Combs v. Shelter Mut. Ins. Co., 07-7042.

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Citation551 F.3d 991
Docket NumberNo. 07-7043.,No. 07-7042.,07-7042.,07-7043.
PartiesRandy COMBS, Plaintiff-Appellant/Cross-Appellee, v. SHELTER MUTUAL INSURANCE COMPANY; Shelter General Insurance Company, Defendants-Appellees/Cross-Appellants.
Decision Date22 December 2008

Jim T. Priest, Whitten, Nelson, McGuire, Terry & Roselius, Oklahoma City, OK, for Plaintiff-Appellant/Cross Appellee.

Clyde A. Muchmore (Timila S. Rother, with him on the briefs), Crowe & Dunlevy, Oklahoma City, OK, for Defendants-Appellees/Cross Appellants.

Before KELLY, BALDOCK, and O'BRIEN, Circuit Judges.

BALDOCK, Circuit Judge.

Defendant Insurance Companies employ Plaintiff Randy Combs as an insurance sales agent. Plaintiff sued Defendants pursuant to Oklahoma law, alleging various contract and tort claims related to his agency contract. The district court granted summary judgment for Plaintiff on his claims for breach of contract and breach of the implied covenant of good faith and fair dealing. See Fed.R.Civ.P. 56. Subsequently, the district court granted judgment as a matter of law for Defendants as to the remaining claims of fraud/constructive fraud and breach of fiduciary duty. See Fed.R.Civ.P. 50.

Plaintiff appeals alleging the district court committed numerous errors. Defendants cross-appeal alleging the district court erred in granting summary judgment for Plaintiff on the breach of contract and breach of the implied covenant of good faith and fair dealing claims. The parties agree Oklahoma law applies to this diversity case. We have jurisdiction under 28 U.S.C. § 1291. Although our rationale differs from that of the district court, we affirm.

I.

In April 1993, Plaintiff entered an agency agreement (Agreement) with Defendants. Pursuant to this business arrangement, Plaintiff receives a commission for selling policies on behalf of Defendants. Plaintiff is entitled to a bonus commission each year, calculated by the overall "Loss Ratio" on policies he sells. Specifically, the Agreement's bonus provision states "[Plaintiff] may earn bonus commission each calendar year [he] qualif[ies]. [Defendants] will pay [Plaintiff] a percentage of the Total Premium [Defendants] receive on [Plaintiff's] Agent Policies and limited by [Plaintiff's] Loss Ratio for a three year period." The agreement further defines "Loss Ratio" as "the premium [Defendants] earned on [Plaintiff's] Agent Policies divided into the Losses Charged to [Plaintiff's] Agent Policies." "Losses Charged" is defined as "the amount [Defendants] have paid on claims and the amount [Defendants] increase or decrease . . . reserves." (emphasis added).

In 2005, Defendants settled a lawsuit with an insured for $450,000. The suit derived from Defendants' alleged bad-faith handling of a claim made on an insurance policy Plaintiff sold. Defendants subsequently included the settlement payment as a portion of the "Losses Charged" to Plaintiff's "Agent Policies." Because Defendants attributed this payment as a "claim" paid on one of Plaintiff's policies, Plaintiff did not qualify for a bonus commission in 2005. Plaintiff filed suit alleging the settlement payment was not a "claim" under the Agreement and should not have been included in his Loss Ratio.

Prior to trial, Plaintiff and Defendants filed cross-motions for summary judgment. In granting Plaintiff's motion in part and denying Defendants' motion, the district court held Defendants were in breach of contract because the application of the settlement payment to Plaintiff's Loss Ratio violated Oklahoma law. The district court relied on Oklahoma case law precluding insured parties from including third-party agents in suits against insurance companies for bad-faith handling of policy claims. Thus, the district court concluded that attributing such bad-faith settlement payments to third-party agents through contract violated Oklahoma public policy. The district court further charged Defendants with constructive knowledge of this Oklahoma law and, therefore, ruled Defendants violated the implied covenant of good faith and fair dealing. Despite Plaintiff's request for punitive damages, the district court limited Plaintiff's recovery on the implied covenant of good faith and fair dealing claim to contract damages.

During trial on Plaintiff's fraud/constructive fraud and breach of fiduciary duty claims, the district court excluded evidence of Defendants' business practices outside Oklahoma. The district court also granted Defendants' motion to exclude Plaintiff's expert witness. At the close of each party's case-in-chief, Defendants moved for judgment as a matter of law. The district court orally granted Defendants' motion, holding (1) Plaintiff did not establish the necessary elements for fraud/constructive fraud by clear and convincing evidence, and (2) Defendants did not owe Plaintiff a fiduciary duty. Thus, the district court refused to submit the fraud/constructive fraud and breach of fiduciary claims to the jury.

Under the breach of contract and breach of the implied covenant of good faith and fair dealing claims, the district court awarded Plaintiff $27,988.00 in contract damages. This amount was based upon Plaintiff's projected bonus commission without the application of Defendants' settlement payment as a "claim" paid on one of Plaintiff's policies. The district court also awarded Plaintiff $14,126.25 in attorney fees. Because attorney fees are not permitted for tort actions under Oklahoma law, the district court apportioned Plaintiff's attorney fees between his tort and contract claims, and limited the award to work performed before the district court granted summary judgment on Plaintiff's breach of contract claim. Both parties appeal. For clarity's sake, we first address Defendants' cross-appeal.

II.

On cross-appeal, Defendants argue the district court erred in granting summary judgment for Plaintiff on his claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Defendants assert the Agreement does not violate Oklahoma law and contend the Agreement unambiguously includes bad-faith settlement payments as "claims" charged to an agent's policy. Thus, Defendants request that we reverse the district court and enter summary judgment for Defendants on the claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

A.

Relying on Timmons v. Royal Globe Ins. Co., 653 P.2d 907 (Okla.1982) and its progeny, the district court ruled Defendants' practice of attributing badfaith settlement payments to agents' loss ratios violated Oklahoma law. In Timmons, the Oklahoma Supreme Court held that a third-party agent was not a party to the contract between an insured and an insurance company. Id. at 912. As such, the insured could not hold a third-party agent liable for an insurance company's breach of its duty of good faith and fair dealing. Id. Because Timmons held this duty owed to the insured was non-delagable, id. at 914, the district court reasoned Defendants could not achieve a similar delegation of this duty by applying a bad-faith settlement payment to a third-party agent's bonus commission. The district court held Defendants' interpretation of the Agreement was contrary to Oklahoma public policy and a breach of contract. Our review of the district court's determination is de novo. See Scrivner v. Sonat Exploration Co., 242 F.3d 1288, 1291 (10th Cir.2001).

Defendants argue Timmons only precluded a cause of action by an insured against a third-party agent for breach of the implied good faith duty owed by the insurance company to the insured under an insurance contract. Defendants believe Timmons does not speak to how insurance companies and their agents contract amongst themselves. Defendants' argument relies on general principles of freedom of contract. Under Oklahoma law, "[a]bsent illegality, the parties are free to bargain as they see fit, and the court may neither make a new contract, or rewrite the existing contract." Oxley v. Gen. Atlantic Res., Inc., 936 P.2d 943, 945 (Okla. 1997). Accordingly, courts' "power to void a contract as being in contravention of public policy is delicate and undefined" and may only be exercised "in cases free from doubt." In re Kaufman, 37 P.3d 845, 854 (Okla.2001); see also Shepard v. Farmers Ins. Co. Inc., 678 P.2d 250, 251 (Okla.1983) ("Courts will exercise their power to nullify contracts made in contravention of public policy only rarely, with great caution and in cases that are free from doubt.").

Because we hold the Agreement unambiguously excludes tort payments from the calculation of Plaintiff's Loss Ratio, we need not speculate whether the Oklahoma Supreme Court would find the Agreement at issue violative of Oklahoma public policy. See Medina v. City and County of Denver, 960 F.2d 1493, 1495 n. 1 (10th Cir.1992) ("We are free to affirm a district court decision on any grounds for which there is a record sufficient to permit conclusions of law, even grounds not relied upon by the district court.") (citation omitted). In addition, because Defendants are in breach of contract, we do not decide whether they also breached the implied covenant of good faith and fair dealing owed to Plaintiff.

B.

When interpreting a contract, Oklahoma law requires courts to "consider the entire agreement `so as to give effect to every part, if reasonably practicable.'" Scrivner, 242 F.3d at 1291 (quoting 15 Okla. Stat. § 157). Determination of "whether a contract is ambiguous and interpretation of an unambiguous contract are questions of law" for the court. Otis Elevator Co. v. Midland Red Oak Realty, Inc., 483 F.3d 1095, 1101 (10th Cir.2007). An ambiguous contract, however, "is a mixed question of law and fact and should be decided by the jury." Id. In determining whether a contract is ambiguous, courts must "construe the words as they are `understood in their ordinary and popular sense, rather than according to their strict legal...

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