Utica Mut. Ins. Co. v. Voyles, 051208 FED10, 06-6283

Docket Nº:06-6283, 07-6044
Party Name:UTICA MUTUAL INSURANCE COMPANY, Appellant, v. PAUL VOYLES, GREAT STATES INSURANCE AGENCY, INC., HEALTHBACK HOLDINGS, L.L.C., GREG PECK, BRYANT JONES ENTERPRISES, INC., JUSTIN BRUNER, JOHN MILLSPAUGH, TABITHA JAQUAY-FERNANDEZ, BOARDMAN, INC., WICHITA STEEL FABRICATORS, INC., BREWER CARPET & DESIGN CENTER, INC., also known as BREWER CARPET & DESIGN,
Case Date:May 12, 2008
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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UTICA MUTUAL INSURANCE COMPANY, Appellant,

v.

PAUL VOYLES, GREAT STATES INSURANCE AGENCY, INC., HEALTHBACK HOLDINGS, L.L.C., GREG PECK, BRYANT JONES ENTERPRISES, INC., JUSTIN BRUNER, JOHN MILLSPAUGH, TABITHA JAQUAY-FERNANDEZ, BOARDMAN, INC., WICHITA STEEL FABRICATORS, INC., BREWER CARPET & DESIGN CENTER, INC., also known as BREWER CARPET & DESIGN, INC., STONE MOUNTAIN OF OKLAHOMA CITY, L.L.C., PRO-SOURCE OF OKLAHOMA CITY, INC., and TOJO, INC., Appellees.

Nos. 06-6283, 07-6044

United States Court of Appeals, Tenth Circuit

May 12, 2008

(W.D. of Okla.) (D.C. No. CV-04-965-C)

ORDER AND JUDGMENT[*]

Before TACHA, MCKAY, and TYMKOVICH, Circuit Judges.

Timothy M. Tymkovich Circuit Judge

Utica Mutual Insurance Company filed a declaratory judgment action to resolve whether it had a duty to defend or indemnify Great States Insurance Company and Great States's president, Paul Voyles, in several Oklahoma state court lawsuits. The state suits were brought by third-party plaintiffs claiming fraud and negligence by Great States and Voyles in the course of their insurance business. The district court entered judgment in favor of Voyles and Great States in the federal case. It also awarded Voyles and Great States attorneys' fees in accordance with 36 Oklahoma Statutes § 3629(B). Utica appeals the determination of its duty to defend and the award of attorneys' fees.

We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and affirm.

I. Background

A. Factual Background

Great States is an insurance agency located in Oklahoma City, Oklahoma. During the relevant period, Paul Voyles was an agent of Great States, as well as its president. To protect Great States and its agents from any wrongful or negligent acts or omissions committed during the course of its business, Voyles obtained an errors and omissions insurance policy from Utica.

In late 1999 or early 2000, Voyles helped form an employee-leasing company called Fairway Employment Services, Inc. Voyles was vice-president and a twenty-percent owner. Fairway leased employees to businesses operating in and around Oklahoma City for a fee. Fairway was responsible for the leased employees' wages, as well as their health insurance, workers' compensation coverage, payroll taxes, and other incidents of employment. Using his experience as an insurance agent, Voyles helped Fairway set-up a partially self-funded health insurance plan for the leased employees. Voyles also obtained an excess liability policy from Monumental Life Insurance Company for Fairway's leased employees that contained a $75,000 per-employee deductible. This meant either the employee or Fairway was responsible for health care costs below the deductible amount; traditional insurance coverage applied only once costs exceeded $75,000.

When employees began to submit claims to Fairway (their new employer) for reimbursement, they found that Fairway was unable to pay benefits. Consequently, in 2002, several of Fairway's clients sued Fairway in Oklahoma state court in connection with the benefits the clients and their leased employees were supposed to receive. The complaints alleged Fairway had not provided insurance coverage as promised. The clients alleged they had requested traditional insurance coverage (with normal deductibles) from Voyles, but Voyles negligently or fraudulently instead placed them into a high-deductible, partially self-funded health care plan operated by Fairway. As a result, the clients were forced to pay the claims instead. The complaints also alleged that some of the leased employees were not covered by Fairway's partially self-funded plan; these employees received no health insurance at all. Other employees did not receive the workers' compensation coverage promised them.

Fairway sought recovery against Voyles and Great States for injuries sustained by Fairway's clients and the leased employees. Since Voyles had been responsible for obtaining the insurance coverage, Fairway looked to Voyles to explain the problems with the self-funded plan he had created. These problems included not only a lack of traditional insurance coverage, but also a lack of any health insurance coverage at all for some employees and a lack of workers' compensation benefits for others. Fairway and the leased employees alleged Voyles had made promises in regard to their insurance coverage which were not kept. Fairway's clients subsequently amended their complaints to also include Voyles and Great States as defendants. Voyles and Great States requested Utica defend and indemnify them against the state court claims.

B. Procedural History

Utica filed a federal diversity action seeking a declaration that it had no duty to defend or indemnify Great States or Voyles in state court litigation. Utica claimed that two exceptions to the errors and omissions policy held by Great States excluded coverage of the claims asserted against Voyles and Great States. Voyles and Great States in turn counter-claimed, seeking a declaration that Utica had a duty to defend and indemnify. They contended the state court complaints asserted liability upon grounds that fell within the scope of the policy.

On cross-motions for summary judgment, the district court held Utica had a duty to defend and indemnify Great States and Voyles against allegations that they committed wrongful acts or omissions during the course of Great States's business. The court also determined Great States and Voyles were entitled to attorneys' fees as the "prevailing party" under 36 Okla. Stat. § 3629(B), and awarded fees in the amount of $10,917. Utica timely appealed.

II. Analysis

A. Standard of Review

Utica appeals from a grant of summary judgment in favor of the defendants. We review a district court's grant of summary judgment de novo, applying the same legal standard as the district court. Byers v. Albuquerque, 150 F.3d 1271, 1274 (10th Cir. 1998). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). When applying this standard, we view the evidence and draw reasonable inferences therefrom in the light most favorable to the nonmoving party. Byers, 150 F.3d at 1274.

In this diversity action, the law of Oklahoma applies. Erie R.R. v. Tompkins, 304 U.S. 64 (1938). "The obligation of responsible appellate review and the principles of a cooperative judicial federalism underlying Erie require that courts of appeals review the state-law determinations of district courts de novo." Salve Regina Coll. v. Russell, 499 U.S. 225, 239 (1991); see also Roberts v. Printup, 422 F.3d 1211, 1215 (10th Cir. 2005) (noting "the United States Supreme Court has held that 'no form of appellate deference is acceptable,' when we are asked to review a district court's determination of state law").

B. Utica's Duty to Defend

1. Initial Determination of Coverage

Utica's appeal centers on whether it has a duty to defend Voyles and Great States against claims asserted against them in Oklahoma state court proceedings. To answer this question, we apply the facts of the case to the language of Great States's errors and omissions policy. We conclude Utica has a duty to defend.

a. Applicable Law

Under Oklahoma law, "[a]n insurer's duty to defend claims against its insured is an ex contractu obligation." First Bank of Turley v. Fid. & Dep. Ins. Co. of Md., 928 P.2d 298, 302 (Okla. 1996). "If language of a contract is clear and free of ambiguity the court is to interpret it as a matter of law, giving effect to the mutual intent of the parties at the time of contracting." Pitco Prod. Co. v. Chaparral Energy, Inc., 63 P.3d 541, 545 (Okla. 2003) (footnote omitted). Whether the contract is ambiguous is for the court to decide, considering the contract as a whole. Id. at 545-46. "The test for ambiguity is whether the language is susceptible to two interpretations on its face . . . from the standpoint of a reasonably prudent lay person, not from that of a lawyer." Spears v. Shelter Mut. Ins. Co., 73 P.3d 865, 869 (Okla. 2003) (internal quotation marks omitted). In the absence of an ambiguity, the court must enforce an insurance contract according to its express terms, giving the policy's language its plain and ordinary meaning. Pitco Prod. Co., 63 P.2d at 546 & nn.20-22.

An insurer's duty to defend is broader than its duty to indemnify. E.g., First Bank of Turley, 928 P.2d at 303. This rule stems from a coverage provision found in most insurance contracts, which imposes a duty to defend on the insurer "whenever it ascertains the presence of facts that give rise to the potential of liability under the policy." Id. "The phrase potentially covered means that the insurer's duty to defend its insured arises whenever the allegations in a complaint state a cause of action that gives rise to the possibility of a recovery under the...

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