First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland, 85735

Citation1996 OK 105,928 P.2d 298
Decision Date24 September 1996
Docket NumberNo. 85735,85735
CourtSupreme Court of Oklahoma

Jerry Reed, Tulsa, and Joseph R. Farris, Jody R. Nathan, Feldman, Hall, Franden, Woodard & Farris, Tulsa, for Plaintiff.

Robert L. Magrini, John B. Hayes, Brigid F. Kennedy, Looney, Nichols, Johnson & Hayes, Oklahoma City, for Defendant.

OPALA, Justice.

The United States District Court for the Northern District of Oklahoma [certifying court] certified the following questions 1 in (1) Once an insurance company has declined to defend its insured in a lawsuit, does the insured have any obligation to keep the insurance company advised of developments in the lawsuit, or [to supply] new information which may bear on the insurer's decision?

accordance with the provisions of the Uniform Certification of Questions of Law Act, 20 O.S.1991 §§ 1601 et seq.:

(2) Under Oklahoma law, does an insurance company have as a defense in a bad-faith case the "comparative bad faith" of the insured? and

(3) If "comparative bad faith" is an available defense, what is the effect of the defense (i.e. are damages barred or reduced), what are the elements of the defense, and is the insured's duty to deal in good faith a continuing one?

In answer to the first question, we hold that an insured's failure to give proper notice when demanding that the insurer defend the suit or an insured's giving of inadequate notice does not constitute actionable conduct either ex contractu or ex delicto. The omission or deficiency in notice-giving is to be treated as contractual nonperformance or misperformance of a policy condition, which the insurer may invoke as a defense. If the facts surrounding notice and its adequacy are in dispute, the issue is one for the trier. As for the case before us, we defer to the certifying court, as we must, to resolve the question whether the evidentiary materials in this suit may be regarded as tendering an issue of law because the material facts, which are undisputed, will support but a single inference. For a detailed explanation of our analysis of the first question see Part III, infra. We answer the second question in the negative. In response to the third question, we hold that the insured, who fails, in whole or in part, in its duty-triggering obligation that calls for notice to the insurer, which must include critical facts connected with the lawsuit to be defended, is not answerable in tort; the deficiency in the insured's notice may be interposed as a defense against the insurer's liability--i.e., as a complete (in toto ) bar to any recovery--or, if the facts so warrant, against the quantum of the insured's recoverable loss (pro tanto defense).


On September 28, 1988, Buel and Peggy Neece sued First Bank of Turley [Bank] for invasion of privacy. The Bank reported on October 7, 1988 this suit's filing to its insurer, Fidelity and Deposit Insurance Company of Maryland [F & D]. The Bank's president, Mikel Hoffman [Hoffman], provided the insurer with a "sequence of events" revealing that he had called the I.R.S. to report what he considered as a possible violation of law. Hoffman stated that although he was familiar with the pertinent privacy act provisions, he was uncertain as to what he was free to share with the authorities.

F & D denied coverage on January 23, 1989 by informing the Bank that it was not bound to provide a defense on the then-extant allegations. The insurer explained by letter that the Bank's submitted documentation demonstrates the insured's "willful and intentional" violation of the Neeces' statutory privacy rights, which conduct brings the suit beyond the coverage provided by the policy.

When deposed, Hoffman revealed (a) he was familiar with the Right to Financial Privacy Act, and (b) what he had disclosed to the I.R.S. about the Neeces' financial information he believed to fall within a statutory exception. When it denied coverage, F & D was unaware of this deposition excerpt.

J.R.F., one of the Bank's lawyers, wrote, on February 9, 1989, a letter to J.R., another lawyer for the Bank, stating that in his opinion F & D had wrongfully denied the Bank's claim and had misrepresented the parameters of its coverage, but counseled the client not to recontact F & D as yet.

The litigation between the Bank and the Neeces went forward. On September 30, 1992, J.R.F. requested F & D in writing to reevaluate its coverage position in the lawsuit, citing the pertinent policy provisions and providing legal reasons for a favorable decision. F & D's Tulsa lawyer then arranged to look at J.R.F.'s file in the Neece case. In course of this examination, F & D's lawyer discovered and copied J.R.F.'s February 9, 1989 letter to J.R F & D offered on January 29, 1993(a) to provide the requested defense under a reservation of rights and (b) to reimburse the Bank for all fees and expenses reasonably incurred in its defense of the suit forward from the date of the Bank's request that the coverage be reexamined.

The Bank declined F & D's offer since it did not include payment for defense expenses incurred before the September 30, 1992 request for review. By letters dated February 10, 1993 and March 18, 1993, J.R.F. demanded that the insurer provide full reimbursement of all past defense costs or face litigation for bad-faith refusal to act. When the insurer stood on its earlier decision, the federal-court suit here under consideration followed.

F & D urges that the conduct of the Bank's lawyers calls for the application of the so-called "comparative bad faith" doctrine. 2 According to the insurer, the Bank should either be barred from all recovery or its actual damages be subject to reduction. The Bank counters that Oklahoma law does not recognize the insurer-invoked doctrine, and even if it did, the rule would not be applicable to the facts tendered by this case.




While in answering the queries posed by a federal court the parameters of state-law claims or defenses identified by the submitted questions may be tested, it is not this court's province to intrude (by its responses) upon the certifying court's decision-making process. 3 The latter court must be left entirely free to assess the impact of the answers and to make its own appraisal of the proof in the case before it. 4

Because this action is not before us for decision, we refrain from applying, as we must, the declared state-law responses to the facts now known or to be elicited in the federal-court litigation either by evidence at trial or by acceptable probative substitutes (the so-called "evidentiary materials"), which are in use or will be used in the summary adjudication process. 5 The task of analyzing today's answers for their application to this case is hence deferred, as it must be, to the certifying court.


The first question calls for an analysis of the governing principles of contract law. The relationship between the insured and insurer is contractual in nature. 6 An insurer's duty to defend claims against its insured is an ex contractu obligation. 7 A liability insurance policy generally contains two basic duties--the duty to defend and the An insurer ordinarily has no duty to defend an insured absent a request to provide a defense, 17 which act serves to trigger the insurer's performance under the contract. 18 It is the insured's sole duty to give its insurer timely and adequate notice of a third-party claim 19 to aid the insurer in the discovery of facts bearing on coverage. Once an insurer receives notice of a claim and proof of loss, the insurer should evaluate the matter and make a reasonable investigation to determine whether a potential for coverage exists. 20 An insured in turn has an obligation to cooperate with the insurer, which is both contractual 21 and implied in law. 22 An insurer who disputes the insured's demand to defend has three options. It can (1) seek declaratory relief that would define the insurer's rights and obligations; 23 (2) The insurer's liability for breach of its defense duty by refusal to provide a defense is measured by the facts that were known and knowable 25--by what the insurer knows or by what the insurer was capable of discovering itself--at the time the insured's request was tendered.

                duty to indemnify its insured. 8  The insurer's primary duty is to provide indemnity for loss or to pay a specified amount upon determinable contingencies. 9  The duty to defend is separate from, and broader than, the duty to indemnify, 10 but the insurer's obligation is not unlimited.  The defense duty is measured by the nature and kinds of risks covered 11 by the policy as well as by the reasonable expectations of the insured. 12  An insurer has a duty to defend an insured whenever it ascertains the presence of facts 13 that give rise to the potential of liability under the policy. 14  The insurer's defense duty is determined on the basis of information gleaned from the petition (and other pleadings), from the insured and from other sources available to the insurer 15 at the time the defense is demanded 
                (or tendered) rather than by the outcome of the third-party action. 16
                defend the insured under a reservation of rights, or (3) refuse to take any action at the peril of being later found in breach of its duty to defend. 24

As part of its notice-giving obligation, the insured must provide the insurer with facts material to its ascertainment of the duty to defend. A breach of the insured's obligation to give notice of critical post-denial developments may modify, excuse or defeat the insurer's performance under the contract. If the insured's performance of its contractual duty is deficient, the court must focus on whether (1) the...

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