Evans v. Hartford Life Ins. Co., 80-2284

• Decision Date: 11 April 1983
• Docket Number: No. 80-2284,80-2284
• Parties: Marie Faye EVANS, Plaintiff-Appellee, v. HARTFORD LIFE INSURANCE COMPANY, a Massachusetts corporation, and Dick Tanner, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1177

704 F.2d 1177

Marie Faye EVANS, Plaintiff-Appellee, v. HARTFORD LIFE INSURANCE COMPANY, a Massachusetts corporation, and Dick Tanner, Defendants-Appellants.

No. 80-2284.

United States Court of Appeals Tenth Circuit.

April 11, 1983.

Elsie C. Draper of Gable, Gotwals, Rubin, Fox, Johnson & Baker, Tulsa, Okl., for defendants-appellants.

Paul F. McTighe, Jr., Tulsa, Okl., for plaintiff-appellee.

Before SETH, Chief Judge, McWILLIAMS and SEYMOUR, Circuit Judges.

SEYMOUR, Circuit Judge.

Hartford Life Insurance Company (Hartford) appeals a district court order reforming a life insurance policy to extend coverage to plaintiff Marie Evans' deceased husband, Robert Evans. We reverse.

Robert Evans (Evans) was an employee of Dresser Engineering Company (Dresser), a gas field engineering and construction company. Evans completed a job for Dresser in February 1975. From that time through the end of 1975, Dresser had no available work for Evans because of the intermittent nature of its business. In order to maintain an available pool of construction workers willing to move from state to state when the company contracted to work on a construction project, Dresser retained laid-off workers as employees. In accordance with this practice, Evans was considered to be employed and on the payroll until his death, although he did not receive a paycheck after February 1975. ¹ Dresser's shortage of projects continued through 1976, and on December 2, 1976, Evans died without having returned to work.

In March 1975, Dresser negotiated an employee group life insurance policy with Hartford. The standard policy provided that an employee's coverage would terminate on, inter alia, "the date on which the Insured Person's employment terminates. Termination of employment means cessation of active full-time work ...." Rec., vol. I, at 64. "Active full-time" was defined as "regularly employed by the Participant Employer in the usual course of such employer's business and work ... in no event less than 30 hours per week." Id. at 59.

The standard policy also provided that if an individual's employment terminated (as that term was defined in the policy) because of "temporary lay-off, owing to lack of work," coverage would continue "until the end of the policy month following the policy month in which the lay-off commenced." Id. at 64. In order to cover employees who, like Evans, were temporarily out of work, Dresser negotiated a rider to the policy. The rider, drafted by Hartford, provided that

"(1) Anything in the policy to the contrary notwithstanding:

(ii) If an Insured Person's employment terminates because of an approved leave of absence, ... his insurance may be continued until the end of the twelfth policy month following the policy month in which the leave of absence commenced."

The group policy took effect on April 1, 1975. Following Evans' death, Dresser filed a claim that Hartford subsequently denied on the grounds that the coverage had terminated under the rider when twelve months elapsed without Evans returning to work.

This lawsuit followed. Marie Evans sought to recover on the group policy, or, in the alternative, to recover based on an alleged oral contract between Dresser and Hartford to cover persons in Evans' situation. After a trial to the bench, the court found that an understanding existed between Dresser and Hartford to cover employees in Evans' position. Consequently, the court reformed the policy to reflect this understanding. On appeal, Hartford argues that the evidence does not support the court's finding and that reformation was in error. Hartford also contends that Evans was not covered by the terms of the policy as written.

An insurance policy is generally regarded as a contract, and many of the traditional elements of contract law apply. Because of the nature of the typical insurance transaction, however, special rules of construction apply in addition to general precepts of contract law. Under Oklahoma law, insurance policies are treated as adhesion contracts. Short v. Oklahoma Farmers Union Insurance Co., 619 P.2d 588, 589 (Okl.1980). Although ambiguities and uncertainties in insurance policies are strictly construed against the insurance company, parties to the policy are bound by its provisions under contract law, and a company's legal liability will generally extend no further. Travelers Insurance Co. v. Morrow, 645 F.2d 41, 44 (10th Cir.1981); see Badgett v. Oklahoma Life Insurance Co., 176 Okl. 86, 54 P.2d 1059, 1062 (1935).

The trial court did not specifically find the insurance policy as ridered to be unambiguous; however, this finding is implicit in the court's conclusion that reformation was needed to provide coverage for Evans. Under the plain and unambiguous terms of the policy, as amended by the rider, insurance coverage was provided for Evans for twelve months after the policy became effective on April 1, 1975. Consequently, unless the policy was properly reformed, insurance coverage of Evans terminated on March 31, 1976, because he did not return to active full-time work prior to that time.

An action seeking reformation proceeds from the premise that the parties came to an understanding but, when it was reduced to writing, some provision was omitted from the contract or a mistake was inserted through mutual mistake and fraud. Agee v. Travelers Indemnity Co., 264 F.Supp. 322, 326 (W.D.Okl.1967), aff'd, 396 F.2d 57 (10th Cir.1968). No reformation may be had unless there was a prior agreement to which the contract as written can be reformed. Id.; Tuloma Pipe & Supply Co. v. Townsend, 182 Okl. 321, 77 P.2d 535, 537 (1938); Douglas v. Douglas, 176 Okl. 378, 56 P.2d 362, 363, 369 (1936). An agreement must have been reached; a court will not reform an insurance contract to "conform to the parties' negotiations or haphazardly expressed intentions." Industrial Indemnity Co. v. Aetna Casualty & Surety Co., 465 F.2d 934, 938 (9th Cir.1972). "Even in situations where obvious mistakes have been made, courts will not rewrite the contract ... but will only enforce the legal obligations of the parties according to their original agreement." Mutual of Omaha Insurance Co. v. Russell, 402 F.2d 339, 344 (10th Cir.1968), cert. denied, 394 U.S. 973, 89 S.Ct. 1456, 22 L.Ed.2d 753 (1969). Because of the courts' traditional reluctance to disturb the terms of a written instrument presumably agreed to by both parties involved, a party seeking reformation under Oklahoma law must show by proof that is clear, unequivocal, and decisive, and more than a mere preponderance, that a prior agreement existed and that the contract does not reflect that agreement because of fraud or mistake. Agee, 264 F.Supp. at 326; Douglas, 56 P.2d at 364, 369. The evidence must be sufficient to take the question out of the range of reasonable controversy. Agee, 264 F.Supp. at 326. Douglas, 56 P.2d at 364, 369. Even where a prior agreement is established, the party seeking reformation must also prove that the written instrument differs because of mutual mistake or fraud.

The trial court found as a matter of fact that Evans' employment with Dresser was not terminated prior to his death, and that "it was the understanding of both Dresser Engineering Company and Hartford Life Insurance Company ... that employees such as Robert Evans would be insured under the terms of the group policy," Rec., vol. I, at 47. The court concluded as a matter of law that "[t]he insurance agreement should be reformed to state the understanding reached between Dresser and Hartford that employees such as Robert Evans who were on a leave of absence status for lack of work were insured so long as their premiums were paid by the employer." Id. at 48. The court entered judgment under the reformed insurance contract in the amount of $24,000 plus costs and reasonable attorney's fees.

The trial court's factfinding that Hartford and Dresser intended to provide coverage for employees laid off of work but still considered by Dresser to be employees, must be upheld unless clearly erroneous. Fed.R.Civ.P. 52(a). However, we must also consider the rigorous standard of proof required by Oklahoma law as a prerequisite to reformation. Our scope of review is "whether the facts on which the judgment of the trial court is based meets [sic ] the required degree of proof." Ohio Casualty Insurance Co. v. Callaway, 134 F.2d 788, 789 (10th Cir.1943). In Ohio Casualty, a contract reformation case, we clearly incorporated the state law standards into our examination. We do so in this case as well.

Our review of the record leaves us convinced that William Hansel, who negotiated the group policy for Dresser, wanted the policy to cover all persons he considered to be Dresser employees, regardless of the length of time that work was unavailable for them. ² However, we have no such conviction regarding Hartford's understanding. Hartford clearly understood that Dresser wished to provide coverage for out-of-work employees, and Hartford knew that Evans and another employee were on lay-off status when the insurance contract was negotiated. There is absolutely no evidence, however, that Hartford was ever informed an employee might remain on lay-off status more than a year. In fact, the testimony of Hansel is to the contrary:

"Q. Did you tell Mr. Tanner [Hartford's representative] how long these employees might be out of work?

A. I may have given him a shotgun estimate and I don't remember the details.

Q. What would that estimate have been?

A. Oh, it could have been from three weeks to six months or longer.

Q. Did you ever have employees who were off more than six months?

A. In 1962 our field was out of work completely and for a matter of darn near a year, we had very little field construction going and we kept the employees then.

Q. When you say 'darn near a year', was this less than a year in 1962?

A. I don't recall the exact timing but it was--it was close, give or take, just...