First Bank of Turley v. Fidelity and Deposit Insur. Co. of Maryland

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First Bank of Turley v. Fidelity and Deposit Insur. Co. of Maryland
1996 OK 105
928 P.2d 298
67 OBJ 2941
Case Number: 85735
Decided: 09/24/1996
Supreme Court of Oklahoma

FIRST BANK OF TURLEY, Plaintiff,
v.
FIDELITY AND DEPOSIT INSURANCE COMPANY OF MARYLAND, Defendant.
Certified Questions from a United States Court.

¶0 An insured sued its insurer for wrongful denial of a claim by bad-faith refusal to defend the insured in a lawsuit. The United States District Court for the Northern District of Oklahoma, James O. Ellison, Senior Judge, certified several questions of state law left unsettled by extant Oklahoma precedent.

CERTIFIED QUESTIONS ANSWERED.

Jerry Reed, Tulsa, and Joseph R. Farris, Jody R. Nathan, Feldman, Hall, Franden, Woodard & Farris, Tulsa, for Plaintiff.

Robert L. Magrini, John B. Hayes, Brigid F. Kennedy, Looney, Nichols, Johnson & Hayes, Oklahoma City, for Defendant.

OPALA, Justice.

[928 P.2d 300]

¶1 The United States District Court for the Northern District of Oklahoma [certifying court] certified the following questions

(1) Once an insurance company has declined to defend its insured in a lawsuit, does the insured have any obligation to keep the insurance company advised of developments in the lawsuit, or [to supply] new information which may bear on the insurer's decision?

(2) Under Oklahoma law, does an insurance company have as a defense in a bad-faith case the "comparative bad faith" of the insured? and

(3) If "comparative bad faith" is an available defense, what is the effect of the defense (i.e. are damages barred or reduced), what are the elements of the defense, and is the insured's duty to deal in good faith a continuing one?

¶2 In answer to the first question, we hold that an insured's failure to give proper notice when demanding that the insurer defend the suit or an insured's giving of inadequate notice does not constitute actionable conduct either ex contractu or ex delicto. The omission or deficiency in notice-giving is to be treated as contractual nonperformance or misperformance of a policy condition, which the insurer may invoke as a defense. If the facts surrounding notice and its adequacy are in dispute, the issue is one for the trier. As for the case before us, we defer to the certifying court, as we must, to resolve the question whether the evidentiary materials in this suit may be regarded as tendering an issue of law because the material facts, which are undisputed, will support but a single inference. For a detailed explanation of our analysis of the first question see Part III, infra. We answer the second question in the negative. In response to the third question, we hold that the insured, who fails, in whole or in part, in its duty-triggering obligation that calls for notice to the insurer, which must include critical facts connected with the lawsuit to be defended, is not answerable in tort; the deficiency in the insured's notice may be interposed as a defense against the insurer's liability - i.e., as a complete (in toto) bar to any recovery - or, if the facts so warrant, against the quantum of the insured's recoverable loss (pro tanto defense).

I

THE ANATOMY OF THE FEDERAL-COURT LITIGATION

¶3 On September 28, 1988, Buel and Peggy Neece sued First Bank of Turley [Bank] for invasion of privacy. The Bank reported on October 7, 1988 this suit's filing to its insurer, Fidelity and Deposit Insurance Company of Maryland [F & D]. The Bank's president, Mikel Hoffman [Hoffman], provided the insurer with a "sequence of events" revealing that he had called the I.R.S. to report what he considered as a possible violation of law. Hoffman stated that although he was familiar with the pertinent privacy act provisions, he was uncertain as to what he was free to share with the authorities.

¶4 F & D denied coverage on January 23, 1989 by informing the Bank that it was not bound to provide a defense on the then-extant allegations. The insurer explained by letter that the Bank's submitted documentation demonstrates the insured's "willful and intentional" violation of the Neeces' statutory privacy rights, which conduct brings the suit beyond the coverage provided by the policy.

¶5 When deposed, Hoffman revealed (a) he was familiar with the Right to Financial Privacy Act, and (b) what he had disclosed to the I.R.S. about the Neeces' financial information he believed to fall within a statutory exception. When it denied coverage, F & D was unaware of this deposition excerpt.

¶6 J.R.F., one of the Bank's lawyers, wrote, on February 9, 1989, a letter to J.R., another lawyer for the Bank, stating that in his opinion F & D had wrongfully denied the Bank's claim and had misrepresented the parameters of its coverage, but counseled the client not to recontact F & D as yet.

¶7 The litigation between the Bank and the Neeces went forward. On September 30, 1992, J.R.F. requested F & D in writing to reevaluate its coverage position in the lawsuit, citing the pertinent policy provisions and providing legal reasons for a favorable decision. F & D's Tulsa lawyer then arranged to look at J.R.F.'s file in the Neece case. In course of this examination, F & D's lawyer discovered and copied J.R.F.'s February 9, 1989 letter to J.R.

[928 P.2d 302]

¶8 F & D offered on January 29, 1993 (a) to provide the requested defense under a reservation of rights and (b) to reimburse the Bank for all fees and expenses reasonably incurred in its defense of the suit forward from the date of the Bank's request that the coverage be reexamined.

¶9 The Bank declined F & D's offer since it did not include payment for defense expenses incurred before the September 30, 1992 request for review. By letters dated February 10, 1993 and March 18, 1993, J.R.F. demanded that the insurer provide full reimbursement of all past defense costs or face litigation for bad-faith refusal to act. When the insurer stood on its earlier decision, the federal-court suit here under consideration followed.

¶10 F & D urges that the conduct of the Bank's lawyers calls for the application of the so-called "comparative bad faith" doctrine.

II

THE NATURE OF THIS COURT'S FUNCTION WHEN ANSWERING QUESTIONS FROM A FEDERAL COURT

¶11 While in answering the queries posed by a federal court the parameters of state-law claims or defenses identified by the submitted questions may be tested, it is not this court's province to intrude (by its responses) upon the certifying court's decision-making process.

¶12 Because this action is not before us for decision, we refrain from applying, as we must, the declared state-law responses to the facts now known or to be elicited in the federal-court litigation either by evidence at trial or by acceptable probative substitutes (the so-called "evidentiary materials"), which are in use or will be used in the summary adjudication process.

III

THE DUTY TO DEFEND

¶13 The first question calls for an analysis of the governing principles of contract law. The relationship between the insured and insurer is contractual in nature.

¶14 An insurer ordinarily has no duty to defend an insured absent a request to provide a defense,

¶15 The insurer's liability for breach of its defense duty by refusal to provide a defense is measured by the facts that were known and knowable

¶16 As part of its notice-giving obligation, the insured must provide the insurer with facts material to its ascertainment of the duty to defend. A breach of the insured's obligation to give notice of critical post-denial developments may modify, excuse or defeat the insurer's performance under the contract. If the insured's performance of its contractual duty is deficient, the court must focus on whether (1) the initial notice was adequate to put the insurer on notice of potential liability under the policy, (2) the nondisclosed (or later-revealed) facts were so material that they should have been reported, (3) the notice was sufficient for the insurer's investigation and discovery of all the facts relative to its potential liability; and (4) the insurer's reasonable investigation could have uncovered the excluded information. None of these issues, if contested, can be resolved as a matter of law. Each is to be treated as a disputed fact for the trier.

¶17 If a duty to defend was the insured's due under the insurance contract, an insurer's refusal to defend was in breach of that obligation, which renders the insurer liable for all reasonable expenses incurred by an insured in defense of a third-party action.

¶18 Our analysis calls for the conclusion that in the scenario of this case there is but a single actionable breach, if any, by the insurer for its wrongful refusal to defend, and the correctness of the insurer's decision clearly depends on facts known and knowable at the time it was called upon to act. No further comment is deemed necessary to complete our answer to the first question.

IV

THE NATURE OF THE INSURER'S DEFENSE AGAINST A CLAIM FOR BAD-FAITH REFUSAL TO DEFEND WHEN IT IS BASED ON THE INSURED'S FAILURE TO GIVE NOTICE OF SIGNIFICANT POST-DENIAL INFORMATION

The "Bad-Faith" Doctrine and its California Progeny - the "Comparative Bad-Faith" Defense and Reverse Bad-Faith Tort

¶19 We next consider whether the "comparative bad-faith" doctrine is available to the insurer as a defense against an insured's bad-faith claim for refusal to defend.

¶20 California jurisprudence treats an insurer's bad-faith refusal to settle a claim as a tort.

¶21 The comparative fault doctrine is a product of the Christian-type obligation. California permits the defense of comparative bad faith

¶22 For the reasons discussed more fully in Part III supra, we reject the notion that the insured's responsibility to provide its insurer adequate notice of facts relating to insurance coverage can be translated into an actionable tort or into a contributory-fault defense concept for comparison with the fault of the insurer.

V

INSURED'S FAILURE TO GIVE ADEQUATE NOTICE MAY BE A DEFENSE TO DEFEAT LIABILITY IN TOTO OR PRO TANTO

¶23 The third question, as we understand its meaning, asks whether the insured's failure to keep the insurer informed of critical post-denial developments affects the whole liability or goes solely to the issue of damages.

¶24 A tort-like comparison of the parties' degree of bad faith does not avail. Although the insured who fails to meet its duty-triggering conduct by giving deficient notice is not answerable ex delicto, the insured's inadequate notice avails to the insurer as a defense. If failure timely to provide critical information adversely affected the entire loss that was insured, it would avail as an absolute defense against liability (i.e., as in toto defense). That defense should show that the insured's failure to give adequate notice - not available from other sources - made it entirely impossible for the insurer to discharge its duty. On the other hand, if the defense were to be shown as having affected only an element (or portion) of the claimed loss, the defense could be invoked to defeat (pro tanto)

¶25 These defenses depend on the impact of the insured's inadequate notice on the insurer's opportunity to meet its contractual obligation. We leave to the federal court the task of assessing the evidence to determine whether the insured's deficient performance of its duty-triggering conduct will avail here as a liability-defeating bar or merely as a pro tanto defense.

SUMMARY

¶26 We assume the case will be tried and submitted to the jury on the theory declared by the certifying judge's pretrial order - the insurer's bad-faith failure to honor a claim by its refusal to provide a defense. The case presents the breach of a single duty - that of providing a defense. The duty runs from the insurer to the insured. The discharge of this duty is triggered by the insured's conduct which calls for adequate notice of information critical to the insurer's consideration of the claim. An insured's nonperformance or misperformance of its notice-giving obligation is actionable neither ex contractu nor ex delicto. It may serve as a defense to defeat liability (when interposed as an in [

¶27 In short, in this action to recover for the insurer's bad-faith refusal to pay a part of the loss to be indemnified under the policy's provisions, the defense based on the insured's claimed failure timely to supplement its initial notice by providing critical information does not call upon the trier to compare the parties' fault, one toward the other, but rather to measure the extent of the impact, if any, the insured's alleged misperformance (by withholding vital information) may have had on the main issue in the case - the good or bad faith of the insurer's decision not to defend the action against the insured. The trier's assessment, we repeat, is to be rested upon consideration of facts that were known and knowable to the insurer when its response was due to the insured's initial request to defend the action.

¶28 The task of analyzing the effect of today's answers on the pending suit is deferred to the certifying court.

¶29 CERTIFIED QUESTIONS ANSWERED

¶30 ALMA WILSON, C.J., and LAVENDER, SIMMS, HARGRAVE, SUMMERS and WATT, JJ., concur.

¶31 KAUGER, V.C.J., concurs in result.

¶32 HODGES, J., concurs in part and dissents in part.

Footnotes:

An action for declaratory relief is appropriate to resolve coverage disputes between the insurer and insured. See, for example, two cases in which federal-court questions were answered by supplying controlling Oklahoma law. Safeco Ins. Co. of America v. Sanders, Okl.,

But cf. Tokles & Son Inc. v. Midwestern Indemnity Co., 65 Ohio St.3d 621, 605 N.E.2d 936 (1992) (the court refused to recognize the tort of reverse bad faith because of the insurer's superior financial position and bargaining power). Mealey's Litigation Reporter indicates reverse bad-faith claims have been allowed in recent federal- and state-court actions. 10 No. 7 Mealey's Litig. Rept.: Bad Faith 17 (August 1, 1996) (a federal court in Joseph Garvey v. National Grange Mutual Life Insurance Co. No. 95-19 E.D. Pa., May 2, 1996, allowed an insurer to press a reverse bad-faith counterclaim); 2 No. 5 Mealey's Litig. Rept.: Insurance Fraud 7 (April 12, 1995) (an insurance company was awarded a jury verdict for an insured's reverse bad faith in a Texas district court case, Munife Silva v. Metropolitan Life Ins. Co., No. 92-010830).