Magnum Foods, Inc. v. Continental Cas. Co.

• Decision Date: 16 September 1994
• Docket Number: Nos. 92-6148,92-6344 and 92-6355,s. 92-6148
• Citation: 36 F.3d 1491
• Parties: 9 IER Cases 1601 MAGNUM FOODS, INC. d/b/a Little Caesar's Pizza of Oklahoma, Plaintiff-Appellant/Appellee/Cross-Appellant, v. CONTINENTAL CASUALTY COMPANY, an Illinois corporation, and American Casualty Company of Reading, Pennsylvania, a Pennsylvania corporation, both d/b/a The CNA Insurance Companies, Defendants-Appellees/Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1491

36 F.3d 1491

9 IER Cases 1601

MAGNUM FOODS, INC. d/b/a Little Caesar's Pizza of Oklahoma Plaintiff-Appellant/Appellee/Cross-Appellant, v. CONTINENTAL CASUALTY COMPANY, an Illinois corporation, and American Casualty Company of Reading, Pennsylvania, a Pennsylvania corporation, both d/b/a The CNA Insurance Companies, Defendants-Appellees/Appellants/Cross-Appellees.

Nos. 92-6148, 92-6344 and 92-6355.

United States Court of Appeals Tenth Circuit.

Sept. 16, 1994.

Michael W. Hinkle of Mills, Whitten, Mills, Mills & Hinkle, Oklahoma City, OK (Reggie N. Whitten and Glynis C. Edgar of Mills, Whitten, Mills, Mills & Hinkle, Oklahoma City, OK, with him on the brief), for plaintiff-appellant/appellee/cross-appellant.

Thomas B. Kelley of Cooper & Kelley, Denver, CO (John R. Mann of Cooper & Kelley, Denver, CO, and Douglas C. McBee of Andrews Davis Legg Bixler Milsten & Price, Oklahoma City, OK, with him on the brief), for defendants-appellees/appellants/cross-appellees.

Before BRORBY, HOLLOWAY, and KELLY, Circuit Judges.

HOLLOWAY, Circuit Judge.

Plaintiff Magnum Foods, Inc. (Magnum) filed this federal suit seeking a declaratory judgment against defendants Continental Casualty Company and American Casualty Company of Reading, Pennsylvania (collectively CNA), determining that a punitive damage award rendered against Magnum in a state court action was covered under its policies with CNA. Magnum also sought damages on a claim of bad faith by CNA in handling and in settling the state court suit that led to the punitive damage award, inter alia. The court below entered a partial summary judgment for CNA in the declaratory judgment suit, holding that CNA is not liable for the punitive damage award. This order was certified for appeal under Fed.R.Civ.P. 54(b), and Magnum appeals the ruling (No. 92-6148).

The bad faith claim of Magnum for legal relief in the federal suit went to the jury, which awarded Magnum $750,000 in compensatory damages. The jury also awarded Magnum $750,000 in punitive damages on its bad faith claim against CNA. The district court denied CNA's motion for judgment notwithstanding the verdict and awarded attorney fees and expenses to Magnum. CNA appeals, challenging the denial of its motions for a directed verdict and judgment notwithstanding the verdict, the sufficiency of the evidence of damages, and the award of attorney fees (No. 92-6344). Finally, Magnum appeals the district court's refusal to award it prejudgment interest (No. 92-6355).

Our jurisdiction arises under 28 U.S.C. Sec. 1291. We affirm in part, reverse in part, vacate in part, and remand.

I The Factual Background

This controversy had its origin in an incident that occurred on September 3, 1989. On that night James Martina, who was employed by Magnum Foods as an associate manager of one of its Little Caesar's Pizza restaurants, raped and sodomized a female minor (hereinafter "victim"), who was also a Magnum employee, while she was on duty alone with him. Martina was subsequently convicted by a jury and sentenced to two concurrent ninety-nine year terms in prison.

The victim, who was sixteen years old, along with her parents (collectively "plaintiffs"), filed suit in state court in Oklahoma against Martina for assault and against Magnum for negligent hiring, supervision, and retention of Martina. Evidence at this state trial showed that Martina had a prior felony conviction in New York for attempted sexual assault on a child and a prior Oklahoma conviction for embezzlement in connection with the theft of tires from an employer. The evidence also showed that Martina had lied about his criminal record on his application for employment with Magnum. In addition, the plaintiffs introduced evidence that prior to the rape, Martina had repeatedly sexually harassed other employees under his supervision by propositioning them for sex and making lewd and graphic remarks to and about them to other employees. His conduct was so offensive that some young women refused to close the store at night because that would require them to work alone with him.

Martina's misconduct had been reported to store managers Linda Rogers and Bob Bealmer. Rogers complained about Martina to area supervisor Terry Duckworth, who spoke to area director Mark Conover about the problem. Rogers verbally reprimanded Martina on three occasions about his conduct toward female employees, and Bealmer issued a written warning to Martina, which was sent to the home office to be included in Martina's personnel file. Although Martina' conduct was in clear violation of Magnum's written policy against sexual harassment, he was neither fired nor suspended for his actions prior to the rape.

The jury in the state case returned a general verdict finding Martina and Magnum liable for compensatory damages in the amount of $750,000, but finding the victim responsible for ten percent of her damages, thus reducing the compensatory award to $675,000. The jury also assessed punitive damages against Magnum for $750,000 and against Martina for $5 million.

At the time of the rape, Magnum was insured by the CNA companies for $6 million in liability coverage. The policies did not exclude coverage for punitive damages. However, when the state lawsuit was filed, CNA sent a reservation of rights letter to Magnum, advising that CNA would defend the lawsuit but that there was a potential for uninsured punitive damages. The letter said that Magnum might wish to retain separate counsel, which it did. During pretrial negotiations, Magnum requested that CNA settle the case. The plaintiffs offered to settle their claims against Magnum for $495,000, but CNA refused to offer more than $350,000, despite Magnum's urging that it do so in order to avoid exposing Magnum to liability by going to trial.

Following the judgment against it, Magnum filed this action against CNA seeking a declaratory judgment that the CNA policies covered the punitive damages awarded in the state case and seeking damages for CNA's alleged breach of its duty to act in good faith under the insurance policies.

The district court entered a partial summary judgment in the instant federal declaratory judgment action for CNA. The court held that Oklahoma public policy prohibits insurance coverage for punitive damages assessed directly against an employer for its own "wanton, willful, malicious, and/or grossly negligent" conduct. Therefore, the judge concluded that no insurance coverage was available to Magnum for the punitive damages award, since the state jury had found Magnum directly liable for its own acts in connection with the injuries to the victim:

The policy language, while being sufficiently broad enough to include coverage for punitive damages, does not cover the punitive damage award against Magnum as both the verdict forms, as well as the jury instructions, clearly reflect Magnum was found liable and Magnum's liability was not vicarious.

Order of March 26, 1992, at 7.

The court denied CNA's motion for summary judgment on Magnum's bad faith claim. Trial to a jury was held on that claim in federal court on May 21-29, 1992, and, at the close of Magnum's case, CNA moved for a directed verdict. ¹ The district judge denied the motion and the jury awarded Magnum $750,000 in compensatory and $750,000 in punitive damages. The judge denied CNA's motion for judgment notwithstanding the verdict on September 30, 1992. In that same order, the court awarded Magnum its attorney's fees incurred in litigating the bad faith claim as well as fees incurred in the state litigation. The court denied Magnum's request for prejudgment interest.

Magnum appeals the federal declaratory judgment in favor of CNA, denying coverage for the state court punitive award. CNA appeals from the federal judgment against it on the bad faith claim and from the order which awarded Magnum attorney fees. Magnum cross-appeals from that same order insofar as it denied prejudgment interest.

II Insurance Coverage of Punitive Damages

In this diversity case we apply Oklahoma law to evaluate whether the punitive damages assessed against Magnum are covered by the insurance policies. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Brady v. Hopper, 751 F.2d 329, 332 (10th Cir.1984). We review the grant of partial summary judgment de novo and apply the same legal standard used by the district court in evaluating the motion under Fed.R.Civ.P. 56(c). Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990). Summary judgment is appropriate if "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). We view the evidence and draw any inferences in the light most favorable to the party opposing summary judgment. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Hall v. Bellmon, 935 F.2d 1106, 1111 (10th Cir.1991). If the moving party satisfies its initial burden of informing the district court of the basis for its motion, identifying the portions of the pleadings, depositions and the like which it believes demonstrate the absence of a genuine issue of material fact, Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986), then the nonmoving party must identify sufficient evidence that would require submission of the case to a jury. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-52, 106 S.Ct. 2505, 2510-12, 91 L.Ed.2d 202 (1986); Tavery v. United States, 32 F.3d 1423, 1430 n. 7 (10th Cir.1994). The district court's legal conclusions, even as to the law of the state of the district judge, are reviewed de novo. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991).

Oklahoma courts adhere to the view that public policy prohibits liability insurance coverage of punitive damages except where the...