||HAROLD MASSEY AND DOROTHY MASSEY, PLAINTIFFS-APPELLEES AND CROSS-APPELLANTS,
FARMERS INSURANCE GROUP, DOING BUSINESS AS TRUCK INSURANCE
EXCHANGE, DOING BUSINESS AS TRUCK UNDERWRITERS ASSOCIATION, DEFENDANT-APPELLANT AND
||D.C. No. 87-324-C. E.D. Okla.
||Before Tacha and Baldock, Circuit Judges, and O'connor, District Judge.**
||The opinion of the court was delivered by: Baldock
||ORDER AND JUDGMENT
||This diversity case arising in Oklahoma involves claims for breach of an insurance
contract and breach of the implied covenant of good faith and fair dealing. Following a
jury trial, a judgment was entered in favor of Plaintiffs-Appellees Harold and Dorothy
Massey, and they were awarded compensatory damages of $375,000, punitive damages of
$4,000,000, prejudgment interest, attorneys fees and costs. Defendant-Appellant Farmers
Insurance Group appeals from this judgment raising a number of alleged
errors. Plaintiffs cross-appeal the district court's calculation of prejudgment interest
and attorneys fees. We have jurisdiction under 28 U.S.C. § 1291.
||This case arose out of an arson fire at Plaintiffs' home. Defendant insured Plaintiffs
against fire loss to their home with policy limits of $75,000. Defendant's adjuster, Joe
Delacerda, determined that Plaintiffs were not involved in the arson. Delacerda made a
preliminary finding that the house could be repaired for approximately $45,000. Delacerda
asked Mr. Massey to obtain estimates from two contractors. Mr. Massey obtained estimates
from Simon-Price Construction and Gerald Eaves Construction which he submitted to
Defendant. Both of these estimates exceeded $100,000 and involved demolishing the
remaining structure and completely rebuilding the house.
||After receiving Plaintiffs' estimates, Defendant adjusted its loss reserves up to the
policy limits. Delacerda then obtained an estimate to repair the house for approximately
$47,000 from First General Services of Tulsa. Contrary to Defendant's own policy,
Delacerda did not obtain a second estimate. Three weeks after receiving Plaintiffs'
estimates, Defendant notified Plaintiffs that their policy on the damaged house as well as
a separate policy on Plaintiffs' business would be cancelled effective at the end of the
month. Soon thereafter, Defendant retained an attorney, Ray Wilburn, to represent it in
||The central dispute at this point was whether repairing the house would restore it to
its prefire condition or whether the house would have to be torn down and completely
rebuilt to restore it to its prefire condition. With the parties at an impasse, Defendant
invoked the statutory appraisal clause of the policy. See Okla. Stat. Ann. tit. 36, §
4803 (West 1990). This clause provides that in the event that the parties fail to agree on
the amount of loss, either party may invoke the appraisal process. Once this process is
invoked, each party is required to select a competent and disinterested appraiser. The
appraisers then select an umpire, and, if the appraisers cannot agree on an umpire, a
court shall select the umpire. Each appraiser then submits an itemized appraisal of the
loss. The appraisers' differences are submitted to the umpire who then determines the
amount of the loss. Each party is expected to bear the cost of its own appraiser, and the
parties equally share the cost of the umpire. Plaintiffs offered evidence at trial that it
was contrary to Defendant's company policy to invoke the appraisal process, although
Defendant sharply contested this fact claiming that the training manual upon which
Plaintiffs relied was outdated and no longer reflected company policy.
||Defendant initially appointed attorney Wilburn as its "disinterested"
appraiser despite the fact that Wilburn was already actively representing Defendant as its
attorney in this matter. Moreover, Wilburn's firm did a significant amount of other legal
work on Defendant's behalf, receiving over $2.4 million in fees from Defendant for a
two-year period. After Plaintiffs objected to Wilburn's capacity to be disinterested and
to his competency as an appraiser, Defendant substituted Peter Murlowski as their
appraiser. Murlowski was employed by First General Services of Tulsa--the firm that had
earlier given Defendant an estimate to repair the house. Evidence at trial indicated that
First General depended on insurance repair work for 95% of its business, and 25% of its
business came from Defendant. Wilburn informed Murlowski that Defendant expected Murlowski
to stand by his initial estimate. Upon inspecting the house, Murlowski maintained that the
house could be repaired but adjusted his initial estimate of approximately $7,000 upward
by approximately $2,000.
||Plaintiffs appointed Dan Simmons of Simmons-Price Construction, which had prepared one
of Plaintiffs' earlier estimates to rebuild the house. Simmons maintained that the house
would have to be completely rebuilt at a cost of approximately $100,000 to restore it to
its prefire condition. Thus, Simmons and Murlowski were unable to agree, and neither
appraiser suggested the appointment of an umpire.
||Plaintiffs filed suit in state district court for breach of contract and breach of the
implied covenant of good faith and fair dealing. Subsequently, Defendant moved the court
for the appointment of an umpire pursuant to the statutory appraisal process. At the
suggestion of Defendant's counsel, the court appointed David Lambert, a local builder who
specialized in commercial building and served on the Board of Directors of two insurance
companies. Lambert inspected the property and received incomplete estimates from Murlowski
and Simmons. The Murlowski estimate did not have any dollar values placed on it, and the
Simmons estimate was merely three lines rather than the itemized estimate he had earlier
provided to Defendant. Lambert never attempted to negotiate a compromise between Murlowski
and Simmons. Rather, Lambert prepared a report finding the house could be rebuilt at a
cost of approximately $49,000, consistent with the Murlowski estimate. Although Defendant
tendered payment, Plaintiffs rejected the settlement, dismissed their retained attorney,
and, acting pro se, moved the court to reconsider the umpire's estimate on the basis of
alleged improprieties in the appraisal process. With their motion to reconsider pending,
Plaintiffs, upon the advice of their newly retained counsel, dismissed their state action
without prejudice under Okla. Stat. Ann. tit. 12, § 683 (West 1988).
||Plaintiffs refiled their suit in the Oklahoma federal district court on the basis of
diversity jurisdiction. 28 U.S.C. § 1332. Following a jury trial, Plaintiffs were awarded
$75,000 for loss of their home, $15,000 for additional living expenses and $300,000 in
consequential damages for Defendant's breach of the insurance policy as well as $4,000,000
in punitive damages for Defendant's breach of the implied covenant of good faith and fair
dealing. The district court further awarded Plaintiffs attorney fees of $376,275,
prejudgment interest exceeding $390,000 and costs totalling $44,766.
||Among its many contentions, Defendant initially asserts that the state court umpire's
damage appraisal of Plaintiffs' home is conclusive on the issue of the amount necessary to
restore the dwelling to its prefire condition, and thus fixed the damages due on the
dwelling. Defendant further asserts that if the umpire's award is valid, then Defendant
could not have acted in bad faith because Plaintiffs' case rests upon Defendant's
purportedly improper handling of the appraisal process.
||In the interest of comity, and pursuant to Okla. Stat. Ann. tit. 20, §§ 1602-1605
(West Supp. 1990), we certified the following question to the Oklahoma Supreme Court:
||Under Oklahoma law, what is the preclusive effect of a court-appointed umpire's damage
appraisal under a statutorily-mandated provision of a fire insurance policy, where the
insured, as of right, dismisses without prejudice an initial lawsuit without challenging
the umpire's appraisal and, thereafter, institutes a subsequent lawsuit on the same cause
of action in another court?
||Massey v. Farmers Ins. Group, No. 88-2085, slip op. at 2 (10th Cir. Mar. 26, 1990)
(certification order). The Oklahoma Supreme Court has since answered the question by
holding that "a court-appointed umpire's damage appraisal under the
statutorily-mandated provision of a fire insurance policy, [Okla. Stat. Ann. tit. 36, §
4803(G) (West 1990)], has no preclusive effect upon the party who did not demand the
appraisal process." Massey v. Farmers Ins. Group, 837 P.2d 880, 885 (Okla. 1992).
Accordingly, because Plaintiffs did not demand the appraisal process, the earlier
appraisal by the state court appointed umpire has no preclusive effect on Plaintiffs'
present action. Therefore, the district court did not err in denying Defendant's motion
for summary judgment and motion for a directed verdict on this issue.
||Defendant raises three challenges to the sufficiency of the evidence: (A) the evidence
was insufficient to support the contractual damage award for additional living expenses;
(B) the evidence was insufficient for the jury to find that Defendant breached the implied
covenant of good faith and fair dealing; and (C) the evidence was insufficient for the
jury to find that Defendant acted with fraud, malice or oppression. We view the evidence
and all reasonable inferences therefrom in the light most favorable to Plaintiffs and can
reverse only when it is clear that reasonable minds could not differ on the conclusion.
Pytlik v. Professional Resources, Ltd., 887 F.2d 1371, 1380 (10th Cir. 1989); McKinney v.
Gannett Co., Inc., 817 F.2d 659, 663 (10th Cir. 1987).
||The jury awarded Plaintiffs $15,000 in additional living expenses. Such expenses were
covered under a provision of the policy which read as follows:
||If a covered property loss makes the residence premises unfit to live in, we cover the
necessary increase in living expense incurred by you so that your household can maintain
its normal standard of living. We shall pay for the shortest time needed to (a) repair or
replace the damaged property or (b) permanently relocate.
||Harold Massey testified that he requested additional living expenses of $906 per month
which were denied by Defendant. Defendant claims that this request was based on what Mr.
Massey perceived as the fair market value of the house destroyed in the fire, and that
Defendant had changed its policy so as to no longer reimburse for the fair market value of
the destroyed property. However, whether the additional living expense provision included
the fair market value of the damaged property during the period of its restoration was a
disputed fact properly left to the resolution of the jury. Further, Defendant overlooks
the additional testimony that after it cancelled Plaintiffs' insurance, Plaintiffs
incurred $10,000 to $12,000 in additional expenses to make another building on Plaintiffs'
property habitable. Taking all reasonable inferences from this testimony in Plaintiffs'
favor, we cannot say that reasonable minds could not differ on the conclusion.
||Defendant next claims that the evidence was insufficient for the jury to find that
Defendants breached the implied covenant of good faith and fair dealing. The parties agree
that Oklahoma recognizes a cause of action sounding in tort for the bad faith breach of an
insurance contract. See Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1108-09 (Okla. 1991);
McCorkle v. Great Atl. Ins. Co., 637 P.2d 583, 588 (Okla. 1981). However, the parties
dispute the quantum of evidence necessary to submit this issue to the jury.
||Defendant argues that unless Plaintiffs were entitled to a directed verdict on the
breach of contract claim, the bad faith claim should not have been submitted to the jury.
Defendant relies on National Sav. Life Ins. Co. v. Dutton, 419 So. 2d 1357 (Ala. 1982), in
which the Alabama Supreme Court stated, ordinarily, if the evidence produced by either
side creates a fact issue with regard to the validity of the claim and, thus, the
legitimacy of the denial thereof, the tort claim must fail and should not be submitted to
the jury." Id. at 1362.
||In support of its contention that Oklahoma follows the rule announced in Dutton,
Defendant directs us to Christian v. American Assurance Co., 577 P.2d 899 (Okla. 1977),
Timmons v. Royal Globe Ins. Co., 653 P.2d 907 (Okla. 1982), and Manis v. Hartford Fire
Ins. Co., 681 P.2d 760 (Okla. 1984). In Christian, which was the first Oklahoma case to
recognize a cause of action sounding in tort against an insurer for breaching an implied
duty to deal fairly and act in good faith with its insured, the court affirmed a bad faith
judgment based on an insurer's failure to pay a claim to which it had no defense. However,
Christian does not suggest that an insurer's absence of a defense to a breach of contract
claim is a necessary predicate to a bad faith cause of action. Indeed, in Timmons, also
relied on by Defendant, the court affirmed a bad faith judgment based on the insurer's
actions in investigating the claim, despite the fact that the insurer had several defenses
to the contract action. *fn1 The Timmons
court recognized that "the essence of the cause before the Court is failure to deal
fairly and in good faith with an insured and as such, the jury may be shown the entire
course of conduct between the parties to arrive at a determination of whether that
standard had been breached or not." 653 P.2d at 917. While the Oklahoma Supreme Court
reversed a bad faith judgment in Manis where the insurer refused to pay a claim for fire
loss claiming that the insured intentionally set the fire, the bad faith claim was based
solely on the insurer's refusal to pay and there was no other evidence that insurer failed
to deal fairly with the insured. Thus, even though the jury rejected the insurer's arson
defense on the contract claim, the Manis court found that there was no evidence that the
insurer acted in bad faith in pursuing the defense.
||In contrast to Manis, Plaintiffs' bad faith claim was based on Defendant's abuse of
the statutory and contractual appraisal process. *fn2
The Oklahoma Supreme Court has made it clear that the question of bad faith turns on the
intent and reasonableness of the insurer's action, and the "crucial
consideration" in determining whether to submit the issue to the jury is "the
relative merit in the evidence supporting [the insurer's] defense." Conti v. Republic
Underwriters Ins. Co., 782 P.2d 1357, 1361 (Okla. 1989). In McCorkle v. Great Atl. Ins.
Co., 637 P.2d 583 (Okla. 1981), the Oklahoma Supreme Court rejected the argument that
allowing a bad faith cause of action denies insurers their right to have a judicial
determination on the amount due on a fire insurance policy, noting that "a party
prosecuting a claim of bad faith must plead the elements of the tort and he/she has the
burden of proof. The pleading and proof requirements are the same as in other lawsuits.
Id. at 587. Clearly rejecting the argument raised by Defendant here, the McCorkle court
||the essence of the intentional tort of bad faith with regard to the insurance industry
is the insurer's unreasonable, bad-faith conduct . . . and if there is conflicting
evidence from which different inferences may be drawn regarding the reasonableness of
insurer's conduct, then what is reasonable is always a question to be determined by the
trier of fact by a consideration of the circumstances in each case.
||Id. More recently, the Oklahoma Supreme Court recognized that whether or not an
insured is legally entitled to recover under the policy is not the "controlling
issue" in a bad faith action based on a denial of coverage; rather, the bad faith
issue, in such a case, turns on "whether [the insurer], at the time [the insureds]
made their claim, was in possession of information to establish that its refusal to pay
was in good faith. . . ." Buzzard v. McDanel, 736 P.2d 157, 159 n.3 (Okla. 1987).
Similarly, in McCoy v. Oklahoma Farm Bureau Mut. Ins. Co., 841 P.2d 568 (Okla. 1992), the
court held that the issue of bad faith was properly submitted to the jury despite the
existence of a triable issue as to whether the insured had burned down his own house. Id.
at 570-72. Thus, we reject Defendant's argument that Plaintiffs must have been entitled to
a directed verdict on the breach of contract claim in order to submit the bad faith claim
to the jury.
||We turn to the question of whether a reasonable jury could have found that Defendant
breached the implied covenant of good faith and fair dealing. Plaintiffs' cause of action
was based on Defendant's handling of their claim, specifically Defendant's abuse of the
statutory and contractual appraisal process. The Oklahoma Supreme Court has recognized
that the manner in which an insurer handles a claim may be the basis for a bad faith
judgment, see Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1109 (Okla. 1991); Timmons v.
Royal Globe Ins. Co., 653 P.2d 907, 917-18 (Okla. 1982), as well as actions by an insurer
which unreasonably withhold the payment of claims. Christian v. American Assurance Co.,
577 P.2d 899, 904-05 (Okla. 1977).
||Taken in the light most favorable to Plaintiffs, the evidence at trial amply supported
Plaintiffs' claim that Defendant acted in bad faith by manipulating and abusing the
statutory and contractual appraisal process. First, according to Defendant's own training
manual, it was against company policy to invoke the appraisal process or to even call it
to the attention of the insured. *fn3
Nevertheless, Defendant did invoke the appraisal process following the fire which
destroyed Plaintiffs' home. Second, under the appraisal process, each party is required to
appoint a "competent and disinterested appraiser" once either party has made a
written demand for an appraisal. Okla. Stat. Ann. tit. 36 § 4803 (West 1990). Substantial
evidence was presented that the first appraiser appointed by Defendant was not competent,
and that neither of the two appraisers appointed by Defendant were disinterested.
Defendant's first appraiser, Wilburn, was an attorney who did substantial work on
Defendant's behalf, and indeed had been retained by Defendant to represent it in its
dealings with Plaintiffs. The second appraiser, Murlowski, relied on insurance work, a
substantial portion of which was from Defendant, for his livelihood, and he had earlier
provided an estimate for repairing the house. Moreover, there was direct evidence, in the
form of a letter by one of Defendant's attorney who happened to be an associate of
Wilburn, that Defendant attempted to improperly influence the second appraiser by
conveying its expectation that the appraiser would stand by his estimate to rebuild the
house. Thus, Defendant's overt failure to follow the terms of its own policy regarding the
appraisal process provides substantial evidence that Defendant acted unreasonably and in
||Other evidence submitted by Plaintiffs could reasonably lead the jury to infer that
Defendant attempted to pressure Plaintiffs into accepting the lesser amount to repair the
house, as opposed to having it rebuilt. Defendant took an average of thirty-seven days to
submit a loss for authority to settle; however, in this case, Defendant took eighty-five
days to submit the contents portion of Plaintiffs' claim. A reasonable inference is that
Defendant delayed payment on the contents in order to pressure Plaintiffs to settle on the
structure, thereby supporting Plaintiffs' assertion that Defendant acted unreasonably and
in bad faith in handling Plaintiffs' claim. Furthermore, Defendant cancelled Plaintiffs'
insurance policies even though Defendant's own investigation indicated that Plaintiffs
were not at fault for the fire. Again, it was reasonable for the jury to infer that this
cancellation was an attempt to pressure Plaintiffs into settling the loss on the
||Finally, in addition to the evidence concerning Defendant's abuse of the appraisal
process and the evidence supporting the inference that Defendant attempted to pressure
Plaintiffs into accepting its offer, there was substantial evidence that Defendant's
actions unreasonably withheld the payment of Plaintiffs' claim. There was testimony that
the branch office's authority to settle a claim on a structure was limited to $40,000, and
any claim in excess had to be submitted to the regional office for approval. Defendant's
own estimate exceeded $40,000, yet defendant waited until June 5, 1986, almost a year
after the fire, to request settlement authority from the regional officer. When authority
was finally granted to settle Plaintiffs' claim for the policy limits of $75,000,
Defendant never offered this amount to Plaintiffs.
||In light of this evidence, and the reasonable inferences that may be drawn from it,
the evidence was more than sufficient to submit the issue of whether Defendant breached
the implied covenant of good faith and fair dealing to the jury.
||Defendant also contends that, even if there was sufficient evidence of bad faith, the
evidence was insufficient to show that Defendant acted fraudulently, maliciously or
oppressively, and, therefore, the punitive judgment award cannot stand. Under Oklahoma
law, malice may be inferred when a party commits willful acts in reckless disregard of
another's rights. Slocum v. Phillips Petroleum Co., 678 P.2d 716, 719 (Okla. 1983). Our
review of the evidence, and specifically Defendant's failure to follow the terms of its
own policy regarding the appraisal process, convinces us that an inference of malice could
properly be drawn by the jury.
||Defendant raises a related argument, which although purporting to challenge the
sufficiency of the jury instruction on punitive damages, appears to be based on the
district court's finding, pursuant to Okla. Stat. Ann. tit. 23, § 9 (West 1987), that
there was clear and convincing evidence to support the award of punitive damages. Oklahoma
law requires the district court, at the conclusion of all the evidence, to make a finding
outside of the presence of the jury "that there is clear and convincing evidence that
the defendant is guilty of conduct evincing a wanton or reckless disregard for the rights
of another, oppression, fraud or malice, actual or presumed" in order for the jury to
award punitive damages. Id. When the district court makes such a finding, the limitation
on punitive damages to the amount of actual damages, see id. (historical note) (discussing
1986 amendment), does not apply. Id.
||The district court found that there was "certainly clear and convincing evidence
that the defendant is guilty of conduct evincing the wanton and reckless disregard for the
rights of others. VIII R. trans. at 1422. For the reasons heretofore stated, we believe
that the district court's finding is supported by the record. Because willful acts in
reckless disregard of Plaintiffs' rights may lead to an inference of malice, Slocum v.
Phillips Petroleum Co., 678 P.2d 716, 719 (Okla. 1983), the district court properly
submitted this issue to the jury without limiting the punitive damages to the amount of
||Defendant raises a myriad of claims alleging error in the admission of evidence. We
review the district court's ruling on the admissibility of the evidence for an abuse of
discretion. K-B Trucking Co. v. Riss Int'l Corp., 763 F.2d 1148, 1155 (10th Cir. 1985);
Rasmussen Drilling, Inc. v. Kerr-McGee Nuclear Corp., 571 F.2d 1144, 1149 (10th Cir.),
cert. denied, 439 U.S. 862 (1978). Even if the district court abuses its discretion by
erroneously admitting particular evidence, we will not reverse a judgment when the error
is harmless -- i.e. when the error does not affect a substantial right of the party
asserting error. K-B Trucking, 763 F.2d at 1156. See also Fed. R. Civ. P. 61; Fed. R.
Evid. 103(a). "The burden of demonstrating that substantial rights were affected
rests with the party asserting error." K-B Trucking, 763 F.2d at 1156.
||Defendant claims that the district court erred in admitting evidence concerning the
worth of companies that do business under the name Farmers Insurance
Group. According to Defendant, evidence of its worth, which was relevant to the issue of
the amount of punitive damages, should have been limited to evidence of the worth of Truck
Insurance Exchange/Truck Underwriters Association which is the named party on the
insurance policy. Although Defendant has not specified the Federal Rule of Evidence which
purportedly renders this evidence inadmissible, Defendant's argument appears to be based
on relevancy. See Fed. R. Evid. 402.
||"'Relevant evidence' means evidence having any tendency to make the existence of
any fact that is of consequence to the determination of the action more probable or less
probable than it would be without the evidence." Fed. R. Evid. 401. Under Oklahoma
law, punitive damages are awarded to punish wrongdoers for wrongs committed upon society
and to deter them from such conduct in the future. Okla. Stat. Ann. tit. 23, § 9 (1987).
Accordingly, evidence of the worth of a party against whom punitive damages are being
sought is relevant to the issue of the amount of damages necessary to sufficiently punish
and deter the party. *fn4 See Silkwood v.
Kerr-McGee Corp., 769 F.2d 1451, 1460 (10th Cir. 1985), cert. denied, 476 U.S. 1104
(1986); Spaeth v. Union Oil Co., 762 F.2d 865, 866 (10th Cir. 1985), cert. denied, 476
U.S. 1104 (1986).
||Nonetheless, Defendant argues that Farmers Insurance Group
was not a party to the contract and therefore could not be liable for bad faith breach of
the contract. See Timmons v. Royal Globe Ins. Co., 653 P.2d 907, 912-13 (Okla. 1982).
Thus, Defendant argues that evidence of the worth of Farmers Insurance
Group should not have been admitted. This is a curious proposition considering that Farmers
Insurance Group is the named defendant in the lawsuit. Under Defendant's
reasoning, evidence of its worth should have been limited to the worth of Truck Insurance
Exchange/Truck Underwriter Association, a subordinate entity within the rubric of
companies forming Farmers Insurance Group. In light of the
evidence in the record showing a significant financial relationship between Farmers
Insurance Group and Truck Insurance Exchange/Truck Underwriters Association,
Farmers Insurance Group's control over the subordinate entity
in the handling of claims in general, and the handling of the claim in this case in
particular, we believe that the worth of Farmers Insurance
Group is the relevant inquiry in determining the amount of damages sufficient to punish
and deter Defendant from its tortious conduct.
||Defendant next claims that the admission of evidence concerning its granting of
settlement authority in the amount of $75,000 to its branch office in June 1986 violated
Fed. R. Evid. 408. This rule provides that
||evidence of (1) furnishing or offering or promising to furnish . . . a valuable
consideration in compromising or attempting to compromise a claim which was disputed as to
either validity or amount, is not admissible to prove liability for . . . the claim or its
amount. Evidence of conduct or statements made in compromise negotiations is likewise not
||Fed. R. Evid. 408. Defendant's argument fails for at least two reasons. First, the
evidence was undisputed that Defendant never furnished, offered or promised to furnish
$75,000 to settle Plaintiffs' claim, nor was this evidence of conduct in compromise
negotiations. Thus, the evidence was not the type for which a Rule 408 objection will lie.
Second, the evidence was not offered to prove liability. Rather, Plaintiffs offered this
evidence to show that, by June 1986, Defendant had evaluated the loss at the policy limits
but failed to offer this amount to Plaintiffs. Therefore, because the evidence was
relevant to the issue of whether Defendant unjustifiably withheld payment of the claim
thereby breaching the implied covenant of good faith and fair dealing, we find no abuse of
discretion in its admission.
||Defendant next contends that the district court erred in admitting evidence that
Defendant cancelled Plaintiffs' three other policies following the fire. Defendant's sole
argument on appeal is that such evidence was not admissible because the cancellation of
the policies did not violate Okla. Stat. Ann. tit. 36, § 4807 (West 1990), which limits
the reasons insurers may cancel policies. Whether or not the cancellation of the policies
violated state law, this evidence was properly admitted to show the course of dealing
between Defendant and Plaintiffs and tended to support Plaintiffs' argument that Defendant
cancelled the policies to pressure Plaintiffs into settling the loss on their dwelling.
Accordingly, we find no abuse of discretion in admitting this evidence.
||Defendant argues that the district court erred in admitting the depositions of Charles
Medlock, an employee of defendant, and Peter Murlowski, an independent contractor whom
Defendant hired as its second appraiser. Again, Defendant's brief does not specifically
articulate why the deposition testimony was inadmissible. However, Defendant asserts that
the videotaped depositions should not have been admitted because both persons were
available to testify and because Murlowski was not an agent of Defendant. Further,
Defendant argues that the district court's informing the jury that the deposition
testimony were admissions against interest was prejudicial to Defendant. While we do not
necessarily agree with the specifics of Defendant's argument, we agree that district court
abused its discretion in admitting the videotaped depositions.
||The use of depositions in a court proceeding is governed by Rule 32 of the Federal
Rules of Civil Procedure. The deposition must be admissible under the rules of evidence *fn5 and may only be admitted against a party who
was present or represented at the deposition. Fed. R. Civ. P. 32(a). Moreover, Rule 32
further limits the admissibility of depositions in court proceedings. A "deposition
may be used by any party for the purpose of contradicting or impeaching the testimony of
deponent as a witness, or for any other purpose permitted by the Federal Rules of
Evidence." Fed. R. Civ. P. 32(a)(1). *fn6
Neither Medlock nor Murlowski testified prior to the introduction of their deposition;
therefore, their depositions were not admissible as impeachment. Rule 32 also permits
"the deposition of a party or of anyone who at the time of taking the deposition was
an officer, director, or managing agent, or a person designated under Rule 30(b)(6) or
31(a) to testify on behalf of a public or private corporation, partnership or association
or governmental agency which is a party" to be used in a court proceeding by an
adverse party. Fed. R. Civ. P. 32(a)(2). While Plaintiffs claim that Medlock and Murlowski
were agents of Defendant, there is no contention that they were "officers, directors,
managing agents, or persons designated pursuant to Rule 30(b)(6) or 31(a)" to testify
on behalf of Defendant. Finally, Rule 32 permits the use of depositions in court
proceedings when the witness is unavailable to testify for particular reasons or when the
court finds "exceptional circumstances." Fed. R. Civ. P. 32(a)(3). Here, both
witnesses were available to testify, and there is no claim that exceptional circumstances
existed. Accordingly, the depositions of Medlock and Murlowski were not properly admitted
||Having found error in the admission of the depositions, we turn to the question of
whether it affected a substantial right of Defendant. We note that since both witness were
available, Defendant had the opportunity to call them to the stand to rehabilitate their
testimony, and, in fact, did so with respect to Murlowski. Further, Medlock's deposition
was videotaped and the tape was presented to the jury, thereby permitting the jury to view
the demeanor of the witness. Finally, Defendant offers no argument as to how it was
prejudiced by the admission of the depositions, and given that the testimony appears to be
largely undisputed, *fn7 we fail to see how a
substantial right of Defendant has been affected. Thus, we hold that the district court's
error in admitting the depositions of Medlock and Murlowski was harmless.
||Defendant next claims error in the instructions to the jury. In reviewing jury
instructions, we must "consider all that the jury heard and . . . decide not whether
the charge was faultless in every particular but whether the jury was misled in any way
and whether it had understanding of the issues and its duty to determine these
issues." Durflinger v. Artiles, 727 F.2d 888, 895 (10th Cir. 1989). See also Ramsey
v. Culpepper, 738 F.2d 1092, 1098 (10th Cir. 1984). "An error in the jury
instructions will mandate reversal only if the error is determined to have been
prejudicial, based on a review of the record as a whole." Durflinger, 727 F.2d at 895
(internal quotations omitted).
||Defendant first contends that the district court erred in failing to instruct the jury
that attorneys fees and interest should not be included in the award of damages. Given
that no evidence was presented concerning attorneys fees and interest, we fail to see the
necessity of such an instruction and find no abuse of discretion in failing to give it.
||Defendant next contends that the district court erred in failing to give Defendant's
proffered instruction concerning the contract measure of damages under the dwelling
coverage provision of the policy. On the issue of damages for the breach of contract
claim, the district court instructed the jury as follows:
||If you find that the defendant is liable to plaintiffs on their breach of contract
cause of action you must then fix the amount of money which will reasonably and fairly
compensate plaintiffs for any of the following elements of damage proved by the evidence
to have resulted from the defendant's breach of contract:
||1. Fire and casualty loss to plaintiff's residence;
||2. Additional living expenses.
||Although Defendant has not directed this court to where in the record we can find its
specific proffered instruction on the issue, defense counsel characterized the instruction
to the district court as limiting Defendant's liability under the dwelling coverage
"as being the smallest of the . . . policy limit . . . replacement . . . the amount
actually and necessarily expended to repair the house. " IX R. trans. at 1428-29.
Although the district court's instruction may not have been a model of completeness, in
light of the alternative presented by Defendant, we cannot say that the district court
abused its discretion.
||Finally, Defendant claims that it was error to instruct the jury on the statutory duty
of insurance companies under the Oklahoma Fair Claims Resolution Act, because the act was
not effective until June 1986 or November 1986 while the loss occurred in June 1985 and
because the act does not apply to private causes of action. Although Defendant has not
directed us to where in the record we can find this allegedly erroneous instruction,
Defendant's objection appears to relate to the district court's instruction regarding
"acts constituting unfair claim settlement practices," see Okla. Stat. Ann. tit.
36, § 1222 (West Supp. 1993); IX R. trans. at 1501-02, and its instruction regarding
prohibited acts by an insurer and its agent. Okla. Stat. Ann. tit. 36, § 1254 (West Supp.
1993); IX R. trans. at 1502-03. Section 1222 was not effective until June 1986, and
Section 1254 was not effective until November 1986. *fn8
||In regards to Defendant's claim that the statutes do not apply to private causes of
action, our review of the record indicates that Defendant did not object to the
instruction on this ground. Rule 51 of the Federal Rules of Civil Procedure provides that
"no party may assign as error the giving . . . an instruction unless that party
objects thereto before the jury retires to consider its verdict, stating distinctly the
matter objected to and the grounds of the objection." Fed. R. Civ. P. 51 (emphasis
added). Because Defendant's objection was limited solely to the ground that the statutes
were not effective until June or November 1986, Defendant has waived the issue of whether
the statutes are applicable to private causes of action.
||As to Defendant's claim that the instructions were erroneous because the statutes were
not effective until June or November 1986, Defendant's actions induced the trial court
into giving the instruction; therefore, Defendant is precluded from raising this issue on
appeal by the "invited error" doctrine. "When a party wishing to raise a
new issue on appeal has by its words or actions invited the alleged error below, it is
particularly inappropriate to consider that theory of relief on appeal." Hokansen v.
United States, 868 F.2d 372, 378 (10th Cir. 1989) (citation omitted). See also Gundy v.
United States, 728 F.2d 484, 488 (10th Cir. 1984) ("An appellant may not complain on
appeal of errors which he himself induced or invited.") After Defendant objected to
these instructions on the ground that the statutes were not effective until after the date
of Plaintiffs' loss, Plaintiffs offered to amend the instruction to specifically inform
the jury that Defendant's statutory duties applied only to its acts taken after the
effective date of the statute. Defendant declined Plaintiffs' amendment claiming that it
"would then place the burden on an insurance adjuster to anticipate what the law
might be a year later." IX R. trans. at 1433. According to defense counsel, the
instruction as offered to be amended by Plaintiffs would "have a prejudicial
effect;" id., however, defense counsel failed to specify, either in the district
court or on appeal, how the instruction as amended would have been prejudicial. The
district court indicated that it was inclined to amend the instruction to make clear that
Defendant's statutory duty only applied to acts taken after the effective date of the
statute, but declined to amend the instruction based on Defendant's objection to the
amendment. While we agree that any statutory duty of Defendant would only arise after the
effective date of the statute, it is undisputed that Defendant continued to handle
Plaintiffs' claim after the effective dates of the statutes. Given that the statutes were
in effect at the time of at least some of Defendant's acts which gave rise to Plaintiffs'
bad faith claim, we do not see how Plaintiffs' amendment would have prejudiced Defendant,
and, as noted earlier, Defendant neglects to inform us as to the nature of the prejudice.
Indeed, it appears that Plaintiffs' amendment would have cured the very objection raised
by Defendant on appeal. Under these circumstances, Defendant's objection to Plaintiffs'
amendment invited the very error of which Defendant now complains; therefore, this issue
cannot be raised on appeal.
||Defendant argues that the $4,000,000 punitive damage award violates the Eighth
Amendment's proscription against excessive fines. The "Excessive Fines Clause does
not apply to awards of punitive damages in cases between private parties."
Browning-Ferris Indus. v. Kelco Disposal, Inc., 492 U.S. 257, 260 (1989). Thus,
Defendant's argument is without merit. *fn9
||Defendant argues that the district court improperly calculated the attorneys fees
award. Under Oklahoma law, attorneys fees are awarded to the prevailing party in an action
between an insurer and an insured. Okla. Stat. Ann. tit. 36, § 3629(B) (West 1990). The
district court calculated the attorneys fees based on the time spent prosecuting both the
breach of contract claim and the bad faith claim. Defendant concedes that attorneys fees
are recoverable on the breach of contract claim but argues that such fees are not
recoverable on the bad faith claim. Defendant argues that the district court should have
apportioned the time of Plaintiffs' attorneys between the two claims. We have squarely
rejected this argument. See Thompson v. Shelter Mutual Ins., 875 F.2d 1460, 1464 (10th
Cir. 1989). See also Oliver's Sports Center v. National Standard Ins. Co., 615 P.2d 291,
295 (Okla. 1980) (recognizing recovery of attorneys fees under § 3629(B) for time spent
prosecuting bad faith claim).
||In their cross-appeal, Plaintiffs raise three arguments. First, Plaintiffs contend
that the district court erred in limiting the prejudgment interest solely to the
compensatory damages. Second, Plaintiffs contend that the district court erred in
determining "the date the loss was payable" for purposes of calculating the
award of prejudgment interest. Finally, Plaintiffs contend that the district court erred
in calculating the award of attorneys fees. We find no merit in any of Plaintiffs'
||Plaintiffs first argue that punitive damages should be included in the calculation of
the prejudgment interest award. Oklahoma law provides for the award of prejudgment
interest "on the verdict at the rate of fifteen percent (15%) per year from the date
the loss was payable pursuant to the provisions of the contract to the date of the
verdict." Okla. Stat. Ann. tit. 36, § 3629 (West 1990). Plaintiffs rely on Oliver's
Sports Center v. National Standard Ins. Co., 615 P.2d 291 (Okla. 1980), wherein the
Oklahoma Supreme Court recognized that an attorney's time in prosecuting a bad faith claim
could be included in the attorneys fees calculation under § 3629. Id. at 295.
||In Casto v. Arkansas-Louisiana Gas Co., 562 F.2d 622 (10th Cir. 1977), we held that
prejudgment interest was not recoverable on a punitive damage award under Okla. Stat. Ann.
tit. 12, § 727(2), a similar Oklahoma statute governing prejudgment interest on damages
by reason of personal injury. Id. at 625-26. We reasoned that express terms of the statute
limited prejudgment interest to a "verdict for damages by reason of personal
injuries." Id. at 625. Moreover, we noted that punitive damages are in the nature of
punishment, rather than compensation. Id. See also Okla. Stat. Ann. tit. 23, § 9.
||While the language of § 3629, unlike the statute at issue in Casto, does not
expressly preclude prejudgment interest on punitive damages, we do not believe that the
Oklahoma Supreme Court would interpret § 3629 to provide for prejudgment interest on a
punitive damage award. As we noted in Casto, punitive damages are designed to punish the
defendant rather than compensate the plaintiff. 562 F.2d at 625. See also Okla. Stat. Ann.
tit. 23, § 9 (West 1987). Awarding prejudgment interest on compensatory damages fulfills
the underlying purpose of making Plaintiffs whole. By contrast, allowing prejudgment
interest on punitive damages would only serve to further punish Defendant when the jury
has already determined the amount necessary to sufficiently punish Defendant. Finally, the
prejudgment interest statute calculates the interest from "the date the loss was
payable." Okla. Stat. Ann. tit. 36 § 3629. The bad faith conduct which gave rise to
the punitive damage award in this case occurred over a substantial period of time. Not
only does a punitive damage award not involve payment for a "loss," Defendant
had no obligation to pay an award until the jury's verdict. Thus, we do not believe the
statute supports Plaintiffs' construction.
||Plaintiffs also argue that the district court's determination of the date that the
prejudgment interest should begin to accrue was erroneous. Under Oklahoma law, an insurer
has a duty to submit a written offer of settlement or rejection of a claim within ninety
days after receipt of a proof of loss. Okla. Stat. Ann. tit. 36, § 3629 (West 1990). The
district court determined that the loss was payable on December 29, 1985, ninety days
after Plaintiffs submitted their proof of loss to Defendant. Nonetheless, Plaintiffs argue
that Defendant waived the proof of loss, and therefore they should have been awarded
prejudgment interest from the date of the loss. Whether or not Defendant waived the proof
of loss is a factual determination to which we give the district court's finding
deference. Moreover, Plaintiffs' argument unreasonably assumes that their loss was payable
on the date of the fire. Thus, we find no error in the district court's determination of
the date the loss was payable.
||Finally, Plaintiffs argue that the district court erred in determining the amount of
attorneys fees. As earlier noted, Oklahoma law allows the prevailing party in an action
between an insurer and an insured to recover costs and attorneys fees. Okla. Stat. Ann.
tit. 36, § 3629 (West 1990). The district court determined the amount of attorneys fees
by multiplying the hours spent by Plaintiffs' attorneys by a reasonable hourly rate and
then doubling this amount to account, presumably for the contingency, which is appropriate
under Oklahoma law. See Oliver's Sports Center v. National Standard Ins. Co., 615 P.2d
291, 294 (Okla. 1980). Notwithstanding Plaintiffs' contention that the fee should have
been 40% of the total recovery in accordance with the contract between Plaintiffs and
their attorney, we cannot say the district court abused its discretion in calculating the
fees as it did.
||Entered for the Court
||Bobby R. Baldock, Circuit Judge
||** The Honorable Earl E. O'Connor, Chief Judge, United States District Court for the
District of Kansas, sitting by designation.
||*fn1 Defendant contends that Timmons supports
its position because prior to the bad faith action, the insured's liability to a third
party had already been discharged by the insurer and thus the contract claim had already
been resolved. 653 P.2d at 911.
||*fn2 We note that, although Defendant's
investigation indicated that the fire was intentionally set, Defendant never sought to
deny coverage on the grounds that Plaintiffs were responsible for the fire, nor did
Defendant assert such a defense at trial. Indeed, the district court granted Plaintiffs'
motion in limine excluding all reference to any responsibility on the part of Plaintiffs
for the fire.
||*fn3 Although Defendant presented testimony
that the training manual did not reflect current company policy, whether Defendant
complied with its own internal policy was a disputed issue for the jury's resolution.
||*fn4 Defendant claims that the evidence was
prejudicial because Farmers Insurance Group had assets of
$10.1 billion in 1986 while Truck Insurance Exchange/Truck Underwriters Association had
assets of between $700-800 million and a net worth of $356 million, thereby making the
jury more inclined to award a greater amount of punitive damages. Nonetheless, we do not
reach the question of prejudice in light of our holding, based on the record before us,
that Farmers Insurance Group is the relevant entity.
||*fn5 Although the district court stated that
the deposition was an "admission against interest," it appears that what it
meant was that the deposition was an admission by an agent of a party opponent. This
distinction is important because an admission by the agent of a party opponent is
considered non-hearsay and does not require unavailability of the declarant, Fed. R. Evid.
801(d)(2), while a statement against interest is considered an exception to the hearsay
rule and does require the unavailability of the declarant. Id. 804(b)(3). While we
recognize Defendant's argument that Murlowski was not its agent, and, therefore, his
deposition was not admissible under Fed. R. Evid. 801(d)(2)(D), we need not resolve this
issue because neither deposition was admissible under Fed. R. Civ. P. 32.
||*fn6 While the rule does allow the deposition
to be used "for any other purpose permitted by the Federal Rules of Evidence,"
this provision was added by the 1980 amendment to allow the use of depositions to bring in
prior inconsistent statements admissible under Fed. R. Evid. 801(d)(1). 4A James W. Moore,
Moore's Federal Practice, P 32.03, at 32-17 (2d ed. 1992). The fact that the deposition
may be admissible under Fed. R. Evid. 801(d)(4)(D) as an admission by an agent of a party
opponent, does not make it admissible "for any other purpose" under Fed. R. Civ.
P. 32(a)(1). See 4A Moore, (supra) , P 32.04, at 32-25. See also Fed. R. Civ. P. 32
(Advisory Committee Note to 1980 Amendment) (noting that language of subdivision (a)(1) is
"too narrow" so as to be consistent with Fed. R. Evid. 801(d)(2)).
||*fn7 Medlock testified about Defendant's
procedures in handling claims, the chain of command within Defendant's company, the
authority to settle claims within the various levels of Defendant's company, Defendant's
relationship with Wilburn, Medlock's specific request to Wilburn in June 1986 to settle
Plaintiffs' claim for the policy limits, and the cancellation of Plaintiffs' other
policies. Defendant has not disputed any of this testimony.
||Murlowski testified about the nature of his insurance repair business and his
relationship with insurance companies in general and Defendant in particular. Murlowski
also testified about his work on Defendant's behalf in estimating and appraising
Plaintiffs' loss. Again, Defendant has not disputed any of this testimony.
||*fn8 The district court also instructed the
jury on Oklahoma's statutory limitation on the grounds for which an insurer can cancel
coverage. See Okla. Stat. Ann. tit. 36, § 3639(C) (West 1990). See also IX R. trans. at
1500-01. However, Defendant's argument, which is limited to the statutes that were
effective in June or November 1986, does not appear to challenge this instruction, because
the statute on which it was based was effective in July 1985. See Okla. Stat. Ann. tit.
36, § 3639 (Historical and Statutory Notes).
||*fn9 While the Supreme Court has recognized
that the due process clause may provide some limits on awarding punitive damages, see
Pacific Mutual Life Ins. Co. v. Haslip, 113 L. Ed. 2d 1, 111 S. Ct. 1032, 1043-46 (1991),
Defendant's argument is limited to an Eighth Amendment challenge.