Automax Hyundai S., L.L.C. v. Zurich Am. Ins. Co.

• Decision Date: 26 June 2013
• Docket Number: No. 12–6161.,12–6161.
• Citation: 720 F.3d 798
• Parties: AUTOMAX HYUNDAI SOUTH, L.L.C., an Oklahoma limited liability company, Plaintiff–Appellant, v. ZURICH AMERICAN INSURANCE COMPANY, and Universal Underwriters Insurance Company, Defendants–Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

720 F.3d 798

AUTOMAX HYUNDAI SOUTH, L.L.C., an Oklahoma limited liability company, Plaintiff–Appellant,

v.ZURICH AMERICAN INSURANCE COMPANY, and Universal Underwriters Insurance Company, Defendants–Appellees.

No. 12–6161.

United States Court of Appeals, Tenth Circuit.

June 26, 2013.

Randall K. Calvert (Rabindranath Ramana with him on the briefs), Calvert Law Firm, Oklahoma City, OK, for Appellant.

Brittan L. Buchanan, Van Osselaer & Buchanan LLP, Austin, TX, (Laura J. Grabouski, Van Osselaer & Buchanan LLP, Austin, TX, and Daniel K. Zorn, Collins, Zorn & Wagner, P.C., Oklahoma City, OK, with him on the brief), for Appellees.

Before KELLY, MURPHY, and TYMKOVICH, Circuit Judges.

TYMKOVICH, Circuit Judge.

Automax Hyundai South, a car dealership in Oklahoma City, Oklahoma, filed suit against its insurer, Zurich American Insurance Co., for Zurich's refusal to defend Automax in a lawsuit. The underlying lawsuit involved two aggrieved customers who brought claims against Automax relating to a car purchase they had made. The customers won a sizable judgment in Oklahoma state court. The district court ruled that Zurich had no duty to defend or indemnify Automax in the underlying lawsuit, and thus its claims failed.

We agree with Automax and conclude Zurich had a duty to defend Automax. Zurich had notice that at least some of the liability asserted against Automax was potentially covered under its policy, which triggered its duty to defend. Zurich's failure to defend Automax also means that Zurich, on the question of indemnity, bears the burden of allocating between covered and noncovered claims.

Exercising our jurisdiction under 28 U.S.C. § 1291, we REVERSE and REMAND.

I. Background

A. Insurance Policy

Automax purchased an insurance policy from Universal Underwriters Insurance Company, whose parent company is Zurich. The policy is specifically designed for automotive businesses, such as dealerships and repair shops. The policy provided coverage up to $500,000 for “an OCCURRENCE arising out of GARAGE OPERATIONS or AUTO HAZARD.” App. 138. The parties refer to this as the “occurrence provision.” An “occurrence” is defined as “an accident ... which results in [ ] INJURY ... neither intended nor expected from the standpoint of a reasonably prudent person.” Id. at 140. And an “injury” is defined to include “mental anguish, mental injury, fright, shock, or humiliation.” Id. at 139.

The policy also provided coverage up to $25,000 for statutory errors and omissions (“STATUTE AND TITLE E & O”). “Statute and Title E & O” is defined to cover suits related to violations of the “odometer law,” “truth-in-lending or truth-in-leasing law,” “auto damage disclosure law,” “competitive auto parts law,” and “used car ‘Buyers Guide,’ including federal regulation 455.” Id. at 140.

The policy has explicit exclusions for injuries “caused by any dishonest, fraudulentor criminal acts” and for conduct committed with “intent to cause harm.” Id. at 141.

B. Moses Lawsuit

The underlying lawsuit began in August 2007 after Tammy Moses purchased a car from Automax. Because she could not obtain financing on her own, she asked her father, David Moses, to cosign the loan for her. But unknown to both of them, Mr. Moses did not end up a mere cosignatory; he was the sole legal signatory on the loan. He later claimed the staff at Automax did not allow him to review the purchase documents despite his requesting to do so.

The car she selected, a Hyundai Elantra, was advertised as new. Another fact then unknown to David and Tammy Moses was that they were not the Elantra's first owners. The car had been sold a few months earlier to another customer, who, after being unable to secure financing, had returned the car to Automax. Automax had then requested a duplicate certificate of origin from the manufacturer and marketed the Elantra as new—a practice Automax later claimed was permitted under Oklahoma regulations.

Tammy and David learned of this prior ownership around two months after their purchase when Tammy crashed the car on a road trip to Dallas. She had driven off the road, she claimed, after the car had veered dramatically. Tammy later stated that she had noticed the car's steering wheel begin to shake about one month before the accident. After the accident, Tammy had the car towed to a nearby Hyundai dealership, where she learned of the prior sale. She also learned that the car had extensive damage to the underbody, ostensibly predating the accident.

David Moses approached Automax and requested compensation for the damage to the Elantra, claiming that the damage predated the car's sale to him. Later, he sought to rescind the sale entirely, alleging that Automax had not fully disclosed the financing terms and had defrauded him by not disclosing the prior damage. Zurich denied coverage of Moses's claim with Automax. Zurich's adjuster explained its decision in a February 2008 letter: “Our investigation into the facts and circumstances concerning the above subject claim fails to reveal any negligence on the part of our insured.” App. 517. Zurich concluded the damage “occurred after Mr. Moses took possession of the vehicle.” Id.

David and Tammy Moses then filed suit in state court in Oklahoma County. Their first petition alleged causes of action for common law fraud, violation of the Truth–in–Lending Act, and violation of Oklahoma's consumer protection statute. The allegations contained in the petition centered on the fact that Automax had intentionally sold the Elantra as “new” when it was in fact used and damaged. They filed four more petitions amending the allegations. In the fourth amended petition, the Moseses included a cause of action for “negligence or predetory [sic] lending,” claiming that Automax had inflated David Moses's income to ensure approval of the loan. Id. at 312. That particular claim mentioned nothing about Automax's failure to find the alleged preexisting defect in the Elantra. Automax contested the Moseses' claims, maintaining that the Elantra was not damaged or “used” for purposes of Oklahoma law when it sold the car to them.

At the beginning of the lawsuit with the Moseses, Zurich paid for Automax's representation under the “Statute and Title E & O” provision of its policy, which had a maximum coverage of $25,000. Zurich did not cover the behavior under the occurrence provision, which provided coverage up to $500,000. Automax's policy coverage maxed out over ten months before trial, and Zurich stopped paying Automax's counsel. Automax continued with the same counsel at its own expense.

Prior to trial, the state court issued a pretrial order listing the various theories of recovery: (1) fraud/deceit, (2) Oklahoma Consumer Protection Act, (3) negligence, (4) one provision of the Truth in Lending Act, (5) another provision of Truth in Lending Act. Id. at 353. At the end of the trial, the jury ended up receiving instructions on only the following three claims: (1) fraud/deceit, (2) negligence, (3) Truth in Lending Act. The fraud/deceit claim contained instructions on multiple theories of liability, including false representation, nondisclosure, deceit, and constructive fraud. The negligence claims included instructions on both ordinary negligence (violation of duty of ordinary care) and negligence per se (violation of specific statutes). The verdict form, however, did not ask the jury to specify the particular theory under which Automax might be guilty. For example, the form only asked whether Automax was guilty of negligence, and not whether the basis for that finding was ordinary negligence or negligence per se.

The jury ultimately returned a verdict for the Moseses on all three claims. The jury also specifically found that Automax had “acted in reckless disregard of the rights of others” and had “acted intentionally and with malice towards others,” though there was no indication as to which claims these findings applied. Id. at 405. The jury awarded compensatory damages of $300,000 and punitive damages of $100,000. Rather than pursue an appeal, Automax settled the case with the Moseses for $300,000.

After the conclusion of the Moses trial, Automax attempted to have Zurich indemnify it for the cost of the settlement. Zurich refused, contending that the jury's intentional conduct finding placed the settlement outside the policy's coverage. Automax then filed a lawsuit in federal district court, alleging that Zurich breached the terms of their insurance contract for refusing to defend and indemnify Automax in the Moses suit, and, in doing so, breached the covenant of good faith and fair dealing (also known as a bad faith claim).

Zurich filed a motion for summary judgment on Automax's breach of contract and bad faith claims, while Automax filed a cross motion for partial summary judgment on those same claims. The district court denied Automax's motion and granted Zurich's. The court reasoned that Zurich had no duty to defend Automax under its occurrence provision because the only negligence claim in the Moses lawsuit was based on intentional conduct—falsifying income information—and all the other claims were also based on intentional conduct. Moreover, because the jury found that Automax acted intentionally and with malice, the court concluded that Zurich had no duty to indemnify Automax under its occurrence provision. These findings, the court noted, also triggered the policy's exclusion for acts done with the intent to harm. Given its conclusion that Zurich had no duty to defend Automax, the court also ruled that Zurich was entitled to summary judgment on the bad faith claim.

II. Analysis

Automax challenges the district court's summary judgment conclusions that Zurich (1) had no duty to defend Automax in the Moses lawsuit, (2) had no duty to indemnify Automax, and (3) did not act in bad faith. “We review a grant of summary judgment de novo, applying the same standard as the district court.” Oldenkamp v. United Am. Ins. Co....