Dayton Hudson Corp. v. American Mut. Liability Ins. Co.

• Decision Date: 23 December 1980
• Docket Number: No. 54683,54683
• Citation: 621 P.2d 1155,1980 OK 193,16 A.L.R.4th 1
• Parties: , 1980 OK 193 DAYTON HUDSON CORPORATION, a corporation, Plaintiff, v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY, a corporation, Defendant.
• Court: Oklahoma Supreme Court

Page 1155

621 P.2d 1155

16 A.L.R.4th 1, 1980 OK 193

DAYTON HUDSON CORPORATION, a corporation, Plaintiff, v. AMERICAN MUTUAL LIABILITY INSURANCE COMPANY, a corporation, Defendant.

No. 54683.

Supreme Court of Oklahoma.

Dec. 23, 1980.

Certified questions from the United States District Court for the Western District of Oklahoma.

Action by insured against the insurer to recover under personal injury liability provisions of the policy the amount of punitive damages' judgment paid by insured in a false arrest suit. The United States District Court for the Western District of Oklahoma, Fred Daugherty, Judge, certifies four questions of law upon which there is no controlling Oklahoma precedent. Jurisdiction assumed and

CERTIFIED QUESTIONS ANSWERED.

Lytle, Soule, Curlee, Harrington, Chandler & Van Dyke by William D. Curlee, Oklahoma City, for plaintiff.

Hemry & Hemry by Gene H. Hemry and John B. Heatley, Oklahoma City, for defendant.

OPALA, Justice.

The United States District Court for the Western District of Oklahoma certified the following questions pursuant to the Uniform Certification of Questions of Law Act, 20 O.S.Supp.1979 § 1601 et seq.:

1. (Does) ... the personal injury liability insurance policy between Plaintiff and Defendant include(s) coverage for punitive damages?

2. If said policy includes coverage for punitive damages, would such coverage contravene the public policy of the State of Oklahoma?

3. If the public policy of Oklahoma prohibits insurance coverage for punitive damages, is there an exception to such policy when the wrongdoer is the agent, servant and employee of the insured or the insured's liability is otherwise vicarious?

4. If the above exception is present in Oklahoma law, would it be subject to being defeated upon a determination that the insured had prior knowledge of a propensity of the agent, servant or employee involved to commit the wrong involved?

We hold (a) the insurance policy in suit includes coverage for punitive damages; (b) public policy is generally contravened by coverage of punitive damages; (c) an exception to public policy exists when the insured's liability is imposed vicariously and (d) prior knowledge of an agent's propensity to commit the wrong for which punitive damages were imposed will not bar recovery against the insurer unless the insured may be said to have been guilty of "gross negligence" in not discharging the "vicious" servant.

FACTS

The plaintiff (Insured), Target Stores, Inc. (Target), ¹ procured from the defendant, American Mutual Liability Insurance Co. (Insurer), a personal liability insurance policy. ² While the policy was in force and effect, Target became legally liable, as a result of a state-court judgment, to pay Dorothy Moore (Moore) actual and punitive damages for her false arrest by Target's

                agent.  3  The insurer paid the award of actual damages but refused to pay the punitive damages.  The insured, who paid the award for punitive damages, 4 brought suit in federal court to recover from the insurer the amount of that award
                

I. SCOPE OF INSURANCE COVERAGE

There is no Oklahoma case law on whether the language of an insurance policy providing for payment of "all sums which the insured might become legally obligated to pay" is sufficiently broad to include punitive damages.

The insurer contends the policy does not include punitive damages recovered against the insured because its terms do not expressly provide for payment of that class of damages. Instead, the provision covers "damages because of injury" which the insurer claims is confined to payment for actual damages. Insurer also argues that since both parties stood vis-a-vis each other in an equal bargaining position, the insurance agreement is not to be viewed as an adhesion contract. The insured, if it so desired, could have procured additional coverage for punitive damages and have its premium adjusted accordingly.

The insured, on the contrary, urges that a proper construction of the policy, as a matter of law, provides it with coverage for punitive damages, because such award is one of the sums which the insured became legally obligated to pay as damages arising from false arrest.

A survey of pronouncements from other jurisdictions, which have addressed this specific issue, indicates a split of authority with the majority holding the terms of the policy embrace liability for punitive damage. ⁵ In Harrell v. Travelers Indemnity Co., ⁶ an Oregon decision, the policy obligated the insurer to pay for the insured all sums which the insured shall become legally obligated to pay as damages. It contained neither an express exclusion nor a like inclusion of punitive damages. The state law favored the insured where the contract was ambiguous. ⁷ In Norfolk & Western Railway The majority rule is in accord with the reasoning followed by this court in interpreting insurance policies. These contracts are to be liberally construed in favor of the object to be accomplished. ⁹ Where the contract is susceptible of two meanings, the words of inclusion are liberally construed in favor of the insured and words of exclusion are strictly construed against the insurer. ¹⁰

Co. v. Hartford Accident and Indemnity Co., ⁸ the court similarly reasoned that where the provisions cover "all sums which the insured shall become legally obligated to pay", the policy unambiguously includes all sums. Punitive damages, which became liquidated by judgment, were considered a "sum" included in the policy. In short, absent a specific exclusion of punitive damages, the court in both cited cases resolved the issue in favor of the insured.

The policy provisions in the case at bar make no distinction between actual and punitive damages. Punitive damages are not specifically excluded. Under the plain language of the policy the company promises to pay on behalf of the insured all sums which the insured shall be legally obligated to pay as damages because of injury arising from false arrest. The law is clear in Oklahoma that insurance policies are to be construed most liberally to favor recovery. We hold that if the language of this policy may be deemed in law to be patently ambiguous, doubts about its meaning must be resolved in favor of the insured. Hence the policy provision "for all sums which the insured might become legally obligated to pay" is sufficiently broad to include liability for punitive damages.

II. PUBLIC POLICY CONSIDERATIONS

The determinative factor in resolving whether an insurer is liable for punitive damages imposed against an insured is to be rested on public policy objectives of reparations for the sake of civil punishment. Oklahoma has given legislative sanction to the common-law rule of punitive damages. 23 O.S. 1971 § 9. ¹¹ We have on many occasions emphasized this legislative policy declaration in recognition of the purpose punitive damages is to serve: punishment of the offender and the deterrence of others, for the benefit of society, from the commission of like wrongs. ¹² Although punitive damages may result in a windfall for the plaintiff, the primary and ultimate benefit of such damages accrues to the community as a whole. It comes as an imposition of restraint on the potential transgressor. ¹³ When considering whether punitive damages may be insurable, this legislated policy becomes important because the question is not so much the efficacy of the policy underlying punitive damages but rather whether that policy can be implemented when the penalty for the misdeed is permitted to be levied on one other than the actual transgressor. ¹⁴

On this issue the courts remain divided. The split is brought about by the tenacity with which some courts adhere to the efficacy-of-punishment theme of punitive damages. The leading case advancing "no coverage" of punitive damages is Northwestern National Cas. Co. v. McNulty. ¹⁵ This case arose out of an automobile accident involving a drunken driver. The court noted that, where punitive damages are awarded for punishment and deterrence, policy considerations would seem to require that the damages rest ultimately, as well as nominally, on the party actually responsible for the wrong. If that person were permitted to shift the burden to an insurance company the court reasoned punitive damages would serve no useful purpose since exemplary awards frequently have no relation to the injured party's actual injuries. If liability could be shifted to the insurer, the court added, the burden would ultimately come to rest not on the insurance company but rather on the public at large, since the added recovery would be passed along to premium payers. Society would then be punishing itself rather than the actual author of the wrong.

The leading case holding that insurance of punitive damages is not barred by public policy is Lazenby v. Universal Underwriters Inc., Co. ¹⁶ Lazenby, while acknowledging the policy that underlies imposition of punitive damages, found the denial of insurance protection to an indistinguishable class of potential tortfeasors to be an ineffective guaranty for deterring misconduct. The court reasoned that public policy is synonymous with public good and that a contract should not be declared void unless it is of the character which clearly tends to hinder or harm public welfare or common weal.

Clearly the purpose of exemplary damages is to punish and deter. Allowing an insurance company to bear the financial impact specifically intended for those guilty of "oppression, fraud or malice" ¹⁷ is to contravene the very public policy we are charged to recognize and implement. We adopt the McNulty rule because its reasoning accords best with the current policy of Oklahoma statutory law with respect to imposition of punitive damages. Giving full effect to the purpose punitive damages must serve, we hold that a culpable party is not to be permitted to escape the civil consequences of its wrong.

III.

RECOGNIZED EXCEPTION TO PUBLIC POLICY...