The plaintiff-insured, Lyons Salt Company, is a Kansas corporation that owns and operates a massive salt mine in Lyons, Kansas. B.S.C. Holding, Inc. is the sole shareholder of Lyons Salt. The defendant-insurer, Lexington Insurance Company, issued eight consecutive policies of commercial property insurance to the plaintiffs from the years 2002 until 2010. The policies at issue, which were all substantially identical, constituted “all risk” insurance policies.
Beginning as early as October 7, 2004, technicians at Lyons identified higher than expected closure rates, indicating that the mine floor and ceiling were coming closer together. Six months later, Lyons again identified abnormally high closure measurements in the same area, nearly 10 times higher than expected. In September 2005, Petersen advised Lyons Salt of the possibility that these abnormal closure rates could cause water to enter the Lyons Mine. Testimony revealed that at this time Lyons characterized water inflow as a worst case scenario that “could be a huge problem.”
On January 17, 2008, as feared, Lyons Salt personnel detected an inflow of water in the same area that Lyons had repeatedly observed high closure rates. The rate of water inflow averaged approximately 31,680 gallons per day. The plaintiffs were not yet certain of the specific cause, duration, or the ultimate damage the water may cause. However, the plaintiffs considered this water inflow a problem that needed to be fixed, and Lyons was concerned about a total loss of the mine due to catastrophic flooding.
On July 19, 2010, the plaintiffs sent a letter and Notice of Loss informing Lexington 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 to investigate and remedy the water inflow problem. The proof of loss itemized $11,508,912 in expenses that the plaintiffs incurred to investigate and remedy the water inflow problem.
Lexington rejected coverage and the plaintiffs filed suit claiming a breach of the insurance contract.Lexington then moved for summary judgment for a number of reasons, including that the plaintiffs’ claims are untimely under the policies’ notice conditions and contractual suit-limitation provision.
Lexington argued that because the plaintiffs failed to provide timely notice after discovering structural defects and water inflow in the Lyons Mine. The Kansas District Court agreed finding that although the investigation and early observations beginning as early as 2004 did not necessarily trigger the provision to put their carrier on notice, the January 18, 2008 discovery of the water inflow problem in the very same area where they had observed the previously high closure rates was sufficient to invoke the notice provisions.
The court further rejected the insureds argument that notice obligations arise only after an insured party independently ascertains coverage or determines a specific cause of the loss. The court held that one cannot reasonably read the policies to suggest that their notice conditions apply only after the plaintiffs have conducted an independent investigation and arrived at a coverage determination. To the contrary, the notice conditions apply upon any discovery that “may give rise to a claim under this policy.”
Furthermore, the court found that Lexington suffered prejudice in that that Lexington had difficulty obtaining accurate reports and information from witnesses because they lacked clear memory of events that had occurred more than two years earlier. Further, Lexington argued that when it received notice of any structural or water inflow problems, the conditions at the mine had significantly changed due to the abnormally high closure rates. Finally, Lexington was deprived of an opportunity to inspect the mine or to evaluate and approve the remedies that the plaintiffs implemented.