Kansas Municipalities and their Contractors Should Be Careful to Avoid Insurance Waiver of the KTCA $500,000 Liability Cap
The Kansas Tort Claims Act, K.S.A. §§ 75-6101 to 6120 (“KTCA”) addresses sovereign immunity for Kansas governmental entities. K.S.A. § 75-6104 identifies the types of functions and claims as to which state and local governmental entities (and employees acting within the scope of governmental employment) are immune from liability. As to matters for which immunity is waived, K.S.A. § 75-6105 limits the potential damage award to “$500,000 for any number of claims arising out of a single occurrence or accident.” This $500,000 limitation on liability, however, does not apply if the governmental entity has liability insurance, “in which case the limitation on liability shall be fixed at the amount for which insurance coverage has been purchased.” K.S.A. § 75-6111. While the application and potential waiver of the $500,000 limit seem straightforward under the statutory language, there are pitfalls, particularly in the area of “additional insured” coverage.
Oftentimes a municipality will enter into a contract requiring that the contractor afford the municipality additional insured coverage under a liability insurance policy. If the additional insured coverage has a limit that exceeds $500,000 per occurrence, K.S.A. § 75-6111 causes a waiver of the $500,000 liability cap. See Kan. State Bank & Trust Co. v. Specialized Transp. Svcs., Inc., 819 P.2d 587, 379 (Kan. 1991).
An unintentional waiver of the $500,000 limit is not far fetched in this context. Liability policies usually make the same limit available for coverage to the named insured (contractor) and additional insured (municipality). Policy limits of $500,000 and less are unusual, and substantially higher limits are typical. If a municipal contract specifies the limit of the additional insured coverage “shall be $500,000”, a contractor might believe that its higher limit policy complies with the requirement. While a higher limit that only applies to the named insured/contractor’s coverage is fine, if that higher limit also applies to the additional insured/municipality’s coverage, then the liability cap would be waived up to the higher limit of the additional insured/municipality coverage.
If the waiver of the $500,000 cap only made the insurer liable for the excess liability, perhaps the insurer would non-renew the contractor or hike premiums, but it wouldn’t directly affect the municipality. The KTCA, including K.S.A. § 75-6111, and Kansas cases, however, do not address what happens if the municipality purchases coverage in excess of $500,000, but the insurer refuses to provide coverage for a particular occurrence or lawsuit. Insurers often refuse to provide coverage for various reasons. For example, the insurer may contend that some exclusion in the policy applies, that the insured has violated a condition of the policy (e.g., by failing to give timely notice, failing to cooperate, or settling without consent), or that the limit of insurance was previously exhausted. The point is, if the municipality purchased coverage in excess of $500,000 and the coverage is ineffective, then the municipality may be exposed to liability, even in excess of the $500,000 cap.
A municipality must be vigilant to avoid an unintentional waiver of the liability cap by ensuring that it does not purchase insurance with a limit in excess of $500,000 for “a single occurrence or accident.” A municipality should employ internal controls to ensure that insurance policies that it purchases directly do not waive the $500,000 cap. But a municipality that requires contractors to provide additional insured coverage should also employ and enforce protective contract terms. That language should (1) clearly specify that $500,000 is both a maximum and a minimum limit of additional insured coverage, (2) obligate the contractor to provide evidence of a maximum and minimum limit of $500,000 (which might consist of certificates, insurance policies and/or relevant excerpts of insurance policies), and (3) require the contractor to indemnify the municipality if, by providing coverage in excess of $500,000, the contractor causes the municipality to suffer a loss through a waiver of the KTCA cap.