Case Title: BALL v. WILSHIRE INSURANCE CO.

Citation: 

Docket Number: 104939

State: oklahoma

Court: Oklahoma Supreme Court

Date: 2009-06-16T00:00:00Z

Document:
BALL v. WILSHIRE INSURANCE CO.  BALL v. WILSHIRE INSURANCE CO. 2009 OK 38 221 P.3d 717 Case Number: 104939 Decided: 06/16/2009 THE SUPREME COURT OF THE STATE OF OKLAHOMA AMANDA L. BALL Plaintiff-Appellant v. WILSHIRE INSURANCE COMPANY, a North Carolina Insurance Company Defendant-Appellee CERTIFIED QUESTIONS OF LAW FROM A FEDERAL COURT ¶0 The United States Court of Appeals for the Tenth Circuit certified to this court five questions of state law pursuant to the Revised Uniform Certification of Questions of Law Act, CERTIFIED QUESTIONS AS CONSOLIDATED AND REFORMULATED ANSWERED Rick W. Bisher, RYAN BISHER RYAN, Oklahoma City, OK, for Plaintiff-Appellant. Scott M. Rhodes, James W. Dobbs, SMITH RHODES STEWART & ELDER, P.L.L.C., Oklahoma City, OK, for Defendant-Appellee.2 OPALA, J. ¶1 The United States Court of Appeals for the Tenth Circuit certified to this court five questions of law under the Revised Uniform Certification of Questions of Law Act.3 We address the following four consolidated and reformulated4 questions: 1. Is a motor-vehicle insurance policy provision that excludes any coverage for "Vehicles Loaned, Leased or Rented to others, including those dealerships and repair shops who provide [word or words omitted in policy] while customer's auto is being repaired" void in whole or in part, in light of Oklahoma's Compulsory Liability Insurance statute, 47 O.S. §7-600 to §7-612? 2. If the answer to #1 is yes, does the exclusion nevertheless relieve an insurance company of its contractual duty to defend an insured? 3. If the answer to the second certified question is "no," does an insurance company act in bad faith in relying on the exclusion to deny a defense to an insured? 4. Does an insurer who relies on the exclusion to deny or delay payment of uninsured motorist benefits act in bad faith? ¶2 We answer the first and second questions in the affirmative. Our answer to the second question makes a response to the third question unnecessary. Our answer to the fourth question is in the negative. I THE ANATOMY OF FEDERAL LITIGATION ¶3 Wilshire Insurance Company issued a commercial auto liability insurance policy to John Drummond, d/b/a Henryetta Auto Sales. The policy contained a "Combined Garage Exclusion Endorsement," which inter alia excluded any coverage for vehicles loaned to customers of an auto repair shop while the customer's car was being repaired ("Loaned Vehicle Exclusion").5 But for the Loaned Vehicle Exclusion, a customer of Henryetta who had no liability insurance of his or her own and who was driving a Henryetta-owned vehicle with Drummond's permission would have fallen under the definition of "an insured"contained in the liability section of the Wilshire policy.6 But for the Exclusion, a customer permissively driving a Henryetta-owned vehicle would also have fallen under the definition of "an insured" in the Uninsured Motorist Coverage Endorsement.7 ¶4 On 2 June 2003, Amanda Ball, with her roommate as a passenger, was driving a pickup truck belonging to Henryetta while her vehicle was being repaired at Drummond's repair shop when she collided with a vehicle that turned left in front of her. In addition to the driver, three children were riding as passengers in the other vehicle. The accident caused serious injuries to the occupants of both vehicles, including the death of one of the children. Both Ball and the other driver were cited for traffic violations. ¶5 The guardian ad litem of two of the children and the personal representative of the deceased child each filed separate negligence actions against Ball in state court. Ball asked Wilshire to defend her. She also made a claim under the uninsured/underinsured motorist ("UM") provisions of the Wilshire policy. Relying on the Loaned Vehicle Exclusion, Wilshire refused to defend Ball or to pay UM benefits to her or to her passenger. The state court consolidated the tort actions and entered a default judgment against Ball in excess of $20,000,000.00. ¶6 Ball sued Wilshire in state court, alleging that she was insured under the Wilshire policy and that Wilshire's refusal to defend her in the tort litigation and its denial of her UM claim breached the insurance contract and violated the insurer's implied duty of good faith and fair dealing. After removing the case to federal court, Wilshire answered and filed a counterclaim for a declaratory judgment that it had no duty to defend Ball. Wilshire also tendered UM limits to Ball and her passenger, but maintains that it was not legally obligated to do so.8 Ball then recast her UM contract and tort claims in terms of delay in payment of benefits due. Upon cross motions for summary judgment, all issues were summarily adjudicated in favor of Wilshire except the UM breach of contract claim, which was left pending. ¶7 Meanwhile, Ball's tort litigation judgment creditors brought a proceeding in state court against Wilshire to garnish the liability proceeds of the Wilshire policy. This proceeding was also removed to federal court. Upon cross motions for summary judgment, the district court ruled that the Loaned Vehicle Exclusion was unenforceable against the garnishors to the extent of the minimum amount of liability coverage required by the Oklahoma Compulsory Liability Insurance Law.9 No appeal was brought from that decision. ¶8 Ball filed an appeal in the United States Court of Appeals for the Tenth Circuit from the federal district court's adverse decision in her contract/tort action against Wilshire. On 20 August 2007, the Tenth Circuit certified five questions of state law to this court, deeming them to be unsettled by extant Oklahoma jurisprudence. Because the paperwork submitted to this court by the Tenth Circuit at that time indicated that the federal appellate court might yet refuse to exercise jurisdiction over the appeal, we issued an opinion on 23 October 2007 in which we declined to answer the certified questions as potentially calling for a prohibited advisory opinion.10 The jurisdictional issue having since been resolved,11 the federal appellate court has recertified the legal questions which as consolidated and reformulated we answer today. II THE NATURE OF THIS COURT'S FUNCTION WHEN ANSWERING QUESTIONS FROM A FEDERAL COURT ¶9 In answering questions submitted by a federal court the parameters of state-law claims or defenses identified by the questions may be tested. Yet it is not this court's province to intrude (by its responses) upon the certifying court's decision-making process.12 The certifying court must be left entirely free to assess the impact of our answers and to make its own appraisal of the proof in the case before it.13 ¶10 Because this case is not before us for decision, we refrain, as we must, from applying the declared state-law responses to the facts in the federal-court litigation. Those facts have been tendered for review by the certifying court either in the form of evidence adduced at trial or in acceptable probative substitutes (so-called "evidentiary materials").14 The task of analyzing today's answers for their application to this case is deferred in its entirety to the certifying court.15 III THE LOANED VEHICLE EXCLUSION CONTRAVENES THE PUBLIC POLICY BEHIND THE COMPULSORY LIABILITY INSURANCE LAW TO THE EXTENT IT DENIES TO AN INJURED THIRD PARTY THE MINIMUM AMOUNT OF LIABILITY INSURANCE REQUIRED BY STATUTE16¶11 The provisions of 47 O.S. 2001 §7-601(C)(1) prohibit the operation of any motor vehicle in this state unless it is insured or secured for the payment of personal injury or property damage to another arising out of the ownership, maintenance, operation or use of the vehicle.17 As part of this mandate, the law requires that every owner's policy of automobile liability insurance include an "omnibus clause" that insures against liability not only the named insured, but also any other person using an insured vehicle with the express or implied permission of the named insured.18 No one may be excluded from liability coverage unless the exclusion is authorized by "existing laws."19 ¶12 The principal purpose of compulsory liability insurance is to protect the public from the financial hardship that may result from the use of automobiles by people who are financially unable to respond in damages for any injury done. ¶13 The Loaned Vehicle Exclusion is not authorized by the Compulsory Liability Insurance Law and does not differ in any significant respect from other exclusions deemed incompatible with the statute because they would bar from coverage all potential claimants. The Loaned Vehicle Exclusion removes protection from the general public by rendering uninsured an otherwise insured vehicle when a certain class of people, customers of a named-insured dealership or repair shop, happen to be driving that vehicle. Because the Loaned Vehicle Exclusion has the effect of withholding coverage from the general public and is not sanctioned by existing law, we pronounce it violative of the public policy embodied in ¶14 The legislatively-declared imperative behind the Compulsory Liability Insurance Law is that a minimum amount of liability insurance be available for the protection of the general public. IV THE COMPULSORY LIABILITY INSURANCE LAW DISPLACES INSURANCE POLICY PROVISIONS ONLY TO THE EXTENT THEY ARE INCOMPATIBLE WITH THE LAW'S INTENT TO PROVIDE MINIMAL COMPENSATION TO AN INJURED THIRD PARTY ¶15 Ball argues that the Compulsory Liability Insurance Law completely nullifies an exclusionary clause that violates its mandate of minimum liability coverage. She argues that if a person would have been a policy-defined insured under the terms of the omnibus clause but for the exclusion, he or she becomes such by reason of the exclusion's nullification. ¶16 An insurer's duty to defend claims against its insured is an ex contractu obligation.27 The defense duty is measured by the nature and kinds of risks covered by the policy as well as by the reasonable expectations of the insured.28 Ordinarily the duty to defend accompanies the duty to indemnify, but the parties may provide otherwise.29 ¶17 No public policy requires our interference with an insurance contract hammered out by the parties as long as all applicable legislative mandates are met.30 It is "the intent of the compulsory liability insurance law that, to the minimum amount of liability coverage required by statute, the innocent plaintiff should be entitled to recover."31 Our decisions invalidating exclusionary clauses have been narrowly crafted to achieve this purpose. Where an offending exclusion has diluted the omnibus coverage required by statute, we have treated the policy as providing the required coverage for the benefit of the innocent plaintiff.32 We have never held, nor do our decisions suggest, that the exclusion is nullified beyond achieving that purpose. Thus, in O'Neill v. Long,33 we held that while the Compulsory Liability Insurance Law requires an insurer to provide liability insurance in the minimum statutory amount, the unauthorized driver of the insured vehicle "was not an insured under the terms of [the insurer's] policy for of liability coverage in excess of the statutory minimum compulsory insurance."34 (emphasis added). We said instead that the Law "requires liability insurance must continue to cover the insured vehicle even though the permittee exceeds the scope of the named insured's consent."35 (emphasis added) ¶18 Our Compulsory Liability Insurance Law mandates that vehicles be secured against liability to innocent victims where harm occurs from a vehicle's negligent operation. It does not mandate an insurer-provided defense of persons driving vehicles that are secured by operation of the Compulsory Liability Insurance Law.36 The statutory omnibus clause displaces only those insurance policy provisions that are incompatible with the law's intent to provide minimal compensation to an injured third party. The person whose minimal coverage is law-mandated is not entitled to the insurer's performance of purely contractual obligations that stand outside the law's mandate. This rule gives effect to the public policy underlying the Compulsory Liability Insurance Law while refraining from unduly interfering with the parties' freedom to contract, which can be restricted only in the name of articulated public policy.37 ¶19 Oklahoma's decisional law is by now firmly established that liability exclusions, no matter the identity of the class of persons excluded, which diminish the protection afforded by the Compulsory Liability Insurance Law will not be enforced as to minimal statutory liability coverage, except as permitted by existing law. Today's pronouncement, recognizing that the duty to defend is not a part of the Law's mandate, should not be taken by the insurance industry as a license to place or leave in place unenforceable exclusions in policies in a manner that misleads insureds as to the insurer's other, dependent contractual obligations. Should flagrant and persistent abuses arise, the court might find itself impelled to reconsider the point addressed by today's decision. It would be advantageous for all concerned if insurers would draft their policies to take into account today's pronouncement. V IN THE ABSENCE OF CONTROLLING LEGAL AUTHORITY MAKING THE LOANED VEHICLE EXCLUSION UNENFORCEABLE AS TO UM COVERAGE, AN INSURER WHO RELIES ON THE EXCLUSION DOES NOT ACT IN BAD FAITH ¶20 Ball alleged that Wilshire not only breached the insurance contract by delaying payment of her UM claim, but also violated an insurer's implied-in-law duty to its insured to act fairly and in good faith.38 She hence alleged a bad faith tort claim against Wilshire, which was summarily dismissed by the federal district court. The Tenth Circuit has asked whether Oklahoma law is settled regarding an insurer's obligation to provide UM benefits to a person in Ball's position. We agree with the federal district court that Oklahoma law at this time does not provide a conclusive answer to this question. ¶21 The elements of a bad faith claim against an insurer for delay in payment of first-party coverage are: (1) claimant was entitled to coverage under the insurance policy at issue; (2) the insurer had no reasonable basis for delaying payment; (3) the insurer did not deal fairly and in good faith with the claimant; and (4) the insurer's violation of its duty of good faith and fair dealing was the direct cause of the claimant's injury.39 The absence of any one of these elements defeats a bad faith claim.40 ¶22 The critical question in a bad faith tort claim is whether the insurer had a "good faith belief, at the time its performance was requested, that it had a justifiable reason for withholding [or delaying] payment under the policy."41 If there is a legitimate dispute concerning coverage or no conclusive precedential legal authority requiring coverage, withholding or delaying payment is not unreasonable or in bad faith.42 The tort of bad faith hence does not prevent an insurer from denying, resisting or litigating any claim as to which the insurer has a reasonable defense.43 "Resort to a judicial forum is not per se bad faith or unfair dealing on the part of the insurer regardless of the outcome of the suit."44 ¶23 The provisions of Oklahoma's UM statute, 36 O.S. 2001 §3636,45 state that any motor vehicle liability policy issued with respect to a vehicle registered in this state or principally garaged in this state shall provide UM coverage "for the protection of persons insured thereunder." UM coverage may be rejected by a policyholder46 in the manner provided by the statute.47 Drummond accepted UM coverage for vehicles owned by him as well as for one specifically described vehicle. ¶24 Ball contends that Oklahoma law is settled that regardless of how a person's liability coverage arises, whether by contract or by operation of the Compulsory Liability Insurance Law, any person on whose behalf liability proceeds must be paid is a person insured thereunder within the meaning of §3636. In so arguing, Ball seeks to graft onto UM coverage the power of the Compulsory Liability Insurance Law to render a liability exclusion unenforceable. ¶25 While the Compulsory Liability Insurance Law clearly may override exclusions that violate the law's mandate of minimum liability coverage, nothing in extant jurisprudence precisely defines for other purposes the status of a person on whose behalf such coverage must by law be provided. As noted earlier in today's decision, we have expressly denied insured status to such a person for purposes of liability coverage in excess of the statutory minimum.48 If the Compulsory Liability Insurance Law does not make a person an insured under the policy for purposes of the very coverage to which the Compulsory Liability Insurance Law is directed, it is not unreasonable to question whether it has the power to confer that status for a completely separate coverage. Today we have declared that the Compulsory Liability Insurance Law does not confer insured status on a contractually-excluded person for purposes of an insurer-provided defense. We conclude that there is room for questioning whether the legislature intended that those on whose behalf minimal liability coverage must be paid thereby become persons insured thereunder as that phrase is used in §3636. ¶26 Even in the absence of a violation of a law's express provision, an exclusion may nonetheless be invalid for nonconformity to the policy of the law.49 The Loaned Vehicle Exclusion provides that an auto belonging to the named insured that is otherwise covered under the Wilshire policy becomes uninsured if driven by a person described in the Exclusion. The Wilshire policy's UM endorsement defines as an insured the named insured and any person occupying a covered auto. Ball would come within the definition of an insured in the policy's UM insurance provisions as an occupant of a covered auto but for the Loaned Vehicle Exclusion. The question thus arises whether the Loaned Vehicle Exclusion contravenes the public policy behind the UM legislation when it turns a covered auto into a "not covered" auto based on the commercial nature of the relationship between the named insured and the person driving the auto.50 ¶27 When interpreting automobile insurance contracts, the court strives to strike a balance between freedom of contract principles and the state's interest in protecting the public.51 Statutorily mandated automobile insurance policies bear some characteristics of a public-law obligation under Oklahoma law and the full range of traditional freedom-of-contract principles do not apply.52 Parties to an insurance contract are nevertheless free to agree upon such terms as they wish, including whether to limit or restrict the insurer's liability,53 as long as their agreement does not contravene public policy. A contract violates public policy only if it clearly tends to injure public health, morals or confidence in the administration of law, or if it undermines the security of individual rights with respect to either personal liability or private property.54 Courts exercise their power to nullify contracts made in contravention of public policy only rarely, with great caution and in cases that are free from doubt.55 The sources of Oklahoma's public policy are her jurisprudence, state legislative or constitutional provisions, and those provisions in the federal constitution that prescribe a norm of conduct for the state.56 ¶28 A salient feature of our UM legislation, distinguishing it from compulsory liability insurance, is the latitude given to the policyholder or applicant57 to accept or reject UM coverage. Extensive safeguards have been enacted in §3636 to make certain that the policyholder's choice is knowingly and freely made, but the decision to purchase or decline to purchase UM coverage is left to the policyholder. When a policyholder completely rejects UM coverage, an occupant of a vehicle as to which no UM coverage is available has no independent grounds to claim UM benefits.58 If the legislative intent with respect to UM coverage is satisfied without any such coverage in a policy, it could arguably be satisfied with the acceptance of UM insurance with agreed-upon exclusions from coverage. ¶29 Our decisions interpreting insurance contracts in light of §3636 have been carefully crafted to protect and enforce the policyholder's choice to purchase UM protection. Two lines of cases, one related to "stacking" and the other directly on coverage, are relevant. The former, beginning with Keel v. MFA Insurance Company,59 considered the circumstances under which a person could stack UM coverage provided by two or more policies having some relation to the person or vehicle involved in a collision. We held in those cases that a claimant must be allowed to recover under multiple policies for which multiple UM premiums had been paid, provided that the claimant is an insured under each policy.60 That determination, we said, is to be made by reference to the terms of the insurance contract, which determine who is an insured thereunder.61 Accordingly, in Babcock v. Adkins,62 we held that occupants of an insured motor vehicle involved in an accident who are entitled to UM coverage solely because of their status as passengers may not stack UM coverage under separate policies purchased by the owner of the involved vehicle for his or her other vehicle or vehicles unless those passengers also qualify as insureds under those separate policies.63 ¶30 The principal cases that directly address coverage issues relating to exclusions begin with Cothren v. Emcasco Insurance Company,64 where we first considered whether an exclusionary clause was enforceable in light of the express language and public policy of §3636. In Cothren, the claimant was injured while riding as a passenger on a motorcycle. The motorcycle was owned by the claimant's parents but was not listed as an insured vehicle on their insurance policy. The UM coverage defined as an insured the named insured, any designated insured and, where residents of the same household, the relatives of either. Claimant was a defined insured as a resident relative. The policy excluded from UM coverage injury to an insured while occupying a non-insured highway vehicle owned by the insured or a resident relative of the insured's household. We held that the exclusion was inconsistent with the purpose and philosophy of mandatory UM coverage because the UM statute does not sanction exceptions dependent on the location of an insured at the time of injury.65 ¶31 In Shepard v. Farmers Insurance Company,66 a response to a certified question, the validity of a UM exclusion was at issue when a deceased's personal representatives sought to stack UM coverage under two policies issued to the deceased's parents. Neither policy insured the vehicle the deceased was driving at the time of the accident. The parents' policies contained an exclusion which denied coverage for a relative of the insured living in the same household if such relative or his/her spouse owned an automobile. The deceased apparently owned her own automobile. The insurer argued that the deceased was not an insured under the parents' polices by reason of the exclusion and hence not entitled to UM benefits under the parents' policies. Plaintiffs argued the exclusion violated the public policy expressed in the UM statute. After clarifying that stacking was not available unless the claimant was an insured under each policy sought to be stacked, we considered whether the exclusionary language in the parents' policies, which clearly eliminated coverage for the deceased, contravened the public policy of §3636. Observing that neither the UM statute nor relevant decisional law "dictates mandatory classes of insureds,"67 we held that an exclusion which eliminates UM coverage for a person who owns an automobile contravenes neither the express language nor the underlying policy of §3636. That policy - to provide coverage for tortious conduct which would otherwise go uncompensated - is adequately addressed, we said, by the exclusion's vehicle-ownership condition, which "triggers operation of our mandatory insurance statute and clearly places the burden of carrying automobile insurance upon automobile owners."68 ¶32 In Graham v. Travelers Insurance Company,69 we considered the validity of a partial rejection of UM coverage in light of the public policy expressed in the UM statute. In Graham, a company's automobile insurance policy limited UM coverage to owned autos even though the company carried liability insurance for its employees while using an auto not owned by the company to perform company business. An employee, injured in a collision with an uninsured motorist while driving his personal vehicle on company business, claimed he was entitled to UM benefits under the company policy despite the unambiguous contract language restricting UM coverage to company-owned vehicles. This was so, Graham urged, because the §3636 requires UM coverage to be coextensive with liability coverage. We defined the issue as whether §3636 "requires [UM] coverage over every vehicle this commercial auto policy covers for liability."70 In upholding the restriction of UM coverage to company-owned vehicles, we cited several factors, including the fact that Graham was not a party to the insurance contract and did not pay premiums for coverage under the company's insurance policy and the fact that the purpose of the contract from the company's standpoint was to protect itself from respondeat superior liability in the event one of its employees caused an accident while performing duties for the company. Yet, as in Shepard, the critical factor in upholding the UM coverage restriction appeared to be Graham's ownership of his own vehicle. We found no public policy violated by the UM limitation because by law Graham was required to "insure his vehicle for liability, and §3636 provided him the opportunity to accept or reject UM/UIM coverage for his personal protection."71 ¶33 In State Farm Mutual Automobile Insurance Company v. Wendt,72 we refused to allow an insurer to eliminate UM protection purchased by the named insured for himself and a resident family member by narrowly defining the term "uninsured motor vehicle." We stated in Wendt that "once a person is insured under an uninsured motorist policy, subsequent exclusions inserted by the insurer in the policy which dilute and impermissively [sic] limit uninsured motorist coverage are void as violative of the public policy espoused by 36 O.S.1981 §3636."73 The claimant in Wendt was clearly a defined insured under the policies at issue either as a named insured or as a resident relative. The policy's definition of an uninsured motor vehicle hence took away coverage to which the claimant was entitled as a policy-defined insured. ¶34 Case-law development in the area of permissible UM exclusions is clearly limited in number and scope.74 While it would be fanciful to deny that the trajectory of decisional law is anything but protective of UM coverage, it is certain that the outer boundaries of that protection have not been fully explored. In Cothren and Wendt, we rejected as contrary to the public policy expressed in the UM statute exclusions that limited UM coverage for the named insured or resident members of his or her family based upon the particular vehicle the insured was occupying when injured or by narrowly defining what constitutes an uninsured motor vehicle. In Shepard, we upheld as consistent with the UM statute's public policy an exclusion that eliminated UM coverage for a Class One insured75 who owned her own vehicle and hence had an opportunity to purchase UM coverage of her own. In all three of these cases we considered the effect of an exclusion on a Class One insured and our decision was careful to protect the policyholder's choice of self and family protection.76 No similarly clear expression can be found in our case law obligating the insured and insurer to provide UM protection to persons whose claim to coverage arises solely by reason of their occupancy of a vehicle belonging to the named insured. ¶35 In Graham, we held that a company that purchased liability coverage for any auto not owned by the company when the auto was used by an employee in the performance of company business, but which limited UM coverage to company-owned vehicles, did not violate the UM statute. Graham was using his own vehicle when the accident occurred and we pointed out that he would have had an opportunity to acquire his own UM coverage. Whether that was the decisive factor, in the absence of which we would have invalidated the exclusion, cannot be determined with certainty. Because the facts did not require it, we did not consider that the exclusion would also have eliminated UM coverage for Graham even if he did not own a car of his own and had been driving a car borrowed from someone who had rejected UM coverage. Whether the other factors we discussed in Graham, that Graham was not a party to the insurance contract and did not pay premiums for the coverage at issue and the fact that the purpose of the contract was to protect the named insured from respondeat superior liability, would have led to the same result must await an appropriate case. ¶36 In short, a review of our extant UM jurisprudence reveals (1) a public policy that is protective of UM coverage for Class One insureds and (2) a willingness to uphold UM exclusions which by their express terms are limited to individuals who own a vehicle and who have thus had an opportunity to purchase their own UM coverage. We have not yet addressed whether the public policy expressed in §3636 is offended by an exclusion that applies to Class Two insureds regardless of vehicle ownership.77 Inasmuch as the insurer has made payment to the claimant and the law had not been settled by requiring payment under this fact pattern, a bad-faith claim will not lie against the insurer. VI SUMMARY ¶37 ¶38 CERTIFIED QUESTIONS AS CONSOLIDATED AND REFORMULATED ANSWERED ¶39 EDMONDSON, C.J., TAYLOR, V.C.J., HARGRAVE, OPALA, KAUGER, WATT, WINCHESTER and REIF, JJ., concur. ¶40 COLBERT, J., concurs in result. FOOT