                                                                 F I L E D
                                                           United States Court of Appeals
                                                                   Tenth Circuit
                      UNITED STATES COURT OF APPEALS
                                                                   JAN 9 1998
                                 TENTH CIRCUIT
                                                             PATRICK FISHER
                                                                       Clerk

FIRST NATIONAL BANK, Abilene,
Kansas,

        Plaintiff - Appellant,                     No. 96-3164
vs.                                          (D.C. No. 95-1132-JTM)
                                                    (D. Kan.)
AMERICAN STATES INSURANCE
COMPANY,

        Defendant - Appellee

  and

TRANSAMERICA COMMERCIAL
FINANCE CORPORATION; ITT
COMMERCIAL FINANCE
CORPORATION; AT&T CREDIT
CORP.; UNITED STATES OF
AMERICA; STEELCASE, INC.;
ATLIER INTERNATIONAL, LTD.;
BRAYTON INTERNATIONAL,
LTD.; DESIGNTEX FABRICS, INC.;
HEDBERG DATA SYSTEMS, INC.;
METROPOLITAN CORPORATION;
REVEST, INC.; STEELCASE
FINANCIAL; STEELCASE
CANADA, INC.; STEELCASE
FINANCIAL SERVICES, LTD.

        Defendants.
                          ORDER AND JUDGMENT *


Before ANDERSON, EBEL, and KELLY, Circuit Judges.


      In this diversity case, Plaintiff-Appellant First National Bank (FNB)

appeals the denial in part of its motion for summary judgment on its breach of

insurance contract claim and associated claims for prejudgment interest and

attorney’s fees. Our jurisdiction arises under 28 U.S.C. § 1291.

                                    Background

      The main issue in this case is whether the insurer, Defendant-Appellee

American States Insurance Company (ASIC), properly paid only its named

insured for loss of business income, or should have jointly paid either the named

insured’s mortgage holder or loss payee (referred to as FNB). For appeal

purposes, the mortgage holder and loss payee are effectively FNB because it is a

successor in interest to both. The case was decided by the district court, and is

submitted to this court, on stipulated facts and documents.

      On November 26, 1992, a severe snow storm hit Dodge City, Kansas,

causing a roof collapse at Dodge City Office Equipment (DCOE), the named



      *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. This court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.

                                        -2-
insured in this case. The roof collapse substantially damaged the building,

destroyed most of the inventory, and caused an ongoing loss of income for DCOE.

DCOE sought insurance proceeds from ASIC under its businessowner’s insurance

policy.

      ASIC made various payments under the policy jointly to DCOE and the

mortgage holder or loss payee, but made some payments solely to DCOE.

Specifically, ASIC paid DCOE as sole payee $20,000 for contents loss, and a total

of $117,089 for loss of business income. On February 28, 1995, FNB demanded

that it be paid these same amounts on the theory that it should have been paid

jointly with DCOE. ASIC refused payment on March 10, 1995. On November 6,

1995, the parties stipulated in the district court that the $20,000 check for

contents loss should have been paid jointly to FNB’s predecessor in interest, and

ASIC paid FNB this $20,000 on December 20, 1995, prior to entry of judgment

below.

      The district court granted summary judgment in part to FNB on the $20,000

contents loss payment and related prejudgment interest, but denied summary

judgment to FNB on its claims for the loss of business income proceeds plus

prejudgment interest and all attorney’s fees. The district court reasoned that the

plain, unambiguous language of the provisions for joint payment of proceeds to

mortgage holders and loss payees did not encompass proceeds for loss of business


                                         -3-
income. The district court also reasoned that an attorney’s fee award was

inappropriate with respect to the contents loss dispute because ASIC paid the

$20,000 to FNB prior to judgment, and because FNB’s larger claim was denied.

FNB seeks payment of the $117,089 in lost business income, plus associated

prejudgment interest and attorney’s fees, as well as attorney’s fees with respect to

the $20,000 contents loss dispute.

                                     Discussion

      FNB argues that it should have been jointly paid loss of business income

proceeds (1) based on the language of the policy; (2) because the policy on this

point is ambiguous and therefore should be construed against ASIC; and (3) based

on the policy’s structure and purpose. The clear and unambiguous language of

the policy provides otherwise.

      First, FNB argues that it is entitled to joint payment of loss of business

income proceeds because the policy provides coverage for such loss but does not

clearly and unambiguously exclude mortgage holders or loss payees from joint

payment. Coverage for loss of business income is provided in an additional

coverage paragraph with no specification as to who, other than the named insured,

is to be paid for such loss. FNB misunderstands the relevant burdens in insurance

coverage cases. “The assured has the burden of proving that the loss was of a

type included in the general coverage provisions of the insurance contract.” Clark


                                         -4-
Equip. Co. v. Hartford Accident & Indem. Co., 608 P.2d 903, 906 (Kan. 1980). If

a policy does contain broad promises of coverage to a mortgage holder or loss

payee, then “the insurer has the burden to prove the loss is excepted or excluded

by a specific provision of the policy.” Shelter Mut. Ins. Co. v. Williams, 804

P.2d 1374, 1383 (Kan. 1991) (quotation marks and citations omitted). Here, the

loss of business income paragraph does not broadly promise joint payment to

mortgage holders or loss payees. Therefore, no burden is on ASIC to point to

language specifically excluding joint payment.

      Regardless, the clear and unambiguous policy language provides that

mortgage holders and loss payees do not participate in proceeds for loss of

business income. An insurance policy is a written contract, and its terms are to be

given a reasonable construction, considering the entire contract together and

giving effect to every part. See Blair v. Automobile Owners Safety Ins., 290 P.2d

1028, 1030 (Kan. 1955). The language contained in a policy should be construed

according to the plain, ordinary, and popular sense of the words used. See Wing

Mah v. United States Fire Ins. Co., 545 P.2d 366, 369 (Kan. 1976).

      The mortgage holder paragraph provides as follows: “2. Mortgage Holders

. . . b. We will pay for covered loss of or damage to buildings or structures to

each mortgage holder shown in the Declarations in their order of precedence, as

interests may appear.” Aplt. App. at 222. Thus, mortgage holders are paid for


                                         -5-
loss only to buildings or structures, which FNB concedes does not include

business income. The loss payable paragraph provides as follows:

      A.     LOSS PAYABLE
             For Covered Property in which both you and a Loss Payee shown
             in the Schedule or in the Declarations have an insurable interest,
             we will:
             1.     Adjust losses with you; and
             2.     Pay any claim for loss or damage jointly to you and the
             Loss Payee, as interests may appear.

Aplt. App. at 231. A loss payee is paid only for “Covered Property,” defined as

“buildings” and “business personal property.” FNB concedes, as it must, that

buildings and business personal property do not include business income. No

other language in the policy addresses joint payment to either mortgage holders or

loss payees. Thus, the plain, unambiguous language of the policy does not

broadly promise coverage for lost business income to mortgage holders or loss

payees. On the contrary, the plain language limits mortgage holders’ and loss

payees’ participation in proceeds to those for loss to buildings, structures, and

business personal property.

      Second, FNB argues that the policy language is ambiguous and therefore

must be construed against ASIC so that FNB should have been paid jointly for

loss of business income. The basis for FNB’s ambiguity argument is the language

at the end of both the mortgage holder and loss payable paragraphs. Both

paragraphs provide that if the named insured is denied coverage due to its bad


                                         -6-
acts or failure to comply with the terms of the policy, and if the mortgage holder

or loss payee complies with certain conditions, then the mortgage holder/loss

payee will still be paid. At the end of both paragraphs, the policy states that “[a]ll

of the terms” of the policy “will then apply directly” to the mortgage holder or

loss payee. Aplt. App. at 222, 231.

      FNB contends that this last sentence is ambiguous as to what happens if all

of the previously-listed conditions are not met--i.e., the named insured is not

denied coverage for its acts or failure to comply with the policy. FNB posits that

three potential meanings otherwise exist if all of the terms of the policy do not

apply directly to the mortgage holder/loss payee. FNB urges a potential meaning

under which all of the terms of the policy apply indirectly to the mortgage holder

and loss payee, so that the business income coverage would apply to mortgage

holders and loss payees.

      There is, however, no such ambiguity. “To be ambiguous, a contract must

contain provisions or language of doubtful or conflicting meaning, as gleaned

from a natural and reasonable interpretation of its language.” Farm Bureau Mut.

Ins. Co. v. Old Hickory Cas. Ins. Co., 810 P.2d 283, 285 (Kan. 1991). An

insurance policy is not ambiguous unless a natural reading of the policy leaves a

genuine uncertainty as to which of two or more possible interpretations is proper.

See Spivey v. Safeco Ins. Co., 865 P.2d 182, 185 (Kan. 1993). Although


                                         -7-
ambiguities in insurance contracts are generally construed against the insurer, an

ambiguity must not be created where none exists. See Shelter Mut. Ins. Co., 804

P.2d at 1379.

      The clear and unambiguous language of the policy precludes the supposed

meanings offered by FNB. As discussed above, the mortgage holder and loss

payee paragraphs only specify payment to a mortgage holder or loss payee for

coverages which do not include lost income. Consequently, if the named insured

is not denied coverage due to its acts or failure to comply with the policy, then

only the named insured is paid any loss of business income proceeds. Whether it

would have been wise for the mortgage holder or loss payee to have sought a

provision for joint payment of lost business income proceeds or whether it would

have been a better contract with such a provision is irrelevant to the task at hand.

The function of the court is to enforce an unambiguous contract as made, not to

make another contract for the parties. See Farm Bureau Mut. Ins. Co., 810 P.2d

at 286.

      FNB contends that the business income paragraph does not specify who is

paid proceeds for this coverage, and that the policy therefore should be construed

against ASIC. As the policy does specify who is to be paid, this argument is

unavailing. A natural and reasonable reading of the policy, in the absence of any

mortgage holder or loss payee paragraphs, leads to only one conclusion. The


                                         -8-
named insured is to be paid. See Aplt. App. 212, 214. The business income

coverage provision unambiguously states that ASIC “will pay for the actual loss

of Business Income you sustain . . . .” Aplt. App. at 214 (emphasis added). The

property coverage form states that “the words ‘you’ and ‘your’ refer to the Named

Insured shown in the Declarations.” Aplt. App. at 212.

      Finally, FNB argues that it should have been paid jointly based on the

structure and purpose of the policy. First, FNB contends that the policy should be

construed as a whole, and therefore the provisions for mortgage holder and loss

payee payment should apply to the business income coverage paragraph. No

degree of holistic construction, however, can alter the plain language of the

mortgage holder and loss payee paragraphs which specify only joint payment for

losses that do not include lost business income.

      Second, FNB argues that the purpose of the policy is to indemnify the

named insured, mortgage holder, and loss payee for specified causes of loss, and

that the policy should not be construed to defeat this purpose. According to FNB,

this loss was covered and the mortgage holder and loss payee should be

indemnified just as was the named insured.

      Assuming the general purpose of the policy is to indemnify, such

indemnification must, of course, be according to the policy’s terms. Under this

policy, the mortgage holder’s indemnification is limited to loss of or damage to


                                        -9-
buildings and structures, and the loss payee’s indemnification is limited by the

plain language to loss to “Covered Property.” Although it is always proper to

consider the purpose of a policy when construing its terms, an alleged purpose of

a policy cannot trump its clear and unambiguous language. FNB’s approach treats

indemnification as an all or nothing proposition, in spite of the policy’s terms.

This policy indemnifies mortgage holders and loss payees for the most common

types of loss; if FNB wanted additional coverage, it was incumbent upon it to

insist upon such language as a condition of granting credit. We note that FNB’s

claims for prejudgment interest and attorney’s fees associated with the business

income proceeds dispute are moot based on our conclusion that FNB was not

entitled to joint payment of these proceeds.

      FNB seeks attorney’s fees with respect to the $20,000 contents loss

proceeds which ASIC admitted before judgment should have been paid jointly.

FNB maintains that fees should be awarded because FNB demanded payment on

February 28, 1995, but ASIC did not pay the $20,000 until December 20, 1995,

after FNB filed a complaint, ASIC answered, and discovery was about to begin.

      The statute under which FNB claims attorney’s fees provides

      [t]hat in all actions hereafter commenced, in which judgment is
      rendered against any insurance company . . . , if it appears from the
      evidence that such company, society or exchange has refused without
      just cause or excuse to pay the full amount of such loss, the court in
      rendering such judgment shall allow the plaintiff a reasonable sum as
      an attorney’s fee for services in such action . . . .

                                        - 10 -
Kan. Stat. Ann. § 40-256 (1993). “Where the only issue between the parties is a

factual dispute with respect to coverage under an insurance policy, and the insurer

has refused to pay the full amount of the insured’s loss for such reason, the phrase

‘without just cause or excuse,’ as used in [Kan. Stat. Ann. § 40-256], means a

frivolous or unfounded denial of liability.” Koch v. Prudential Ins. Co. of Am.,

470 P.2d 756, 760 (Kan. 1970). A refusal of payment is not unfounded or

frivolous if there exists a good faith legal controversy as to coverage or a bona

fide and reasonable factual dispute. See Clark Equip. Co., 608 P.2d at 907.

      The district court denied fees, reasoning that the larger portion of FNB’s

claim was denied and that ASIC paid the claimed $20,000 amount before

judgment so that FNB could not demonstrate a refusal to pay. Neither of these

reasons, however, is a proper one for the denial of fees. First, the statute does not

require refusal of payment through to judgment for the insured to be entitled to

attorney’s fees. Fee awards are provided for in cases like these because insureds

should not have to bear the cost of bringing suit to compel an insurer to abandon

an unfounded and frivolous denial of coverage. In furtherance of this rationale,

Kansas courts have explained it is the insurer’s conduct prior to the

commencement of suit that counts. See Sloan v. Employers Cas. Ins. Co., 521

P.2d 249, 250 Syl. ¶ 1 (Kan. 1974). The insurer’s duty to investigate arises, and

must be fulfilled, before refusing payment. See Lord v. State Auto. and Cas.


                                        - 11 -
Underwriters, 491 P.2d 917, 923 (Kan. 1971). Thus, the justification for a refusal

to pay is measured at the time of refusal. See Koch, 470 P.2d at 760; Wolf v.

Mutual Benefit Health and Accident Ass’n, 366 P.2d 219, 228 (Kan. 1961). The

circumstances at the time of refusal are judged “as they would appear to a

reasonably prudent man having a duty to investigate in good faith and to

determine the true facts of the controversy.” Watson v. Jones, 610 P.2d 619, 626

(Kan. 1980). If refusal was unfounded and frivolous at that time, a settlement

offer, or even later payment, after the filing of a complaint will not immunize the

insurer from an appropriate fee award. See Sloan, 521 P.2d at 251; Wolf, 366

P.2d at 228.

      Second, a complete denial of fees is not justified on the basis that the larger

portion of FNB’s claim was denied. Again, the fee award statute protects

insureds from paying attorney’s fees to compel insurers to pay due proceeds. This

is true regardless of the fraction of an overall claim which those proceeds

represent. If the elements of the fee award statute are present with respect to

some portion of the claim, the judgment creditor is entitled to fees attributable to

the dispute over that portion. That the judgment is only for a portion of the

plaintiff’s original claim is not made relevant by the Kansas statute; it is therefore

only relevant to accurate calculation of the awarded fee.

      Because the two reasons given by the district court for its denial of fees


                                         - 12 -
with respect to the contents loss dispute are not proper, an award of fees is

appropriate if ASIC’s refusal of payment was without just cause or excuse. This

case was resolved by the district court on stipulated facts and documentary

evidence so that we can review de novo whether those facts establish just cause or

excuse. See Clark Equip. Co., 608 P.2d at 906.

      ASIC’s refusal letter only states that ASIC did not think it was obligated to

pay the proceeds again. ASIC did, however, assert numerous defenses in its

answer. We are aware that the justification for refusal of payment is measured at

the time of refusal, but consider, in ASIC’s favor, all of these defenses as

potential reasons for refusal at that time.

      Assuming ASIC refused payment on March 10, 1995, for all of those

reasons, none of them constitutes just cause or excuse. First, ASIC asserted that

FNB was not named as a loss payee and therefore was not entitled to proceeds for

contents loss. FNB’s predecessor, the Small Business Administration, was named

as loss payee, and FNB’s demand letter detailed this relationship. Second, ASIC

asserted that FNB’s claim was limited by the terms of the policy. On the

contrary, the terms explicitly provide that the loss payee is entitled to joint

payment of proceeds for loss of Covered Property, which is defined to include

contents loss. Third, ASIC asserted that the policy does not allow for the

assignment of benefits. Admittedly, the policy does not allow assignment by the


                                         - 13 -
named insured, but there is no prohibition of assignment by a loss payee. Finally,

ASIC asserted that FNB did not fulfill the conditions in the policy on timely

notice of loss. The named insured, however, had already fulfilled all of the

necessary conditions, as evidenced by the fact that ASIC paid DCOE $20,000 for

contents loss, albeit improperly.

      ASIC’s assertion that it should not have to pay again as well as all of the

defenses eventually asserted in ASIC’s answer were for the foregoing reasons

frivolous and unfounded. None truly presented a legal controversy or reasonable

factual dispute. Thus, ASIC refused payment without just cause or excuse and we

remand for calculation and award of the attorney’s fees attributable to the

contents loss dispute.

      AFFIRMED IN PART, REVERSED IN PART, and REMANDED.



                                       Entered for the Court


                                       Paul J. Kelly, Jr.
                                       Circuit Judge




                                        - 14 -
