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MGM6/16/1993
The opinion of the court was delivered by
This is an action by insureds against the defendant insurance company seeking: (1) a determination that the comprehensive general liability insurance policy in question afforded coverage for and a duty to defend against lawsuits filed by employees and former employees of insureds; (2) a judgment reimbursing the insureds for monies paid out in settlement of said lawsuits and satisfying the balance of said settlement; and (3) payment of the insureds' attorney fees arising from defense of said actions and the prosecution of the action herein as well as certain consequential damages arising from the insurer's breach of the insurance contract. The defendant insurance company appealed from the judgment of the district court finding there was coverage and a duty to defend and ordering the insurance company
to pay the settlement and the requested attorney fees. The insureds cross-appealed from the refusal of the district court to consider or allow the requested consequential damages. The Court of Appeals reversed the district court's judgment against the insurance company, holding there was no coverage or duty to defend relative to said lawsuits. MGM, Inc. v. Liberty Mut. Ins. Co., 17 Kan. App. 2d 492, 839 P.2d 537 (1992). The matter is before us on petition for review.
The facts may be summarized as follows.
MGM, Inc., (MGM), is a Kansas corporation that owned and operated a Western Sizzlin Steak House, on Rock Road in Wichita, at all pertinent times herein. Defendant John Mash was the president of MGM. Telephone service at the restaurant consisted of a pay phone located in a frequently used area and two nonpay telephones located in the manager's office. The office was kept locked in the manager's absence. No other employee worked in the office. In January 1988, Mash became concerned over telephone charges for unauthorized long distance calls originating from the manager's office. He wanted to find out which employee or employees were making these calls. On January 27, 1988, Mash purchased and installed two telephone recording devices in the office ceiling. The employees were not advised of the installations. The devices would activate when the respective telephone receiver was picked up and would disconnect when the receiver was returned to its cradle.
Every few days Mash would listen to the tapes and rewind them for re-recording. On February 19, 1988, a plumber repairing a hot water pipe discovered the recording devices. That same day, Mash removed the devices.
On May 19, 1988, Mash was contacted by an attorney who advised that she represented two MGM employees, that the use of the recording devices was a criminal offense, that lawsuits were being considered based upon invasion of privacy, and that the matter could be resolved by paying each client $10,000.
That same day Mash called defendant Liberty Mutual Insurance Company (Liberty Mutual), relayed the facts of his visit from the employees' attorney and asked if MGM's liability insurance policy issued by Liberty Mutual would provide coverage in this situation.
The individual Mash talked to was Viola Schuckman, a claims supervisor. Bill Smith, claims manager, was absent at the time. The conversation lasted about 30 minutes. Schuckman told Mash that she did not think there was coverage as the conduct giving rise to the claims was an illegal act, but that she would check the policy and get back with him. She also advised that if suit were filed, the company would evaluate the allegation for coverage. Mash then contacted his own attorney, James Schaefer, and relayed the events which had occurred. On advice of Schaefe
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