Gentry v. American Motorist Ins. Co.

• Decision Date: 18 January 1994
• Docket Number: No. 75737,75737
• Citation: 1994 OK 4,867 P.2d 468
• Parties: L.Z. GENTRY, d/b/a Gentry Enterprises, Inc., and L.Z. Gentry, individually, Appellees, v. AMERICAN MOTORIST INSURANCE COMPANY, Appellant.
• Court: Oklahoma Supreme Court

Page 468

867 P.2d 468

1994 OK 4

L.Z. GENTRY, d/b/a Gentry Enterprises, Inc., and L.Z Gentry, individually, Appellees, v. AMERICAN MOTORIST INSURANCE COMPANY, Appellant.

No. 75737.

Supreme Court of Oklahoma.

Jan. 18, 1994.

On Certiorari to the Court of Appeals, Division No. 1.

L.Z. Gentry purchased an all-risk insurance policy from the appellant covering a construction project, which was to specifically cover loss due to theft. The policy issued excluded theft by any person to whom the property was entrusted. When Gentry filed a claim for his loss due to the wrongful taking of property by his contractor, the appellant rejected his claim. Gentry filed suit against the appellant seeking reformation of the contract. After the first trial was reversed and remanded by the Court of Appeals the trial court reformed the contract and granted damages and attorney fees. The Court of Appeals again reversed and remanded.

CERTIORARI PREVIOUSLY GRANTED. COURT OF APPEALS OPINION VACATED. JUDGMENT OF TRIAL COURT AFFIRMED.

Robert H. Mitchell, Oklahoma City, for appellees.

Stephanie J. Mather, Chandler, for appellant.

ALMA WILSON, Justice:

In 1982, L.Z. Gentry, appellee/counter-appellant, began planning to construct a condominium project known as Rockwell Gardens. He contacted his insurance agent, Tom Lanthrop, agent for American Motorists Insurance Co., appellant/counter-appellee, concerning the purchase of an all-risk policy. Gentry had done business with Lanthrop as his insurance agent since about 1972. Gentry specifically asked if the policy covered theft, and Lanthrop replied that it did. Gentry was not informed that the policy excluded theft by his employees, officers, directors or trustees in the construction of the project.

While building the project, Gentry's contractor wrongfully took building material intended to be used in the construction, and funds advanced by Gentry for the purchase of building material. The contractor was subsequently arrested and pled guilty to one count of obtaining money under false pretense and three counts of embezzlement by trustee. But when Gentry made a claim on his insurance policy, his claim was denied because the policy excluded losses arising from fraudulent, dishonest or criminal acts committed by the insured or any employee, officer, director, partner, or trustee of the insured, or by any others to whom the property covered by the policy had been entrusted.

Gentry filed suit in district court, claiming actual damages, punitive damages for bad faith and attorney fees. The trial court sustained the insurance company's demurrer to the evidence on the punitive damages. The court submitted the claim for actual damages to the jury, which returned a verdict in favor of Gentry for $73,000.00. The trial court awarded attorney fees. After the insurance company appealed, the Court of Appeals reversed and remanded the cause for a new trial, holding that the trial court had improperly instructed the jury.

On remand, the case was retried to the court upon the trial record made during the original trial. The parties presented oral argument upon the issues of mutual mistake and constructive fraud. Finding the parties had made a mutual mistake, the trial court reformed the insurance contract, awarded Gentry $31,439.43 for actual damages and $14,986.00 for attorney fees. The insurance company appealed and Gentry counter-appealed. The Court of Appeals concluded there was no evidence demonstrating mutual mistake. It reversed and remanded with instruction to enter judgment in favor of the insurance company. We previously granted certiorari.

I. Constructive Fraud

Gentry argues that even if the reformation of the contract by the trial court were not supported on the legal doctrine of mutual mistake, it was supported by constructive fraud and upon that ground the judgment must be upheld. Where a trial court's decision is correct, it must be upheld even though it is rested upon an erroneous legal theory. Heiman v. Atlantic Richfield Co., 807 P.2d 257, 262 (Okla.1991). Gentry presented evidence and argued that the insurance agent either did not know that theft by Gentry's contractor was excluded or he misled Gentry by failing to explain to him that such theft was excluded. We hold that the judgment of the trial court to reform the contract is supported by the legal theory of constructive fraud.

The record reveals that the insurance agent, Lanthrop, admitted that Gentry specifically asked for an "all-risk" insurance policy which would cover all the risks of the construction job he was undertaking, and that Gentry specifically asked if the policy included "theft." Lanthrop admitted during cross examination that neither employee dishonesty nor embezzlement were ever discussed when the contract was being negotiated. Lanthrop further testified that had he been asked, he would have answered that embezzlement was not covered. Gentry testified that he did not know embezzlement was excluded. When asked on cross examination if he and Lanthrop discussed any specific type of theft, Gentry answered, "A thief is a thief as far as I was concerned." The evidence establishes that during the negotiations, the only party who knew what exclusions were in the "all-risk" insurance policy was the insurance agent, and that Gentry was not informed of the exclusion.

Title 15 O.S.1991, § 59 ¹ provides:

Constructive fraud consists:

1. In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; or,

2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.

In contrast with actual fraud, constructive fraud does not require an intent to deceive. "Liability for constructive fraud may be based on a negligent misrepresentation. Even an innocent misrepresentation may constitute constructive fraud where there is an underlying right to be correctly informed of the facts." Faulkenberry v. Kansas City Southern Railway Company, 602 P.2d 203, 206 (Okla.1979), at footnote 6.

An example of constructive fraud is found in Pacific Nat'l Fire Ins. Co. v. Smith Bros. Drilling Co., 196 Okla. 74, 162 P.2d 871 (1945). The insurance agent in that case believed that certain tools were covered by the insurance policy and represented them to be covered to the insured. But the tools were not covered by the policy and a fire destroyed them. This Court held that where a policy did not contain the real contract between the parties, and the insured was induced to accept the contract by the unintentional misrepresentations of the insurance agent, the insured was entitled to judgment on the real contract and was entitled to reformation. Pacific Nat'l, 162 P.2d at 874. The case cited Commercial Casualty Ins. Co. v. Connellee, 156 Okla. 170, 9 P.2d 952 (1932) as holding:

[W]here the agent of an insurance company and the insured mutually agreed upon the terms and conditions of an insurance policy, and the policy later issued by the company omitted one of its essential elements, which was not discovered by the insured until after the loss occurred, he was entitled to have the contract reformed and to recover thereon, and that his failure to promptly examine the policy when received and discover that it did not contain the real agreement did not defeat his right to reformation.

Pacific Nat'l, 162 P.2d at 874. "The rule announced in these cases stems from the fundamental principle that one may not profit by his own wrong." Pacific Nat'l, 162 P.2d at 874. ²

In Ohio Casualty Ins. Co. v. Callaway, 134 F.2d 788 (10th Cir.1943), the insured asked the insurance agent if the policy covered the insured's butane truck against "every accident, every fire, and every damage." The insurance agent assured the insured that he was covered. The policy was delivered to the bank that held the mortgage to the vehicle. The insurance agent knew that an endorsement to the policy had been attached that excluded any loss, claim, or damage, resulting from fire, combustion, or explosion of any commodities being loaded on, unloaded from, or transported on the insured vehicle. The insurance company issued the policy, but wrote the agent asking that he have the insured sign the exclusion endorsement. Almost two months later, the agent sent a copy of the endorsement to the insured's home and asked that he sign it. The letter was received the day an accident and explosion occurred, which would have been excluded by the terms of the policy. The insured never signed it.

The Tenth Circuit noted that the agent knew the type and kind of risk to be insured, knew that the insured would not have full coverage with the attached endorsement, and yet agreed to write a policy covering every accident, every fire, and every damage. The insured accepted and relied upon those assurances. The court observed that had the insured read the policy he would have found that the policy did not cover every accident and every damage. Nevertheless, the court affirmed the judgment of the trial court, which reformed the contract to conform to the oral representations of the agent. The court held that the statements and conduct of the agent writing the policy were binding upon his principal, and cited Commercial Casualty Co. v. Connellee, cited above, as authority for its holding. Ohio Casualty Ins. Co., 134 F.2d at 790.

Gentry was bargaining for a policy insuring against theft, and was entitled to know that certain types of theft were excluded from this "all-risk" policy. Although there was no showing the insurance company's agent intended to deceive Gentry, the insurance company through its agent had a duty to inform its insured of exclusions at the time of the negotiations. ³ The duty to inform was breached. The company received its premium. Gentry suffered a loss he believed to be...