Plaintiff,     )
                                   )
v.                                 )    CASE NO. 94CV1464
                                   )
STONEWALL INSURANCE COMPANY,       )
et al.,                            )
                                   )
                Defendants.        )
___________________________________)

The above captioned matter is before the court on Certain Defendant Insurers' Memorandum Regarding Conflict of Laws Between Kansas Law and Illinois Law in response to a request from the court that the Defendants demonstrate a conflict between the laws of Kansas and Illinois before the court will perform a conflict of law analysis to determine which state's law will apply. After careful consideration, the court finds as follows:

Certain Defendant Insurers (Insurers) allege that several issues before the court in this case involve conflicts between the laws of Kansas and Illinois, arguing that Illinois law should apply to all issues. However, before this court analyzes what state's law should apply under a lex loci contractus analysis pursuant to the traditional approach to conflicts of law which is followed in Kansas, a conflict must be shown. As stated by the Kansas Supreme Court on this matter above, "[i]n the absence of a conflict, there would be no call for the district court to apply Kansas' choice of law rules." The Atchison, Topeka & Santa Fe Railway Company v. Stonewall Insurance Company, 1997 WL 1048134. Also as noted by the Kansas Supreme Court in Shutts v. Phillips Petroleum Co., 235 Kan. 195, 679 P.2d 1159 (1984), aff'd in part, rev'd in part Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985): "The general rule is that the law of the forum applies unless it is expressly shown that a different law governs, and in case of doubt, the law of the forum is preferred. 16 Am. Jur. 2d, Conflict of Laws § 5." The court also said: "Where a state court determines it has jurisdiction over a nationwide class action and procedural due process guarantees of notice and adequate representation are present, we believe the law of the forum should be applied unless compelling reasons exist for applying a different law." Id at 221. As noted by the Kansas Supreme Court in this case above, the portion of the decision reversed by the U.S. Supreme Court was the application of the rule that "the law of the forum should be applied unless compelling reasons exist for applying a different law." Santa Fe at 8. The issue is not whether there are compelling reasons to apply the law of Illinois but instead the issue is whether or not there is a conflict between Kansas law and Illinois law which will trigger the need to apply Kansas choice of law rules. Because there are several issues that involve potential conflicts, the court will analyze each separately.

Although the Insurers argue on several issues that if the court accepts Santa Fe's interpretation of Kansas case law, then there is a conflict and Illinois law should be applied, this court finds such an analysis is unnecessary on the conflicts issue and indeed, as the Kansas Supreme Court stated, is a "losing litigant's dream and a successful litigant's nightmare." Santa Fe at 9. This court need not decide conclusively the interpretation to give these cases in order to determine whether there is a conflict. The court has found that the Insurers have the burden to demonstrate a conflict between the law of Kansas and Illinois. If the Insurers are unable to demonstrate a conflict, there is no need to apply Kansas' conflict of law rules, and in such case, Kansas law will apply. As Santa Fe contends, the Insurers still have not made a motion to apply another state's law. Regardless, they have made it clear that they want this court to apply Illinois law (if the court rules they do not prevail under Kansas law) and thus, as instructed by the Kansas Supreme Court, this court will determine whether a conflict has been demonstrated, and if so, will analyze and apply Kansas' choice of law rules.

However, without prematurely deciding the issues underlying the decision that needs to be made regarding conflicts in the laws of Kansas and Illinois, this court will discuss and analyze to some extent the cases and distinctions among the factual scenarios raised in the cases that are purportedly in conflict.

Different issues in the same case may be decided by applying the law of different states by the process of "depecage." 16 Am. Jur. 2d § 6. "Generally, a court will assume that a case is to be governed by the laws of the forum unless it is expressly shown that a different law applies, and in case of doubt as to whether the lex loci or the lex fori should govern, the court will naturally prefer the laws of its own state or country." Id. Here, before we get to the issue of whether the lex loci or lex fori should govern, we must find and analyze whether there is a conflict.

"Courts have recognized that there may be a 'false conflict,' but they differ as to what constitutes a false conflict. Some courts regard a conflict as being false when the laws of the two states are the same or would produce the same result, while other courts regard a conflict as being false when one of the two states related to a case has a legitimate interest in the application of its law and policy and the other has none." 16 Am. Jur. 2d § 85. Since Kansas is concerned with the traditional approach to conflicts issues which does not involve an interest analysis, this court will regard a conflict as being false when the laws of the two states are the same or would produce the same result.

I. The Fortuity and "Known Loss" Doctrines

Insurers discuss the doctrine of "fortuity" or "known loss" with regard to insurance contracts, stating that Kansas has recognized and embraced the fortuity doctrine "and its embodiment in the judicially created doctrine of 'known loss'", citing Matlock v. Hollis, 153 Kan. 227, 109 P.2d 119 (1941). As noted by Insurers, the doctrine precludes coverage for loss that is certain or expected at the time the contract is created. Matlock is a workers compensation case where it was found that the employers fraudulently concealed from the insurance company, at the time application for insurance was made, that an employee had been injured during the term fixed in the policy. The court said:

In insurance contracts "a risk or contingency insured against" is an indispensable factor. Without it the very basis of an insurance contract is absent. (32 C.J. 1095.) This contingency, or uncertain event, is in the nature of a condition precedent. "A breach of condition precedent renders the policy void at its inception, so that it never attaches." (3 Cooley's Briefs on Insurance, 2d ed., 1918).

Matlock at 234.

Insurers argue that since risk is an inherent component in any insurance contract, under Kansas or Illinois law, Santa Fe's claim for indemnification must fail because of their early knowledge of NIHL injuries. However, this is a question of fact that remains for the trier of fact. In addition, Insurers argue that three sub-issues of fortuity are potentially in conflict between Kansas and Illinois law.

A. Fortuity

First, Insurers argue indemnity issues are resolved by the facts, distinguishing cases involving contracts where there is a duty to defend versus duty to indemnify. It is clear that under both Kansas and Illinois law, the analysis in determining of whether there is a duty to indemnify differs from, and is narrower than, the determination of whether there is a duty to defend. As stated in Bankwest v. Fidelity & Deposit Co. of Maryland, 63 F.3d 974 (10th Cir. 1995):

Under Kansas law, an insurer's duty to defend arises "whenever there is a 'potential of liability' under the policy." State Farm Fire & Casualty Co. v. Finney, 244 Kan. 545, 770 P.2d 460, 466 (1989) (quoting Spruill Motors, Inc. v. Universal Underwriters Ins. Co., 212 Kan. 681, 512 P.2d 403, 407 (1973)). The insurer must determine whether there is a potential of liability under the policy by examining the allegations of the complaint as well as any additional facts that have been brought to its attention. Id.; see also American Motorists Ins. Co. v. General Host Corp., 946 F.2d 1482, 1486 (10th Cir.) (discussing duty to defend), reh'g granted and opinion modified, 946 F.2d 1489 (10th Cir.1991). The relevant determination for the insurer is whether there is "a possibility that under the facts of the case the insured may be found legally obligated to pay damages because of an occurrence that was an insured risk; that is, a possibility that there may be a duty to indemnify arising out of the facts of the case. American Fidelity Ins. Co. v. Employers Mut. Casualty Co., 3 Kan. App. 2d 245, 593 P.2d 14, 19-20 (1979).

The duty to indemnify is narrower than the duty to defend. American Motorists, 946 F.2d at 1488-89. Although the duty to defend is determined by the allegations of the underlying complaint and by facts discoverable to the insurer, the duty to indemnify is determined by the facts as they are established at trial or as they are finally determined by some other means (e.g. summary judgment or settlement). Id. (citing Travelers Ins. Co. v. Waltham Indus. Lab. Corp., 883 F.2d 1092, 1099 (1st Cir.1989)).

Insurers have not established a conflict in this regard, since Illinois cases cited by Insurers do not conflict with the analysis set forth in Bankwest.

Secondly, under the fortuity issue, Insurers argue that if the court should hold that the "accident/occurrence" determination is made from the standpoint of the injured person under Kansas law, then there is a conflict. Again, Insurers discuss "potential" conflicts. This court will not apply Kansas' choice of law rules absent a showing of actual conflict. As noted by Insurers, Illinois law cited by Insurers establishes that Illinois courts define accident as "an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character." Aetna Casualty & Surety Co. v. Freyer, 89 Ill. App. 3d 617, 619, 411 N.E.2d 1157, 1158 (1980). However, Insurers fail to demonstrate any clear conflict with Kansas law in this regard, as in the first argument on "potential" conflict under the fortuity doctrine.

In Harris v. Richards, 254 Kan. 549, 867 P.2d 325 (1994), the court discussed the relationship between the terms "accident" and "occurrence" as those terms were used in a homeowners policy at issue. The court, in discussing whether a shooting was an "occurrence" under the policy, stated that "occurrence" under the policy was an "'accident, including continuous or repeated exposure to conditions,'" but that "accident" was not defined by the policy. Harris at 552. Thus, the court looked to the generally accepted meaning of "accident" and stated:

We have explained that

"[t]he word accident does not have a settled legal signification It does have, however, a generally accepted meaning, which is the same whether considered according to the popular understanding or the approved usage of language. An accident is simply an undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force." Gilliland v. Cement Co., 104 Kan. 771, 773, 180 P. 793 (1919).

The court further found, "[w]e believe that the question of coverage relates to Douglas as the insured rather than to Harris, the victim." Harris at 554.

In addition, Insurers have quoted State Farm Fire & Cas. v. Martin, 296 Ill. App. 3d 466, 694 N.E.2d 1058 (1998), stating, "[t]he determination of whether or not an occurrence qualifies as an accident requires reviewing the matter from the objective foreseeability of the insured to determine whether the contingency is 'known to all sensible men as likely to follow' naturally from the insureds conduct." Again, Insurers demonstrate no clear conflict with Kansas law. The court in Harris stated in response to Harris' argument on specific intent to injure, "[w]e do not follow the specific intent rule. Rather, we have adopted the natural and probable consequences test. See Bell, 234 Kan. 461, Syl. ¶ 2, 674 P.2d 468." Harris at 553. Therefore, the Insurers have not demonstrated a conflict between the laws in this regard. This statement goes to Insurers third argument regarding potential conflict under the fortuity doctrine.

Insurers argue that under Illinois law, the natural and probable consequences of any act do not constitute an "accident/occurrence." As noted above, Kansas has expressly adopted the natural and probable consequences test, and thus, Insurers have failed to demonstrate a conflict in this regard.

B. The Known Loss Doctrine

Next, Insurers argue that "in the event" this court finds Kansas would not recognize the known loss doctrine, there is a conflict between the laws of Kansas and Illinois, demonstrating that Illinois has expressly recognized the "known loss doctrine." Again, the question is not what Illinois has recognized, the question is whether there is currently a clear conflict between the laws of Kansas and Illinois, and until Kansas has had the opportunity to speak to an issue, we will not know if there is a conflict. This is the case with the "known loss doctrine" as it has been called in Illinois, as demonstrated by the Insurers. Insurers cite Illinois cases which state that if an insured knows or has reason to know of a substantial probability of loss when purchasing a Comprehensive General Liability (CGL) policy, the risk becomes known and is not covered. As noted by Insurers, Illinois case law states that such knowledge on the part of insureds is a question to be determined on a case-by-case basis and it is the court's duty to find whether factual questions exist with regard to what the insureds knew at the time of purchase.

Santa Fe argues that regardless of whether the Kansas courts recognize the "known loss doctrine" as an implied exclusion, the result would be the same, and thus, Kansas law applies. Santa Fe cites American Motorists Ins. v. General Host Corp., 667 F.Supp. 1423 (D.Kan. 1987), aff'd 946 F.2d 1482 (10th Cir. 1991), vacated in part on other grounds, 946 F.2d 1489 (10th Cir. 1991), stating that "the court ruled that no choice of law analysis was necessary because the result it reached 'would have been reached under any of the . . . suggested jurisdictions.'" (Santa Fe response brief on choice of law at 25, quoting American Motorists at 1427.)

The general rule in Kansas is discussed in Catholic Diocese of Dodge City v. Raymer, 16 Kan. App. 2d 488, 825 P.2d 1144 (1992), which states that "exceptions, limitations, and exclusions to insuring agreements require a narrow construction on the theory that the insurer, having affirmatively expressed coverage through broad promises, assumes a duty to define any limitations on that coverage in clear and explicit terms." Catholic Diocese, Syl. ¶ 1. In that case, the insurer argued they were not liable for damage by vandalism caused by the insured son because the policy "did not cover property damage either expected or intended by the policy insureds." Catholic Diocese at 489. The court quoted Patrons Mut. Ins. Ass'n v. Harmon, 240 Kan. 707, 732 P.2d 741 (1987), which said:

"The language of a policy of insurance, like any other contract, must if possible, be construed in such manner as to give effect to the intention of the parties. Where the terms of a policy of insurance are ambiguous or uncertain, conflicting, or susceptible of more than one construction, the construction most favorable to the insured must prevail. Since the insurer prepares its own contracts, it has a duty to make the meaning clear. If the insurer intends to restrict or limit coverage provided in the policy, it must use clear and unambiguous language in doing so; otherwise, the policy will be liberally construed in favor of the insured. When an insurance contract is not ambiguous, the court may not make another contract for the parties. Its function is to enforce the contract as made. [Citation omitted.]"

Catholic Diocese at 493 quoting Patrons at 713.

In Catholic Diocese, the policy specifically excluded "bodily injury or property damage . . . caused intentionally by or at the direction of an insured . . . ." Catholic Diocese at 492. Thus, the issue was whether or not the specific language of the contract excluded coverage rather than whether a "known loss" was excluded from coverage. Here, there is no evidence, although Kansas recognizes that exclusions or limitations be specifically expressed, that Kansas would not recognize the "known loss" doctrine. In fact, the "known loss doctrine" is closely related to the "fortuity doctrine" which is recognized in Kansas in such cases as Harris, where the court said that an accident is an "undesigned, sudden, and unexpected event." Harris at Syl. ¶ 5. In Harris, the alleged "occurrence" was a shooting which although intentional, the insured argued the injury was accidental. The court then applied the "natural and probable consequences" test, specifically rejecting the specific intent test. Thus, the issue of "known loss" may well rest on the definition of "accident" or "occurrence", rather than on whether there is an express exclusion.

In addition, as noted, Kansas has recognized "fortuity" as an essential element to an insurance contract. If the loss is known or highly probable, fortuity is lost. Therefore, this court finds Insurers have not shown a clear conflict with regard to "known loss."

II. Late Notice

Insurers argue there is a conflict in the laws of Kansas and Illinois on whether timely notice of an occurrence likely to give rise to a claim is a condition precedent to coverage or if prejudice must be shown to relieve an insurer of an obligation to provide coverage where it should otherwise be afforded. Insurers quote Cessna Aircraft Co. v. Hartford Accident & Indemn. Co, 900 F.Supp. 1489, 1515 (D. Kan. 1995), as stating Kansas law "requires a showing of actual prejudice as a result of the untimely notice." In addition, the court said, "[p]rejudice is not presumed and the burden is on the insurer to show that the prejudice is substantial." Id. In Home Life Insurance Company v. Clay, 11 Kan. App. 2d 280, 719 P.2d 756 (1986), the court found that a bank's failure to provide compensated surety with timely notice of loss did not provide relief from liability on bond, unless the surety could show it was prejudiced. The language in the terms of the bond were similar to clauses in the present contracts, providing that notice of loss be given "[a]t the earliest practicable moment after discovery of any loss." Home Life at 284. The court said :

The requirements in the banker's blanket bonds that notice be given to the underwriter "as soon as practicable," "as soon as possible" or "at the earliest practicable moment" have all been construed to essentially mean that notice must be reasonably given. 13A Couch on Insurance 2d §§ 49:221-49:223 (rev. ed. 1982). Such an objective test of timeliness necessarily implies that all of the facts and circumstances surrounding the delay must be taken into account and that the issue of timeliness is a factual one. Travelers Ins. Co. v. Feld Car & Truck Leasing Corp., 517 F.Supp. 1132, 1134 (D.Kan.1981). However, if the circumstances explaining the delay are undisputed and reasonable persons still could not help but conclude that notice was untimely, summary judgment could be properly granted.

In Home Life, in response to one of the insurers arguments that Kansas law does not clearly require proof of prejudice, and that the parties should be held to their contract, the court discussed the issue and said:

The effect which should be given a failure to provide timely notice of a loss to an insurer or compensated surety is a matter open to considerable disagreement. Annot., 23 A.L.R. 2d 1065. Some courts have held that such notice requirements are conditions precedent to the insurer's duty to satisfy a covered loss. (Citations omitted). Other courts have held that failure to comply with a notice provision in a fidelity type insurance policy is only fatal to recovery on the policy if the contract expressly provides for forfeiture in the absence of timely notice. (Citation omitted). However, in what is termed the modern trend, a number of jurisdictions have held that an unreasonable delay in giving notice or a failure to give notice will not excuse an insurer's liability unless it can show that it was prejudiced by the delay. Annot., 32 A.L.R. 4th 141, 157-67. This latter group of cases appears to assume that the notice requirement is a condition precedent but to conclude that in the context of insurance, failure to satisfy the condition should not automatically excuse performance by the insurer. Kansas is generally cited by the authorities as one of the states following the modern trend largely on the basis of an opinion by Judge Kelly in Travelers Ins. Co., 517 F.Supp. at 1134-36, and the old Kansas case, School District v. McCurley, 92 Kan. 53, 142 P. 1077 (1914).

The court relied on its interpretation of McCurley and the reasoning in Travelers in finding that failure to provide timely notice will not necessarily relieve liability unless the surety can show it was prejudiced. In both cases, Cessna and Home Life, there were substantial questions of fact which precluded summary judgment on the issue of whether the insured had knowledge of facts giving rise to the claims such that they allowed an unreasonable time to pass before giving notice. Regardless, it is clear that Kansas law requires a showing of prejudice as a result of untimely notice, as was discussed in National Union Fire Insurance Company of Pittsburgh, Pennsylvania v. Federal Deposit Insurance Corporation, 264 Kan. 733, 957 P.2d 357 (1998). The court in National Union discussed the history of this issue among courts, the "modern trend," and the policy behind the decisions on the issue in Kansas, and concluded,

In summary, we find the better-reasoned case can be made for requiring prejudice than not. Given that insurance contracts are not negotiated agreements, no compelling reason appears for allowing the insurer to avoid performing a duty purchased by the insured's premium unless the insured's delay caused loss to the insurer. This would be true for both notice of loss and proof of loss provisions in the policy or bond. Thus, we conclude that an insurer must prove prejudice before denying coverage based on a late filing of proof of loss.

Santa Fe argues that Illinois requires that excess insurers must prove prejudice in order to sustain a late notice defense, citing Hartford Accident and Indemnity Co. v. Rush-Presbyterian - St. Lukes Med. Center, 595 N.E.2d 1311, (Ill. App. 1992), appeal den'd 602 N.E.2d 452 (Ill. 1992). The notice issue in that case revolved around the determination of whether the insured acted reasonably in giving notice to the insurer when the policy language allowed for discretion in stating that the insurer was obligated to notify insurer "as soon as practicable . . . whenever it appear[ed] that an occurrence [was] likely to involve indemnity under the policy." Hartford at Syl. ¶ 2. The court found that under the excess policy, the hospital was not obligated to notify insurer until it was reasonably determined that a probability existed that liability would exceed one million dollars and excess liability coverage would be implicated, thus finding that notice of 20 months after patient's complaint was filed and seven months after a ten million dollar settlement demand was not unreasonable since the settlement demand did not assist the hospital's counsel in assessing potential liability and insurer was not prejudiced. Id. Thus, even under Illinois law, the prejudicial effect of untimely notice may come into play where there is a question of whether notice was timely under the terms of the policy. The court said:

The real issue is whether Rush complied with the letter of the notice provision, construed against the insurer and in favor of the insured, and whether Rush should be required to lose its excess insurance coverage and Hartford be excused from indemnifying Rush simply because Rush did not evaluate their liability sooner, even though no prejudice resulted to Hartford.

. . . .

In light of the cases cited above we find that when the timeliness of the notice is challenged by an excess insurer and a court is asked to consider whether an insured has complied with the notice provision in an excess insurance policy which leaves the timing of the notice up to the discretion of the insured, the court must determine whether the insured abused the discretion granted it by the insurer, i.e., whether the insured acted unreasonably under the circumstances. The insured must show that notice was given when it concluded that the excess insurance policy was implicated and, if the facts are not in dispute, whether the insured acted unreasonably by withholding notice to the insurer up to that point, is a question of law for the court to determine. Furthermore, part of the equation in determining the reasonableness of the insured actions is whether the insurer has been prejudiced by the timing of the notice. Surely, the more prejudice that an insurer can show, the more likely it is that the insured's failure to notify the insurer is unreasonable.

As noted by Santa Fe, it appears Illinois is beginning to follow the prejudice rule for the "late notice defense" of primary insurers as well, citing Rice v. AAA Aerostar, Inc., 690 N.E.2d 1067, 1072 (Ill. App. 1998); and Cincinnati Ins. Co. v. Baur's Opera House, 694 N.E.2d 593, 598 (Ill. App. 1998), appeal den'd 705 N.E.2d 453 (Ill. 1998). The Insurers cite Sisters of Divine Providence v. Interstate Fire & Casualty Co., 117 Ill. App. 3d 158, 453 N.E.2d 36, (1983), stating with regard to notice that the standard is "reasonableness" and that "prejudice, or the lack thereof, is not the factor which determines coverage." Sisters of Divine Providence at 162. Insurers assert thus, that there is a conflict between Kansas and Illinois law on this issue. However, the question of what is reasonable under the circumstances is obviously fact intensive and must be determined on a case-by-case basis, and thus, the cases cited by both parties involve determinations of varying time periods before notice was given which the court determined reasonable or unreasonable. This does not affect the analysis of whether there is a clear conflict between Kansas and Illinois law on the issue of notice.

In Sisters of Divine Providence, the court did note that prejudice or the lack thereof was not the factor which determines coverage, however, the court went on to state that although the determination of whether notice was given as soon as "practicable" under the policy is to be based on a standard of reasonableness, prejudice was one factor to be taken into consideration in determining the reasonableness of the notice. The court in Millers Mutual Insurance Ass'n v. Graham Oil Co., 282 Ill. App. 3d 129, 141, 218 Ill. Dec. 60, 69, 668 N.E.2d 223, 232 (1996), also found that while absence of prejudice to the insurer is not conclusive in a notice-of-occurrence case, it is a factor to be considered. In Rice v. AAA Aerostar, the court said that in notice-of-lawsuit cases, prejudice must be shown by the insurer to escape liability on the policy. Rice at 808. Therefore, under Illinois law, although prejudice need not necessarily be shown for relief from liability, it is a factor to consider in the reasonableness of notice given and may be relevant to the issue of reasonableness, and in the case of notice-of-lawsuit cases, prejudice must be shown. Thus, it appears the only conflict between Kansas and Illinois on the notice issue is whether prejudice must be shown in notice-of-occurrence cases in order to obtain relief where it has already been shown that notice was unreasonably late.

Santa Fe argues that this is a false conflict because regardless of which law is applied, the result will be the same. As noted above, the Insurer must show under Illinois or Kansas law that under the terms of the policy, Santa Fe's notice was unreasonably late. Under Illinois law, whether Insurers were prejudiced could be a factor in determining whether such untimely notice was unreasonable. Under Kansas law, Insurers would have to prove they were prejudiced to be relieved of liability under their late notice defense, even if it was shown that the notice was unreasonably late. Whether Insurers were prejudiced is not at issue in this case as Insurers have agreed to the fact that they were not prejudiced, as some have stated they have not been prejudiced by the notice and others have stated that had they been notified earlier, they would not have stepped in to defend Santa Fe because they did not believe coverage applied. Therefore, the issue before the court on notice is whether it was unreasonably late. The record has demonstrated no prejudice occurred. Thus, in applying Kansas law, even if the notice was unreasonably late, Insurers cannot escape liability under their late-notice defense, because they cannot show prejudice. In applying Illinois law on the notice of occurrence issue, prejudice is a factor to be considered in whether the notice was unreasonable, and although no prejudice is deemed to have occurred, such weighs in favor of a finding that the late notice was not unreasonable. However, there is no conclusive determination at this point that Insurers cannot prevail on a late-notice defense under Illinois law.

Santa Fe contends that the "notice-prejudice rule" is grounded in Kansas public policy concerns, making it unyielding to a conflicts of law analysis under St. Paul Surplus Lines Ins. Co. v. International Playtex, Inc., 245 Kan. 258, 777 P.2d 1259 (1989). In St. Paul, the issue was indemnification of punitive damages in an insurance case where the defendant, a Delaware corporation, had taken advantage of a weak market by strongly marketing its product as other companies were withdrawing marketing efforts during the first of the "toxic shock syndrome" cases occurring from the use of tampons. The court found that although the insurance contract was unambiguous in providing coverage for punitive and exemplary damages, under the circumstances, the strong public policy of Kansas was that since punitive damages were meant to punish the wrongdoer, and the objective of the policy was to prevent wrongful acts against the citizens of Kansas, it would result in an uneven application of public policy and would thwart the purpose of the public policy of the State to apply Delaware law on the issue of indemnification for punitive damages. Thus, the Kansas Supreme Court applied Kansas law.

Although the public policy is perhaps not quite as strong here, the court finds that under National Union, Kansas has established a clear public policy not to allow insurance companies to escape liability under a technicality when insureds provide notice late, and, the insurer is not prejudiced by it. Thus, due to public policy concerns, this court will apply Kansas law to the issue of whether Insurers must show prejudice if it is found the insured provided unreasonably late notice.

III. Trigger of Coverage/Allocation

Again, with regard to any conflict between Kansas and Illinois on trigger of coverage, Insurers allege a conflict exists if this court agrees with Santa Fe's interpretation of Kansas law. Again, this court finds it is not necessary at this point to rule on the underlying issue as it relates to Kansas law in order to determine if Insurers have demonstrated a clear conflict on this issue.

Insurers discuss Illinois law on trigger of coverage, stating that the only applicable law is that set forth in Missouri Pacific Railroad Co. v. International Ins. Co., 288 Ill. App. 3d 69, 679 N.E.2d 801, cert. denied, 174 Ill. 2d 567, 686 N.E.2d 1164 (1997) (MoPac II). Insurers state that in MoPac, the court rejected the Railroad's assertion that the "all sums" language in the contract meant each insurer was "jointly and severally" liable for the railroad's NIHL losses, stating that the Illinois Appellate Court found that such an argument ignores the contractual limitation that the "occurrence" must "occur while the policy in is force." MoPac at 77. However, Insurers do not show that Kansas law conflicts in this regard.

The court agrees with Santa Fe that there seems to be some confusion over trigger and allocation. To clarify, Santa Fe states that "trigger" determines which policy periods must respond to an occurrence, whereas, "allocation" specifies the extent of liability for a policy period that has been triggered. Santa Fe states that the only Kansas case discussing "trigger" is Scott v. Keever, 212 Kan. 719, 512 P.2d 346 (1973), wherein the injuries occurred after the policy expired and thus, there was no injury to trigger coverage. Thus, lack of Kansas law on the issue would result, at most, in a false conflict.

Santa Fe cites other Illinois cases that dealt with issues involving damage or injury occurring over a period of time, resulting in "continuous trigger." Although these are not NIHL cases, they involve asbestos related injuries which occur over time. Insurers contend such cases are not applicable because of the differences in NIHL cases and asbestos related injuries and how they occur. Insurers state that the nature of injury from asbestos exposure is so different from injury from exposure to injurious levels of noise, that the underlying methodology in the asbestos cases is inapplicable to NIHL and therefore, that the only applicable law is that set forth in MoPac II. Insurers are correct that NIHL is a specific and peculiar type of injury, that may involve different issues than asbestos cases, however, the law does not require that this court follow a specific case outside this jurisdiction that is on point with the present case, simply because the injury is very specific and Kansas does not have established precedent with regard to such cases. Insurers must demonstrate a conflict. As stated previously, in the absence of Kansas law on the subject, there is at most, a false conflict. In addition, this court finds the asbestos-related cases compelling, as there are similarities in the cases since both types of injuries occur over an extended period of time. Insurers have not demonstrated a conflict, thus this court finds no clear conflict between Kansas and Illinois on the trigger of coverage. This of course does not mean Illinois law will not be considered as persuasive authority where no Kansas law exists.

With regard to allocation, Insurers state that Santa Fe argues that when multiple policy periods are triggered, each triggered period is responsible for the entire loss. Much of Santa Fe's assertion that nothing in the policies require Santa Fe to allocate or divide loss into annual portions, rests on its assertion that there in one occurrence in this case - Santa Fe's negligence in failing to implement a hearing conservation program. Santa Fe contends that in determining coverage, the court looks to the theory of liability rather than the direct underlying cause of the injury. This issue is discussed below with regard to conflicts between the laws with regard to "occurrence."

With regard to allocation, this court finds no demonstrated conflict. Both parties cite to the Kansas case of Kuhn v. Grant County, 201 Kan. 163, 439 P.2d 155 (1968), for the proposition that Kansas allows joint and several liability, such that when multiple periods are triggered, each triggered period is responsible for the entire loss. Santa Fe states that the court held that if two policies are triggered with respect to one loss, both carriers should be held "jointly and severally liable, leaving the two contesting insurance companies to litigate their grievances against each other in a separate action." Kuhn at 170-71. However, the circumstances in Kuhn were somewhat different, and thus, this court finds Kuhn does not stand for the general proposition that Kansas law would reject mandatory allocation in a case, as here, where payments have already been made to the injured parties (for the most part), and the only issue is indemnification.

In Kuhn the court required joint and several liability of the insurance companies so that the insurance companies could settle their grievances with each other in an independent action and the claimant would not have to suffer during the delay. The court said:

This conclusion accords with the rationale underlying prior decisions of this court. It also serves a primary purpose of the Workmen's Compensation Act, i.e., the compensation of workers injured in industrial accidents with as little delay as possible and without having to wait for the disposition of collateral issues in which they have no interest.

. . . .

The present action presents a graphic illustration of the hardship which may confront a claimant where insurance carriers are permitted to litigate, during the compensation process, claims and equities existing between themselves. We deduce from the trial court's judgment, that neither Reliance nor Farmers is now paying any compensation. In addition, claimant has been put to the expense of printing a brief and of employing appellate counsel, for whose necessary expenses he will no doubt be liable.

These are the adversities which a claimant should not be forced to undergo. While we recognize the right of insurance carriers to be protected in their legal rights and to engage in litigation when disputes over their respective liabilities arise between them, yet their quarrels should not be resolved at the expense of an injured workman.

Although Santa Fe, as the insured, may deem itself injured, it is the workers who have been injured by NIHL. Since most of those underlying cases have been settled, it is not clear that under the circumstances joint and several liability would apply. In addition, Santa Fe cites Zurich Ins. Co. v. Raymark Indus., 514 N.E.2d 150 (Ill. 1987), affirming, 494 N.E.2d 630, 650 (Ill. App. 1986), stating that the law of Illinois as it relates to the meaning of the "all sums" language in an insurance contract, is that an insurer under any triggered policy is independently responsible for full indemnification of the policyholder. Although the determination of the number of occurrences in this case will have strong implications on what "full indemnification" will be here, (many individual occurrences that trigger several policy periods, or one), a showing of a clear conflict between the laws of Kansas and Illinois has not been made with regard to this issue. Also, there has been no showing that Kansas would not allow the Insurers "the opportunity to present evidence that NIHL may (or may not) be measured and allocated, within a reasonable degree of medical or scientific certainty, to particular policy periods," and allow allocation on a "pro-rata, time-on-the-risk allocation method." MoPac II at 78, 80. Thus, Kansas law will be applied.

As a related issue to allocation, the Insurers again cite MoPac in stating that "[l]ike the Kansas Supreme Court, the court in MoPac recognized the distinction between primary and excess coverage when it held that the Railroad's SIR's were its primary coverage." (Insurers memorandum brief regarding conflict of laws at p.19.) Here, Insurers merely reiterate their argument regarding horizontal exhaustion of SIR's without showing any conflict between the laws of Kansas and Illinois on this issue.

Insurers argue that for the time periods when Santa Fe was self-insured (referred to as "SIR") the SIR's must be viewed as primary coverage that must be "horizontally exhausted" before the excess coverage can apply. Again, Insurers state that should the court agree with Santa Fe's interpretation of Kansas law, then the laws of the two states are in conflict. Again, this court finds it unnecessary to decide this issue before deciding if a conflict has been shown.

Insurers specifically cite to United States Gypsum Co. v. Admiral Ins. Co., 268 Ill. App. 3d 598, 643 N.E.2d 1226 (1994), in which the court adopted the principle of "horizontal exhaustion" where there was self-insurance over multiple policy periods. The court rejected Gypsum's claim permitting "vertical exhaustion" because the court did not want to allow Gypsum to "manipulate its source of recovery," and concluded that "[s]uch a practice would blur the distinction between primary and excess insurance, and would allow certain primary insurers to escape unscathed when they would otherwise bear the initial burden of providing indemnification." Gypsum at 654.

Again, this is an issue that requires a determination with regard to the "occurrence" issue before the issue of "horizontal exhaustion" can be determined. However, such a determination is not essential to finding whether a clear conflict exists with regard to this issue. The court in Gypsum found the district court erred in using a discovery trigger to determine what policies applied, and found that although pursuant to the language of the policies, trigger would occur if damage occurred during the term covered by the policy, this was not inconsistent with finding that where the injury occurred in more than one policy period or in each policy period, the concept of continuous trigger could apply. However, assuming continuous trigger is found to apply, as it applied in Gypsum, the question is whether all SIR's for the periods in which excess coverage is "triggered" must be exhausted before the excess coverage kicks in.

If it were determined that there is one occurrence - Santa Fe's negligent act of failing to implement a hearing conservation program - then the SIR for the period which is triggered for that occurrence must be exhausted before the excess layers of coverage will apply. However, if it is determined that because the underlying causes of the NIHL claims consist of different kinds and levels of noise in different locations and different work stations, and thus, there are several occurrences, then the SIR's need only be exhausted for the time periods in which coverage is triggered by the multiple occurrences. As noted by Insurers, the court in MoPac found that the unique nature of excess coverage requires exhaustion of a full SIR per occurrence per policy period before looking to excess coverage. MoPac II at 80-82. This would be the result under either states law, and Insurers have failed to cite Kansas law that holds otherwise. Again, if Kansas is silent on the issue, Illinois cases may become strong persuasive authority. However, the absence of Kansas law on the issue does not constitute a true conflict. Thus, Insurers have failed to demonstrate a clear conflict with regard to this issue as well, and thus, the law of the forum will apply.

IV. Number of "Occurrences"

Here, Insurers concede that Kansas and Illinois law are in accordance in stating both states use the "cause test" to determine number of occurrences. However, Insurers argue that if this court agrees with Santa Fe's interpretation of Kansas law that the focus of the cause test is the underlying theory of liability, then there is a conflict and Illinois law must apply. Again, this court need not decide the issue in order to decide if a clear conflict exists between Kansas and Illinois on this issue.

Insurers cite several Illinois cases with different factual scenarios for the proposition that the NIHL claims should all be viewed as multiple occurrences as opposed to the one occurrence theory proposed by Santa Fe, which stresses their theory of liability that there was only one occurrence which caused all the NIHL injuries ie. their own negligence in failing to implement a hearing conservation program. It is interesting to note that although Insurers contend that since the asbestos cases are so different from NIHL injuries, the reasoning from those cases is inapplicable here, Insurers cite "tainted food" cases for the proposition that multiple occurrences were found there, and should be here.

Regardless, such cases do provide an analogous situation from which the court can glean insight into the appropriate test for determining whether the NIHL losses resulted from multiple occurrences or one occurrence. However, that issue is held for a later determination following the determination of what state's law should apply to this issue.

There appears to be a conflict as to whether the "theory of liability" can be viewed as a means of determining the occurrence. Kansas has recognized "theory of liability" in determining occurrence under insurance policies, whereas Illinois appears to adhere to determining the immediate cause of the injury, rejecting "theory of liability" in determining the cause. However, this conflict is only clear with respect to a narrow line of cases specifically dealing with homeowners insurance policies that expressly exclude certain causes of damage such as that arising from the ownership or use of an automobile, or specific exclusions of intentional acts by or at the direction of the insured. The rule in Kansas was thoroughly compared with that in other states in Marquis v. State Farm Fire and Casualty Co., 265 Kan. 317, 961 P.2d 1213 (1998):

In Upland Mutual Insurance, Inc. v. Noel, 214 Kan. 145, 519 P.2d 737, we held that a homeowner's policy exclusion for bodily injury or property damage arising from the ownership, maintenance, operation, use, loading, and unloading of automobiles did not exclude coverage for the insured's liability for negligent entrustment of an automobile to another. "[E]ven though the immediate cause of the injury . . . was . . . operation of the automobile," the legal theory of liability, which was well recognized under Kansas law, was not excluded by the policy. 214 Kan. at 150, 519 P.2d 737. Thus, the rule taken from Upland is that the theory of liability rather than the cause of the accident governs coverage. Where a policy seeks to exclude coverage for an accident arising out of the use of an automobile, coverage will still be found if the theory of liability establishes negligence independent of the use of the automobile, which negligence is covered under the policy.

Although Upland was a negligent entrustment case, its rule applies to claims based on negligent hiring, retention, or supervision. In this case, State Farm's contractor's policy excludes coverage for accidents arising from the use or negligent entrustment of an automobile, but does not exclude coverage for the negligent hiring, retention, or supervision of an employee. Under Upland, it makes no difference that the accident was causally related to the use of an automobile because the theory of liability is negligent hiring, retention, or supervision based on the independent negligence of Sharon Auck. Upland is the rule in Kansas.

. . . .

State Farm contends that our decision in Upland should be limited and has been limited by the Court of Appeals and federal district court in cases which were decided after Upland. See U.S. Fidelity & Guar. Co. v. Heltsley, 733 F.Supp. 1418 (D.Kan.1990); State Farm Mut. Auto. Ins. Co. v. Cummings, 13 Kan. App. 2d 630, 778 P.2d 370 (1989).

Upland is a minority rule in its recognition that policy provisions excluding coverage for the use of an automobile owned or operated by any insured do not necessarily exclude coverage for the distinct and separate liability theory of negligent entrustment. Perhaps the case which best expresses the majority rule and reasoning, and one relied upon by State Farm, is Oakley Transport v. Zurich Insurance Co., 271 Ill. App. 3d 716, 208 Ill. Dec. 177, 648 N.E.2d 1099 (1995). In Oakley, the court interpreted an exclusion similar to the one we now consider in this case. It noted that the employer's negligent supervision could not be divorced from its employee's negligent driving of the vehicle and, thus, coverage was excluded . . .

We acknowledge that Kansas remains in a minority position with reference to this exclusion. However, as late as 1992, this court had an opportunity to revisit Upland in Catholic Diocese of Dodge City v. Raymer, 251 Kan. 689, 840 P.2d 456. We recognized again in Catholic Diocese of Dodge City that the coverage for parents' liability for negligent supervision of their child was sufficient to invoke coverage even though the intentional act of the child in causing damage to a school was excluded from coverage. We held that even though the intentional acts exclusion would exclude coverage of the child's liability, the policy did not exclude coverage for the separate and distinct theory of negligent supervision liability of the parents. In affirming Upland, we held that "unlike other states, Kansas does not look to the underlying cause of the injury to determine coverage, but to the specific theory of liability." 251 Kan. at 697, 840 P.2d 456.

Here, there is no issue regarding specific language as in the above cited cases. Santa Fe argues that coverage applies because the theory of liability is their own negligence in failing to implement a hearing conservation program, which caused the losses. Insurers argue that the court can only look to the immediate cause of injury - the separate occurrences of noise at different times, levels and locations. Since under Marquis, the rule in Upland applies to negligent entrustment case, along with claims based on negligent hiring, retention, or supervision, it is not clearly settled that Kansas would look to the theory of liability in this case which does not fall into the categories of claims listed in Marquis. In addition, in Cummings the Kansas Court of Appeals stated its disbelief that the Kansas Supreme Court "intended for its decision in Upland Mutual to apply to uninsured motorist cases," and further stated "nor do we believe it applicable to cases which do not involve exclusion clauses under homeowner's liability policies." Cummings at 637.

Thus, since Kansas has not spoken to whether one looks to the theory of liability or immediate cause of injury when applying the "cause test" to occurrence issues in any case similar to NIHL or other occupational injuries which are "continuing" in nature, Kansas law will apply to this issue. However, as noted above, in the absence of relevant Kansas law, the court will look to persuasive authority outside this jurisdiction.

In addition, it is the court's opinion that how the "cause test" is applied will depend more directly on the language in the policies than any differences between Kansas law and Illinois law. The determination of the number of occurrences using the "cause test" may yield a different result with an occurrence policy.

Conclusion

For the above reasons, the court concludes that Insurers have failed to demonstrate an actual conflict in any of the issues before this court between Kansas and Illinois law, except for the specific issue of the effect of prejudice in a late notice defense in notice of occurrence cases. However, the court has found that the public policy of the State allows this court to look to Kansas law on this narrow issue as well. Thus, the court will apply Kansas law to all issues including the late notice defense.

The foregoing shall serve as the journal entry of judgment in this matter. No further journal entry is required.

Dated this 3rd day of November, 1999.

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I hereby certify that a copy of the above and foregoing MEMORANDUM DECISION AND ORDER was mailed this day of November , 1999 to the following:

 
Weston W. Marsh
David V. Goodsir
Freeborn & Peters 311 S. Wacker Drive
Suite 3000
Chicago, Illinois 60606

 
Steve R. Fabert
Fisher, Patterson, Sayler & Smith
3550 SW 5th Street
Topeka, Kansas 66601

 
Thomas M. Ryan
Bollinger, Ruberry & Garvey
Citicorp Center
500 West Madison Street
Suite 2300
Chicago, Illinois 60661

 
Arthur A. Glassman
Michael E. Francis
Sloan, Listrom, Eisenbarth, Sloan & Glassman
714 Capitol Federal Building
Topeka, Kansas 66603

 
Corliss S. Worford
Richard M. Watson
Lord, Bissell & Brook
One Atlantic Center
1201 West Peachtree Street
Suite 3700
Atlanta, Georgia 30309

 
Daniel E. Murphy, II
Gilberg & Kiernan
1250 Eye Street, N.W.
Suite 600
Washington, DC 20005

 
Steven W. Cavanaugh
Fisher, Cavanaugh & Smith
534 Kansas Avenue
Suite 1035
Topeka, Kansas 66603

 
Eric C. Young
Dunham Boman & Leskera
103 East B Street
Belleville, Illinois 62220

 
Paul E. Escobar
German, Gallagher & Murtagh
The Bellevue
Fifth Floor
200 South Broad Street
Philadelphia, PA 19102

 
Richard W. Bryan
Jackson & Campbell
South Tower
One Lafayette Center
1120-20th Street, NW
Washington, DC 20036

 
Richard V. Eckert
5601 SW Barrington Court South
Topeka, Kansas 66614

 
Stacy S. Freel
Brand & Novak
135 South LaSalle Street
Suite 3700
Chicago, Illinois 60603

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