Timberlake Const. Co. v. U.S. Fidelity and Guar. Co., s. 94-6080

• Citation: 71 F.3d 335
• Decision Date: 22 November 1995
• Docket Number: Nos. 94-6080,94-6149,s. 94-6080
• Parties: TIMBERLAKE CONSTRUCTION CO., Plaintiff-Appellee/Cross-Appellant, v. U.S. FIDELITY AND GUARANTY CO., Defendant-Appellant/Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 335

71 F.3d 335

64 USLW 2399

TIMBERLAKE CONSTRUCTION CO., Plaintiff-Appellee/Cross-Appellant, v. U.S. FIDELITY AND GUARANTY CO., Defendant-Appellant/Cross-Appellee.

Nos. 94-6080, 94-6149.

United States Court of Appeals, Tenth Circuit.

Nov. 22, 1995.

Sarah J. Rhodes (Mort G. Welch and Murray E. Abowitz, with her on the briefs), Abowitz, Welch & Rhodes, Oklahoma City, Oklahoma, for Plaintiff-Appellee/Cross-Appellant.

Larry D. Ottaway (Darrell W. Downs, with him on the briefs), Foliart, Huff, Ottaway & Caldwell, Oklahoma City, Oklahoma, for Defendant-Appellant/Cross-Appellee.

Before KELLY and BARRETT, Circuit Judges, and OWEN, ^* Senior District Judge.

OWEN, Senior District Judge.

Defendant-appellant U.S. Fidelity and Guaranty Company ("Fidelity") appeals from an adverse jury verdict in an action commenced by its insured, plaintiff-appellee Timberlake Construction Company.

Timberlake contracted with Wal-Mart Stores to build a Wal-Mart supercenter in Claremore, Oklahoma. It purchased a $4,600,000 builders' risk insurance policy from Fidelity to cover risks associated with construction of the building. The policy covered the period from July 12, 1991 to August 15, 1992. It provided that coverage would terminate when the project was "accepted by the buyer" or, in a separate clause, that

[T]he building ... under construction (the "project" ...) may not be occupied or put to any use without our written consent and an additional premium, if any, paid. If the "project" ... becomes occupied and you do not tell us, we will not pay for any "loss" that occurs after it has become occupied.

Neither "accepted" nor "occupied or put to any use" was defined in the policy.

July 13, 1992 had been designated by Wal-Mart as its "possession date" based on a letter Timberlake had written Wal-Mart three months earlier in April stating that the building would be substantially complete on July 13 and that "possession date" was never changed. It was acknowledged by Timberlake's president at the time that the project was "substantially complete" by that date (see, infra ). At the beginning of that day, a Monday, only $23,000 (or .0004%) of building costs remained to be completed by Timberlake. Wal-Mart had some forty employees in the building and had already moved in such things as the refrigerated food display cases, walk-in coolers, bakery equipment and security cameras. The telephones were working. The air-conditioners were working, as was the satellite communication disc on the roof. Wal-Mart had laid the carpet and floor tiles and completed the pharmacy. Cash registers, fixtures and other stock were stored in the back, and trucks had arrived outside to be unloaded. At about 7:30 that morning, Timberlake, as had been arranged, turned over to Wal-Mart the keys to the building. Thereafter, Wal-Mart's employees were the only ones with access, or the ability to give access, even to Timberlake. Also that day, Wal-Mart's own corporate policies were imposed on the building, including policies regarding smoking, security, safety and sexual-harassment, among others, all of which were communicated by Wal-Mart to the remaining Timberlake employees. Unfortunately, shortly before noon that very day, a Timberlake subcontractor welding on the roof started a fire which caused some $2 million damage to the building and over $1.2 million damage to Wal-Mart's property.

Timberlake notified Fidelity of the fire later that day and Fidelity immediately sought an available investigator to send to the site. That investigator, Charles Murray, was in Claremore, Oklahoma two days later, Wednesday morning, July 15. By noon of that day, he had met with Timberlake's employees and commenced a tape-recorded interview with Timberlake's President, David Timberlake, who had been at the site on Monday, and was one of the first on the roof after the fire was initially observed. In that taped interview, Timberlake spoke of the prior Monday, July 13, being Wal-Mart's possession date and that Timberlake's contract with Wal-Mart provided "... that Wal-Mart takes over when there's substantial completion." He also said that trailer loads of Wal-Mart stock and equipment had arrived on Monday, some portion of which were unloaded and stored that Monday before the fire. One question and answer in the interview went as follows:

Q. To the best of your knowledge, except for punch lists and the carpet you mentioned and finishing the parking lot, you were substantially complete at the construction site to the point where Wal-Mart had taken the keys, had rechanged the tumblers and was having the merchandise delivered for setup.

A. That is correct and I remember I said to the best of my knowledge the tumblers were changed. I've been busy doing other things since then and that's typically what's supposed to happen and I believe that is the case but I need to verify that with Miles Wilson.

Implicit in this and later confirmed was the fact that some forty Wal-Mart employees were at work on the premises. Fidelity also immediately ascertained that Wal-Mart had its own insurance coverage on the building and contents through Insurance Company of North America (sometimes called "INA" or "Cigna"). Fidelity's entry in its files five days after the fire reads:

07-17-1992 This is a large fire loss to a Wal-Mart store located in Claremore, OK. We have it insured under a builders risk policy. There is a question of coverage as Wal-Mart took the keys and changed the locks out on the building the day of the fire. I understand that the G/A Charlie Murray is in the process of sending a copy of the contract with Wal-Mart to Mickey James our fire attorney and we are going to see who has the coverage.

Fidelity faxed this information and other documents to its Oklahoma City attorney, Mickey James, for a legal opinion regarding whether coverage existed for this fire loss. James advised that there was no coverage available for Timberlake's claim. INA however took the position that Fidelity's policy, not its own, was applicable to the loss and that Wal-Mart was an additional insured under its terms. INA nevertheless wanted to have the building rebuilt as soon as possible, as it had business interruption coverage for Wal-Mart which would cause it to incur liability in the amount of $500,000.00 per week while the store was not operating. Timberlake also wanted to complete the center to fulfill its contract with Wal-Mart.

At that point, Fidelity, having the view that there was no coverage under its policy, considered either denying Timberlake's claim and filing a declaratory judgment action to adjudicate liability under its builder's risk policy, or working out an agreement with INA to get the building built. It did the latter, and four weeks after the fire, entered into a "non-waiver" agreement with INA ¹ to split the damages caused by the fire, pay Timberlake the cost of reconstruction, and resolve the coverage issues between the companies at a later time. Accordingly, three days later, one month after the fire, Fidelity paid a half-a-million dollars to Timberlake on account. ²

The insurance companies further agreed to allow Timberlake to remain on the project and repair the damage notwithstanding the fact that the fire originated because of apparent malfeasance by one of its subcontractors, and Fidelity agreed to pay Timberlake 10 1/4% profit on the project even though Wal-Mart had allowed Timberlake only a 3 1/2% profit on its original construction. With this agreement in place, Timberlake began repairs to the Wal-Mart building and looked to both companies for payment pursuant to the non-waiver agreement. ³ Fidelity's first payment of $500,000, mentioned above, was made before Fidelity received any records from Timberlake as to expenditures or cost estimates. The next payment of $250,000 on August 28, 1992 was made within a week of Timberlake's request. Fidelity made another payment of $311,132 to Timberlake on October 6, 1992 after receiving verification of various expenses on October 1, 1992, and made a final payment of $86,049 on November 23, 1992.

INA on August 17, 1992 made a payment of $500,000 to Timberlake pursuant to the non-waiver agreement. INA then delayed making further payment under the non-waiver agreement because it did not believe Timberlake had supplied adequate documentation of its expenses. Unfortunately, because of this, on October 23, 1992 plaintiff filed suit against both Fidelity and INA for breach of the non-waiver agreement.

INA subsequently made additional payments of $263,640 on December 28, 1992, $366,798 on March 30, 1993, and a final payment during trial to comply with the terms of the non-waiver agreement. INA then settled its dispute with Timberlake.

At the time of the filing of Timberlake's complaint, Fidelity was in full compliance with the terms of the non-waiver agreement, and shortly after the suit was filed it made one small payment in normal course upon immediate receipt of documentation supplied by Timberlake. Timberlake in its initial complaint did not sue Fidelity for bad faith, but rather only for an alleged breach of the non-waiver agreement. ⁴ It was not until several months later, March 15, 1993, that Timberlake filed an amended complaint accusing Fidelity and INA of acting in bad faith in the handling of the Claremore fire loss. Within fifteen days of the filing of the amended complaint, INA made its final payment and Timberlake was thereby paid in full for its reconstruction costs with, as observed, a 10 1/4 percent profit.

The trial in this case took place in November, 1993. Since between Fidelity and INA, Timberlake had been fully paid its reconstruction costs, the only issues submitted to the jury were the subsequently-asserted claims of bad faith and punitive damages.

The jury found against Fidelity on the bad faith claim, awarding Timberlake $2,001,423.00 in compensatory damages and $1,334,282.00 in punitive damages. Upon...