Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-94-06080/USCOURTS-ca10-94-06080-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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Patrick Fisher 

Clerk 

UNITED STATES COURT OF APPEALS 

Office of the Clerk 

Byron White United states courthouse 

1823 stout street 

Denver, co 80257 

December 13, 1995 

Elisabeth Shumaker 

Chief Deputy Clerk 

TO: ALL RECIPIENTS OF THE CAPTIONED OPINION 

RE: 94-6080, 94-6149, Timberlake Construction v. us Fidelity 

Filed November 22, 1995 by Judge Richard Owen, Senior 

District Judge for the u.s. District Court, Southern 

District of New York 

Please be advised of the following correction to the 

captioned decision: 

Page 15, the last sentence of the last full paragraph, 

the name Hamilton should be replaced with Hammond. 

Please make this correction to your copy. 

Very truly yours, 

Patrick Fisher, 

Clerk 

Barbara Schermerhorn 

Deputy Clerk 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 1 
PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

TIMBERLAKE CONSTRUCTION CO. ) 

) 

Plaintiff-Appellee/Cross-Appellant, ) 

) 

~ ) 

) 

U.S. FIDELITY AND GUARANTY CO. ) 

) 

Defendant -Appellant/Cross-Appellee. ) 

Nos. 94-6080 

94-6149 

Appeal from the United States District Court 

for the Western District of Oklahoma 

(D.C. No. CIV-92-2103) 

FILED 

United States Court of Appeals 

Tenth Circuit 

NOV 2 2 1995 

PATRICK FISHER 

Clerlt 

Sarah J. Rhodes, (Mort G. Welch and Murray E. Abowitz, with her on the briefs), Abowitz, 

Welch & Rhodes, Oklahoma City, Oklahoma, for Plaintiff-Appellee/Cross-Appellant. 

Larry D. Ottaway, (Darrell W. Downs with him on the briefs), Foliart, Huff, Ottaway & 

Caldwell, Oklahoma City, Oklahoma, for Defendant-Appellant/Cross-Appellee. 

Before KELLY and BARRETT, Circuit Judges, and OWEN,* District Judge. 

*The Honorable Richard Owen, Senior District Judge for the United States District Court for the 

Southern District ofNew York, sitting by designation. 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 2 
OWEN. District Judge 

Defendant-appellant U.S. Fidelity and Guaranty Company ("Fidelity") appeals from an 

adverse jury verdict in an action commenced by its insured, plaintiff-appellee Timberlake 

Construction Company. 

Timberlake contracted with Wal-Mart Stores to build a Wal-Mart supercenter in 

Claremore, Oklahoma. It purchased a $4,600,000 builders' risk insurance policy from Fidelity 

to cover risks associated with construction of the building. The policy covered the period from 

July 12, 1991 to August 15, 1992. It provided that coverage would terminate when the project 

was "accepted by the buyer" or, in a separate clause, that 

[T]he building ... under construction (the "project" ... ) may not be occupied 

or put to any use without our written consent and an additional premium, if any, 

paid. If the "project" ... becomes occupied and you do not tell us, we will not 

pay for any "loss" that occurs after it has become occupied. 

Neither "accepted" nor "occupied or put to any use" was defined in the policy. 

July 13, 1992 had been designated by Wal-Mart as its "possession date" based on a letter 

Timberlake had written Wal-Mait three months earlier in April stating that the building would 

be substantially complete on July 13 and that "possession date" was never changed. It was 

acknowledged by Timberlake's president at the time that the project was "substantially complete" 

by that date (see, infra). At the beginning of that day, a Monday, only $23,000 (or .0004%) 

of building costs remained to be completed by Timberlake. Wal-Mart had some forty employees 

in the building and had already moved in such things as the refrigerated food display cases, 

walk-in coolers, bakery equipment and security cameras. The telephones were working. The 

air-conditioners were working, as was the satellite communication disc on the roof. Wal-Mart 

had laid the carpet and floor tiles and completed the pharmacy. Cash registers, fixtures and 

other stock were stored in the back, and trucks had arrived outside to be unloaded. At about 

7:30 that morning, Timberlake, as had been arranged, turned over to Wal-Mart the keys to the 

building. Thereafter, Wal-Mart's employees were the only ones with access, or the ability to 

give access, even to Timberlake. Also that day, Wal-Mart's own corporate policies were 

imposed on the building, including polices regarding smoking, security, safety and sexualAppellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 3 
harassment, among others, all of which were communicated by Wal-Mart to the remaining 

Timberlake employees. Unfortunately, shortly before noon that very day, a Timberlake 

subcontractor welding on the roof started a fire which caused some $2 million damage to the 

building and over $1.2 million damage to Wal-Mart's property. 

Timberlake notified Fidelity of the fire later that day and Fidelity immediately sought an 

available investigator to send to the site. That investigator, Charles Murray, was in Claremore, 

Oklahoma two days later, Wednesday morning, July 15. By noon of that day, he had met with 

Timberlake's employees and commenced a tape-recorded interview with Timberl~e's President, 

David Timberlake, who had been at the site on Monday, and was one of the first on the roof 

after the fire was initially observed. In that taped interview, Timberlake spoke of the prior 

Monday, July 13, being Wal-Mart's possession date and that Timberlake's contract with WalMart provided " ... that Wal-Mart takes over when there's substantial completion." He also 

said that trailer loads of Wal-Mart stock and equipment had arrived on Monday, some portion 

of which were unloaded and stored that Monday before the fire. One question and answer in 

the interview went as follows: 

Q. To the best of your knowledge, except for punch lists and the carpet you 

mentioned and finishing the parking lot, you were substantially complete at the 

construction site to the point where Wal-Mart had taken the keys, had rechanged 

the tumblers and was having the merchandise delivered for setup. 

A. That is correct and I remember I said to the best of my knowledge the 

tumblers were changed. I've been busy doing other things since then and that's 

typically what's supposed to happen and I believe that is the case but I need to 

verify that with Miles Wilson. 

Implicit in this and later confrrmed was the fact that some forty Wal-Mart employees were at 

work on the premises. Fidelity also immediately ascertained that Wal-Mart had its own 

insurance coverage on the building and contents through Insurance Company of North America 

(sometimes called "INA" or "Cigna"). Fidelity's entry in its files five days after the fire reads: 

07-17-1992 This is a large fire loss to a Wal-:Mart store located in Claremore, 

OK. We have it insured under a builders risk policy. There is a 

question of coverage as Wal-Mart took the keys and changed the 

locks out on the building the day of the fire. I understand that the 

2 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 4 
G/ A Charlie Murray is in the process of sending a copy of the 

contract with Wal-Mart to Mickey James our fire attorney and we 

are going to see who has the coverage. 

Fidelity faxed this information and other documents to its Oklahoma City attorney, Mickey 

James, for a legal opinion regarding whether coverage existed for this fue loss. James advised 

that there was no coverage available for Timberlake's claim. INA however took the position 

that Fidelity's policy, not its own, was applicable to the loss and that Wal-Mart was an 

additional insured under its terms. INA nevertheless wanted to have the building rebuilt as soon 

as possible, as it had business interruption coverage for Wal-Mart which would cause it to incur 

liability in the amount of $500,000.00 per week while the store was not operating. Timberlake 

also wanted to complete the center to fulfill its contract with Wal-Mart. 

At that point, Fidelity, having the view that there was no coverage under its policy, 

considered either denying Timberlake's claim and filing a declaratory judgment action to 

adjudicate liability under its builder's risk policy, or working out an agreement with INA to get 

the building built. It did the latter, and four weeks after the fire, entered into a "non-waiver" 

agreement with INA1 to split the damages caused by the fire, pay Timberlake the cost of 

reconstruction, and resolve the coverage issues between the companies at a later time. 

Accordingly, three days later, one month after the fue, Fidelity paid a half-a-million dollars to 

Timberlake on account. 2 

The insurance companies further agreed to allow Timberlake to remain on the project and 

repair the damage notwithstanding the fact that the fire originated because of apparent 

malfeasance by one of its subcontractors, and Fidelity agreed to pay Timberlake 10 114% profit 

on-..the project even though Wal-Mart had allowed Timberlake only a 3 112% profit on its 

original construction. With this agreement in place, Timberlake began repairs to the Wal-Mart 

1 INA's willingness to enter with this agreement necessarily evidences INA's awareness 

that Fidelity had some basis supporting its questioning coverage under the builder's risk policy. 

2 Even Timberlake's expert on the trial conceded that this and Fidelity's other payments 

were acts of good faith. · 

3 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 5 
building and looked to both companies for payment pursuant to the non-waiver agreement.3 

Fidelity's first payment of $500,000, mentioned above, was made before Fidelity received any 

records from Timberlake as to expenditures or cost estimates. The next payment of $250,000 

on August 28, 1992 was made within a week of Timberlake's request. FidelitY made another 

payment of $311,132 to Timberlake on October 6, 1992 after receiving verification of various 

expenses on October 1, 1992, and made a fmal payment of $86,049 on November 23, 1992. 

INA on August 17, 1992 made a payment of $500,000 to Timberlake pursuant to the 

non-waiver agreement. INA then delayed making further payment under the non-waiver 

agreement because it did not believe Timberlake had supplied adequate documentation of its 

expenses. Unfortunately, because of this, on October 23, 1992 plaintiff filed suit against both 

Fidelity and INA for breach of the non-waiver agreement. 

INA subsequently made additional payments of $263,640 on December 28, 1992, $366, 

798 on March 30, 1993, and a final payment during trial to comply with the terms of the nonwaiver agreement. INA then settled its dispute with Timberlake. 

At the time of the filing of Timberlake's complaint, Fidelity was in full compliance with 

the terms of the non-waiver agreement, and shortly after the suit was filed it J\l.ade one small 

payment in normal course upon immediate receipt of documentation supplied by Timberlake. 

Timberlake in its initial complaint did not sue Fidelity for bad faith, but rather only for an 

alleged breach of the non-waiver agreement.4 It was not until several months later, March 15, 

1993, that Timberlake filed an amended complaint accusing Fidelity and INA of acting in bad 

faith in the handling of the Claremore fire loss. Within fifteen days of the filing of the amended 

complaint, INA made its final payment and Timberlake was thereby paid in full for its 

3 The non-waiver agreement provided that payments made to Timberlake would not be 

construed as admission of liability and any actions the companies might take thereto would not 

result in a waiver of any defenses they may have to the fire loss claim. 

4 President Earl Timberlake admitted that if INA had made its payments as scheduled, this 

lawsuit would not have been flled. 

4 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 6 
reconstruction costs with, as observed, a 10 114 percent profit. 

The trial in this case took place in November, 1993. Since between Fidelity and INA, 

Timberlake had been fully paid its reconstructions costs, the only issues submitted to the jury 

were the subsequently-asserted claims of bad faith and punitive damages. 

The jury found against Fidelity on the bad faith claim, awarding Timberlake 

$2,001,423.00 in compensatory damages and $1,334,282.00 in punitive damages. Upon 

postverdict motion, Timberlake was granted attorney's fees ($113,274. 75), expenses 

($18,508. 78), and postjudgment interest on the entire award at 3.57 percent. Fidelity challenges 

the jury verdict as well as the court's award of attorney's fees and pos~udgment interest on the 

punitive damages. Timberlake cross-appeals and challenges the court's denial of prejudgment 

interest on the compensatory damages. 

From a thorough review of the record, we sustain Fidelity's essential challenges. We 

must, however, frrst consider Fidelity's contentions that certain items of evidence were 

erroneously received and certain subject matters were erroneously put before the jury. We 

address certain of them before turning to Fidelity's major contentions that the bad faith and 

punitive damage claims were erroneously submitted to the jury. 

Fidelity claims the district court erred in allowing Timberlake to use litigation conduct 

of Fidelity's counsel as evidence of bad faith. Specifically, Fidelity challenges the admission 

of three things: a letter from Fidelity's counsel to a Fidelity adjuster; the fact that Fidelity 

filed a counterclaim against Timberlake seeking to recover the monies paid pursuant to the nonwaiver agreement; and the fact that Fidelity made a motion to join Wal-Mart in Timberlake's 

suit as a necessary party. Timberlake in its brief before us relies heavily on counsel's 

counterclaim and motion as evidence of Fidelity's "malicious intent". We note, however, that 

5

The letter stated: "Enclosed is a copy of plaintiffs response to our motion to dismiss and 

supporting brief. It looks like we have Timberlake squirming pretty good. I will be filing an 

application with the court to respond to the issues raised by plaintiff. If plaintiff is only suing 

to recover on the contract, why did they sue us instead of just suing CIGNA? . . . . " 

Appellant's Appendix at 1160. 

5 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 7 
Timberlake, over its president's signature, specifically acknowledged in a writing dated August 

11, 1992, under which it accepted payment by Fidelity of the first one-half million dollars that 

Fidelity had a right to make such a counterclaim and motion. 6 Even in the absence of 

Timberlake's specific recognition of Fidelity's right to so proceed, it was error to permit the jury 

to consider these standard and facially permissible litigation steps as evidence of Fidelity's bad 

faith. 

Neither this Court nor the Oklahoma Supreme Court has directly addressed the general 

question of whether an insurer's litigation conduct may be· admissible as evidence of bad faith. 

However, related holdings of the Oklahoma Supreme Court, as well as public policy concerns, 

indicate that such evidence should rarely, if ever, be allowed to serve as proof of bad faith. 

The Oklahoma Supreme Court established the tort of bad faith by an insurer in Christian 

v. American Home Assur. Co .. 577 P.2d 899 (Okla. 1977). In that seminal case, the court 

noted: 

We do not hold that an insurer who resists and litigates a claim made by its 

insured does so at its peril that. . . it will be held to have breached its duty to act fairly 

and in good faith and thus be liable in tort. 

We recognize that there can be disagreements between insurer and insured 

6 Timberlake's written agreement is as follows: 

[fimberlake] understands fully that there is a dispute involving . the 

coverage provided by [Fidelity] insurance coverage purchased by Wal-Mart 

Stores, Inc. through CIGNA Insurance Company [INA] for the damage which 

occurred to the Wal-Mart Supercenter, Claremore, Oklahoma, on July 13, 1992. 

Timberlake Construction Company, Inc. fully understands that by making this 

loan, [Fidelity] is in no way admitting liability or assuming responsibility and 

liability for the loss. The loan is being made in an effort to mitigate the damages 

and facilitate an agreement between the two primary insurance carriers as to 

liability and coverage. 

Timberlake Construction Company. Inc. further understands that [Fidelity] 

may. at its option. file a suit for declaratory judgment. naming as defendants not 

only Timberlake Construction Company. Inc .. but may include Wal-Mart Stores. 

Inc., its insurance carrier, CIGNA Insurance Company, and any other person or 

persons who might have an interest in the proceeds of any insurance or have any 

claim as a result of the fire. (emphasis supplied) 

6 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 8 
on a variety of matters such as insurable interest, extent of coverage, cause of 

loss, amount of loss, or breach of policy conditions. 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. 

Christian, 577 P .2d at 904-05 (emphasis added). "As numerous cases since Christian have made 

clear. fT]he insurer does not breach the duty of good faith by refusing to pay a claim or by 

litigating a dispute with its insured if there is a legitimate dispute as to coverage or amount of 

the claim, and the insurer's position is reasonable and legitimate." Oulds v. Principal Mut. Life 

Ins. Co., 6 F.3d 1431, 1436 (lOth Cir. 1993) (citations omitted). Christian and its progeny must 

be read together with other case law that sheds light on the relevance of litigation conduct 

to a bad faith claim. The Oklahoma Supreme Court has held that, in a claim for bad faith, 

"[t]he action of the [insurer] must be assessed in light of all facts known or knowable concerning 

the claim at the time [the insured] requested the [insurer] to perform its contractual obligation." 

Conti v. Republic Underwriters Ins. Co., 782 P.2d 1357, 1362 (Okla. 1989); see Oulds, 6 F.3d 

1431, 1436 (lOth Cir. 1993), (citing McCoy v. Oklahoma Farm Bureau Mut. Ins. Co., 841 P.2d 

568, 572 (Okla. 1992)). Thus, if "the focus of a bad faith claim is the insurer's knowledge and 

belief during the time the claim is being reviewed," as Timberlake itself states in its brief,7 then 

the relevance of litigation conduct is severely diminished. "In general, an insurer's litigation 

tactics and strategy in defending a claim are not relevant to the insurer's decision to deny 

coverage . . . . [O]nce litigation has commenced, the actions taken in its defense are not ... 

probative of whether [an insurer] in bad faith denied the contractual lawsuit. "8 Palmer v. 

Farmers Ins. Exchange, 861 P.2d 895, 915 (Mont. 1993) (citations omitted). 

Allowing litigation conduct to serve as evidence of bad faith would undermine an 

7

Appellee's Answer Brief at 21. 

8

In holding that an insurer's litigation conduct was not relevant to a bad faith claim, the 

Montana Supreme Court also stated in Palmer: "The jury was allowed to consider [the 

insurer's] legitimate defense strategy and proper litigation tactics as evidence of bad faith, when 

the relevant inquiry should have been whether Farmers' had a reasonable basis for denying the 

claim." 861 p. 21 at 915. · 

7 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 9 
insurer's right to contest questionable claims and to defend itself against such claims. As a 

district court in this Circuit aptly noted, permitting allegations of litigation misconduct would 

have a "chilling effect on insurers, which could unfairly penalize them by inhibiting their 

attorneys from zealously and effectively representing their clients within the bounds permitted 

by law." International Sumlus Lines Ins. Co. v. University of Wyoming Research Com., 850 

F. Supp. 1509, 1529 (D.Wyo. 1994), affd, 52 F.3d 901 (lOth Cir. 1995). Insurers' counsel 

would be placed in an untenable position if legitimate litigation conduct could be used as 

evidence of bad faith. Where improper litigation conduct is at issue, generally the Federal Rules 

of Civil Procedure provide adequate means of redress, such as motions to strike, compel 

discovery, secure protective orders, or impose sanctions. See id. at 1528-29. 

In light of existing case law and the public policy concerns identified above, we hold that 

while evidence of an insurer's litigation conduct may, in some rare instances, be admissible on 

the issue of bad faith, such evidence will generally be inadmissible, as it lacks probative value 

and carries a high risk of prejudice. See Fed. R. Evid. 401, 403. Turning therefore to 

Fidelity's counterclaim and motion at issue in this case, we conclude that the district court erred 

in admitting or permitting the use of such evidence as proof of Fidelity's bad faith. Its receipt 

for that purpose was prejudicial. 

Finally, in this area, the lawyer's letter with its self-adulatory comment,9 in what is 

otherwise a vacuum is not something a jury should have been permitted to consider as binding 

on a client. Even if it had any probative value, which we question, its probative value was 

grossly outweighed by its prejudice, and it should not have been received. 

Fidelity next contends that the district court erred in admitting several letters under the 

business records exception to the hearsay rule, Federal Rule of Evidence 803(6). At issue are 

five letters: two letters from David Timberlake to Craig McNew, Wal-Mart's director of 

construction, dated September 22, 1992, and October 13, 1992; one letter from Timberlake to 

9 See Fn. 5 supra. 

8 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 10 
Charles Murray, a Fidelity adjuster, dated October 5, 1992; one letter from Murray E. Abowitz, 

Timberlake's trial counsel, to Mickey James, Fidelity's counsel, dated October 13, 1992; and, 

one letter from Beau Neal, Wal-Mart's insurance agent, to Charles Murray dated August 14, 

1992. Fidelity maintains that the business records exception is inapplicable because writing these 

letters was not within the regular course of the construction business and because the letters 

contained double hearsay. 

Business records are admissible despite the prohibition against hearsay if they are "kept 

in the course of a regularly conducted business activity, and if it was the regular practice of that 

business activity to make the [record]." Fed. R. Evid. 803(b). The rule cautions, however, that 

business records will not be admissible where "the source of information or the method of 

circumstances of preparation indicate lack of trustworthiness." Id. The rationale behind the 

business records exception is that such, documents have a high degree of reliability because 

businesses have incentives to keep accurate records. "The business records exception is based 

on a presumption of accuracy, accorded because the information is part of a regularly conducted 

activity, kept by those trained in the habits of precision, and customarily checked for 

correctness, and because of the accuracy demanded in the conduct of the nation's business." 

U.S. v. Snyder, 787 F.2d 1429, 143.3-34 (lOth Cir. 1986), cert. denied, 479 U.S. 836 (1986). 

"If any person in the process is not acting in the regular course of business, then an essential 

link in the trustworthiness chain fails .... " U.S. v. Mcintyre, 997 F.2d 687, 699 (lOth Cir. 

(1993)), cert. denied, 114 S.Ct. 736 (1994). It is well-established that one who prepares a 

document in anticipation of litigation is not acting in the regular course of business. See Palmer 

v. Hoffman, 318 U.S. 109, 114 (1943); Fed. R. Evid. 803(6) advisory committee's note. 

We tum now to the contents of the five letters at issue, all written during the period of 

controversy. Three were written by David Timberlake-- two of them to Wal-Mart's McNew, 

and one to Fidelity's Murray. In all three, Timberlake recites his fmn's relationship with WalMart and Fidelity focusing on resolving the insurance coverage dispute. None are a record made 

9 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 11 
in the "regular practice" of the construction business. Instead, his letters have all the earmarks 

of being motivated and generated to further Timberlake's interest, with litigation actually not far 

around the comer. 10 The same holds true for the October 13 letter from Abowitz, 

Timberlake's counsel, to James, counsel for Fidelity, demanding that Fidelity cover 

Timberlake's loss. The letter states that Fidelity was acting contrary to law in not paying 

Timberlake's claim and threatens a lawsuit.U This is clearly not a business record within the 

meaning of Rule 803(6). Finally, the August 14 letter from Neal to Murray similarly fails to 

10 In addition, several contained double hearsay. The letter of September 22, from David 

Timberlake to Wal-Mart's McNew, states: "[Y]ou explained to me that our Company would 

be removed from future Wal-Mart bid lists until the Claremore matter was 'satisfactorily 

resolved.'" Similarly, the October 13 letter from Timberlake to McNew states: "I understand 

from [our] conversation that the insurance companies' inability to completely settle this matter 

is the only detail that is preventing us from bidding on future jobs with you." This hearsay 

recitation by Timberlake is essentially contradicted by what Wal-Mart's McNew testified in the 

case: 

Q. I understood that at some point in time Timberlake was removed from 

Wal-Mart's bid list. 

A. Yes. 

Q. I understand that you were the person who removed them. 

A. Yes, I was. 

* * * 

Q. Did the actions of [Fidelity] have anything to do with your basis or 

reasons for removing Timberlake from the bid list? 

A. No. 

11 The letter reads in pertinent part: 

On behalf of Timberlake Construction Company, Inc. , I demand that your client, 

[Fidelity], adjust the loss to the satisfaction of its insured .... [Timberlake] has been, 

as your client knows, financially weakened by the fact [that Fidelity] has not fully 

adjusted the loss as it is required to do under the law . . . . You are advised if this loss 

is not fully adjusted to the satisfaction of my client by the close of business on Monday, 

October 19, 1992, a lawsuit will thereafter be immediately filed .... (emphasis 

supplied). 

10 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 12 
qualify as a business record. Neal, an agent employed by the brokerage firm that wrote WalMart's INA policy, sent Murray a demand letter, ordering Fidelity to make payment to 

Timberlake and Wal-Mart. The letter discusses in detail the portion of Fidelity's builder's risk 

policy outlining when coverage ceases, flatly asserting that the policy was in force because none 

of the five conditions had been met. The letter, detailing legal authority, was thus clearly a selfserving INA document. At trial, counsel for Timberlake attempted to lay the foundation for the 

letter as a business record through Mr. Murray. However, Murray testified that in the course 

of his dealings in the insurance industry, letters from agents were "very rarely" received. 

Furthermore, he stated that his response to Neal's letter was "[telling] him that I was turning 

it over to our attorney." The district court nevertheless admitted the letter as a business record 

based on this testimony. This, too, was error, for the letter was written in anticipation of 

litigation and therefore was not admissible as a business record within 803(6). 

We note that Fidelity had waived objection to the October 5 letter from Timberlake to 

Murray. But this was a relatively bland letter in which Timberlake was foreshadowing possible 

damages. It was not a letter proffered in support of Fidelity's alleged bad faith in questioning 

Timberlake's claim. In any event, viewed against the four letters as to which there was 

objection, it was completely overshadowed. For example, although the October 5th letter 

contained a general reference to Timberlake being stricken from Wal-Mart's bid lists, the 

September 22 letter has the hearsay implication that McNew of Wal-Mart had himself linked 

Timberlake's removal from the bid list with Fidelity's conduct. Similarly, the October 13letter 

from Timberlake to McNew stated, "I understand from [our] conversation that the insurance 

companies' inability to completely settle this matter is the only detail that is preventing us from 

bidding on future jobs with you." 12 The two remaining letters, dated October 13 and August 

14, were dearly prepared in anticipation of litigation, containing legal conclusions asserting 

Fidelity's coverage. In sum, we conclude that the court below abused its discretion in admitting 

12 But see Fn. 10, supra, setting forth McNew's testimony to the contrary. 

11 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 13 
the contested letters into evidence and that the error caused manifest injustice, despite the fact 

that it was not plain error for the court to have admitted the letter of October 5th. 

We now tum to Fidelity's contention that with inadmissible evidence excluded, there was 

no basis to submit the issue of bad faith, let alone punitive damages, to the jury. At the close 

of Timberlake's case at trial, Fidelity moved for judgment as a matter of law on the bad faith 

claim, pursuant to Rule 50 of the Federal Rules of Civil Procedure. The court denied the 

motion, and review of that denial is de novo. Bankers Trust Co. v. Lee Keeling & Assoc. Inc., 

20 F.3d 1092, 1099 (lOth Cir. 1994). Our inquiry at this point is whether, on the record as it 

should have been, there was sufficient evidentiary basis for a reasonable jury to return a verdict 

in Timberlake's favor on its bad faith claim. As is the case where we review an order granting 

summary judgment, on this appeal we consider only admissible evidence. See, Gross v. 

Burggraf Construction Company, 53 F. 3d 1531, 1541 (lOth Cir. 1995). Fidelity's contention 

is that where, as it asserts here, there is a legitimate dispute as to coverage, a finding of bad 

faith is precluded. As a starting point, Fidelity reasons that there could be no bad faith denial 

of coverage where it offered evidence from which a jury could have concluded there was no 

coverage under the policy, even if the jury did not actually reach that conclusion. Fidelity also 

points to its prompt and voluntary entry into the non-waiver agreement as compelling evidence 

of good faith. 

Under Oklahoma law, "an insurer has an implied duty to deal fairly and act in good faith 

with its insured." Christian v. American Home Assurance Co., 577 P.2d 899, 904 (Okla. 

1977). Violation of this duty gives rise to an action in tort. Id. "The essence of the tort of bad 

faith, as it is recognized in Oklahoma, is the unreasonableness of the insurer's actions." Conti 

v. Republic Underwriters Ins. Co., 782 P.2d 1357, 1360 (Okla. 1989). The Oklahoma Supreme 

Court and. this Court have made clear that an insurer does not subject itself to a claim of bad 

faith merely by disputing coverage. "The insurer does not breach the duty of good faith by 

refusing to pay a claim or by litigating a dispute with its insured if there is a 'legitimate dispute' 

12 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 14 
as to coverage or amount of the claim, and the insurer's position is 'reasonable and legitimate.'" 

Thompson v. Shelter Mut. Ins., 875 F.2d 1460, 1462 (lOth Cir. 1989) (citing Manis v. Hartford 

Fire Ins. Co., 681 P.2d 760, 762 (Okla. 1984)). So long as there is a legitimate basis for doing 

so, disputing coverage is not bad faith per se. Oulds v. Principal Mut. Life Ins. Co., 6 F.3d 

1431, 1436 (lOth Cir. 1993). We note, though, that a legitimate dispute as to coverage will not 

act as an impenetrable shield against a valid claim of bad faith. An insured may pursue a claim 

of bad faith even where the insurer has a legitimate defense to coverage. 13 However, in order 

to pursue such a claim, the insured must present sufficient "evidence reasonably tending to show 

bad faith." Id. at 1440. As we stated in Oulds: 

Numerous Oklahoma cases have ruled as a matter of law that no reasonable inference of 

bad faith arises when an insurer denied a claim solely because of the existence of a 

legitimate dispute. As these cases indicate, the fact that a reasonable jury could fmd in 

favor of the insurer based on all facts known or that should have been known by the 

insurer when it denied a claim is strong evidence that a dispute is "legitimate." ... [In] 

cases in which the question of bad faith was required to be submitted to the jury, the 

evidence of the insurer's defense to the underlying claim was so weak that a reasonable 

inference could be drawn that the insurer denied the claim in bad faith. 

Id. at 1442 (citations omitted). In sum, "in order to establish [a bad faith] claim, the insured 

must present evidence from which a reasonable jury could conclude that the insurer did not have 

a reasonable good faith belief for withholding payment of the insured's claim." Id. at 1436 

(citing McCoy, 841 P.2d at 572). 

Upon review of the record, we conclude that there was a legitimate dispute as to 

coverage under the policy, and that Fidelity's position was reasonable in light of the facts known 

or knowable to it at the time it denied Timberlake's claim. See Buzzard, 736 P.2d at 159. 

t· 

Under the terms of the builders' risk policy, Timberlake's coverage terminated when the WalMart project was "accepted" or "occupied" by Wal-Mart. At trial, Fidelity presented evidence 

13~ Timmons v. Royal Globe Ins. Co., 653 P.2d 907 (Okla. 1984) (affirming a bad faith 

judgment despite insurer having several defenses to coverage); Massey v. Farmers Ins. Group, 

1993 WL 34770 (lOth Cir.) cert. denied 113 S. Ct. 2345 (1993). ("Christian does not suggest 

that an insurer's absence of a defense to a breach of contract claim is a necessary predicate to 

a bad faith cause of action). 

13 

.. 

Appellate Case: 94-6080 Document: 01019279169 Date Filed: 11/22/1995 Page: 15 
from which a reasonable trier of fact could conclude that both conditions had been met on July 

13, the day the fire broke out. Miles Wilson, project superintendent for Timberlake, admitted 

under cross-examination by Fidelity that July 13 was Wal-Mart's designated "possession day" 

or "takeover day." Fidelity also offered into evidence a letter written by Timberlake's project 

manager, Frank Narcomi, to Wal-Mart, stating: "[T]his letter shall serve as our 90-day notice 

prior to possession by Wal-Mart and confirm the date of substantial completion to be Monday, 

July 13, 1992." Wilson acknowledged that keys were given to the Wal-Mart "takeover team." 

Greg Epps, co-manager of the Wal-Mart supercenter, testified that before the fire broke out, 

keys had been turned over to him so that the locks could be changed. Fidelity presented 

evidence that as many as forty Wal-Mart employees were working in the building. Wal-Mart 

had also moved a substantial amount of equipment into the store, including security cameras, 

refrigerated food display cases, a working phone system, a satellite dish, and a pharmacy. In 

addition, Fidelity offered evidence that on July 13, Wal-Mart's company policies, including a 

no smoking policy, a security policy, and a sexual harassment policy, were imposed on the 

building. Based on all of these factors, we conclude that a reasonable jury could very well have 

concluded that Wal-Mart accepted or occupied the supercenter, and thus Fidelity had at least a 

legitimate dispute as to coverage. 14 

Since a legitimate dispute as to coverage did exist, then as a matter of law Fidelity did 

not breach the duty of good faith merely by refusing to pay Timberlake's claim. Thompson, 875 

F.2d at 1462. Thus, Timberlake needed to produce additional evidence of bad faith in order to 

send the issue to the jury. "The mere allegation that an insurer breached the duty of good faith 

and fair dealing does not automatically entitle a litigant to submit the issue to a jury for 

14 Timberlake's contention that the building was not "occupied" by Wal-Mart because it 

was not ready "to receive retail customers" (Answer Brief p. 18) is without merit. We can 

easily envision a situation where the builder finishes, turns over the keys and leaves, and WalMart, for whatever reason, does not immediately use the building, merely putting in a security 

staff. It is nevertheless "occupied" by Wal-Mart within Fidelity's builder's policy, even though 

empty, and the builder's risk policy has terminated. 

14 

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determination. A jury question arises only where the relevant facts are in dispute or where the 

undisputed facts permit differing inferences as to the reasonableness and good faith of the 

insurer's conduct." Oulds, 6 F.3d at 1436 (citations omitted). Our review is de novo and we 

may consider only admissible evidence. See Security Nat. Bank v. Belleville Livestock Comm 'n 

,CQ.., 619 F.2d 840, 848 (lOth Cir. 1979) 

Considering only admissible evidence, at the core of Timberlake's bad faith claim is its 

assertion that Fidelity failed to adequately investigate its claim under the builders' risk policy. 

It appears that Fidelity did not contact anyone from Wa1-Mart to determine if they regarded the 

project as accepted or occupied until after coverage was denied. Timberlake's expert witness, 

John Hammond testified that in his opinion, Fidelity breached its duty of good faith because 

"[Fidelity] had not completed an investigation. They had only gotten one side of the story." 

However, we note the side of the story Fidelity had immediately gotten in detail was that of its 

own insured, on whose statements it was entitled to rely. Hammond also put before the jury the 

assertion that the duty of good faith includes a duty on the part of the insurer to "use an equal 

amount of effort to develop information that would lead toward the payment of the claim as well 

as that would lead toward the denial of the claim. "

15 Hamilton then stated that Fidelity, from 

his review of the claims flle, had not tried to fmd support for coverage in this case. 

As we noted in Oulds: "The investigation of a claim may in some circumstances permit 

one to reasonably conclude that the insurer has acted in bad faith. This is particularly true if 

15 Whether such a duty in fact exists in Oklahoma as Hammond testified, or whether 

Hammond was sufficiently qualified as an expert to give testimony as to it, we need not decide 

on this appeal. Cf such authorities as Anderson v. Continental Insurance Co.,. 271 N. W. 2d 

368, 377 (Wise. 1978) requiring a claim to be "properly investigated ... " and Pirkl v. 

Northwestern Mutual Ins. Co., 348 N.W. 2d 633, 635 (Sup. Ct. Iowa, 1984) where the Court 

stated at 635: 

In the casualty insurance situation, the relationship between insurer and insured 

is for many purposes at arms length. The insurer has no clearly defined duty of 

investigation and may require the insured to present adequate proof of loss before 

paying the claim. The two parties are on opposite sides of the issue rather than 

being partners on the same side as in the liability insurance situation. 

No supporting authorities are cited in the trial record or the appellee's briefs before us for 

Hammond's definition of the duty, and our research fails to reveal authorities on this point in 

either Oklahoma or our Circuit. 

We further note that this is not the first time our Court has had occasion to address the 

propriety of testimony from witness John Hammond, as "an expert in 'bad faith denial and 

investigation of insurance claims ... [under] the industry standard and the laws of the State of 

Oklahoma.'" Thompson v. State Farm Fire and Cas. Co., 34 F. 3d 932, (lOth Cir. 1994) at 

940-1, where the Court also stated: 

And what we have already said as to the jury's competence to deal with the bad 

faith issue on its own confirms the discretionary power of the magistrate judge 

to bar testimony by the asserted expert [Hammond]. 

15 

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the manner of investigation suggests that the insurer has constructed a sham defense to the claim 

or has intentionally disregarded undisputed facts supporting the insured's claim." 6 F.3d at 1442 

(citations omitted). Timberlake's evidence of Fidelity's investigation does not, however, suggest 

a sham defense or an intentional disregard of uncontrovertible facts. Moreover, when a bad 

faith claim is premised on inadequate investigation, the insured must make a showing that 

material facts were overlooked or that a more thorough investigation would have produced 

relevant information. Id.. at 1442. Timberlake made no such showing. For example, while 

Hammond, Timberlake's expert, testified that Fidelity breached the duty of good faith by not 

questioning Wal-Mart representatives about whether, in their view, they had accepted or 

occupied the supercenter, Wal-Mart's views on this subject would not have changed the 

underlying facts already known to Fidelity, facts from which Fidelity was entitled to form a 

reasonable belief that the building was either accepted or occupied. Hammond acknowledged 

this on cross-examination: 

Q: Would you agree that.if [Fidelity] had done this further investigation, they 

would have .found what we've been talking about here all the time, that 

Timberlake wrote the 90-day letter saying the building will be substantially 

complete on July 13th, 1992? Is there any amount of investigation that would 

change what was in that letter? 

A: No. 

Q: All right. That Wal-Mart in their language calls this 90 days or July 13th, 

they call it possession day and that their people, as you've read in the deposition, 

that is the day we want to get control because we're moving stuff in there. Now, 

is there any amount of investigation that would have changed that? 

A: No. 

Q: All right. Is there any amount of investigation that would change the fact that 

at the takeover meeting on July 13th Wal-Mart said, "Certain of our rules are 

enforced right now. Namely, our no-smoking and proper treatment of ladies." 

Is there any amount of investigation that would have changed that? 

A:. No. 

Timberlake also contends that it is evidence of bad faith that Fidelity never verified David 

Timberlake's statement that Wal-Mart in fact changed the locks after it acquired the keys to the 

16 

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existing locks. But whether or not the locks were changed is immaterial where David 

Timberlake had told Fidelity at the outset the undisputed fact that before the fire Wal-Mart had 

been given the keys to the locks that were there and thus Wal-Mart had control of ingress and 

egress. Hammond himself acknowledged that Wal-Mart taking the keys indicated that it was 

taking steps to get control of the building. 

Furthermore, Hammond significantly testified: 

Q. [H]as anything come to your attention now or from then to now that makes 

you say that the information that David Timberlake gave to us was false and we 

have no right to rely on it? 

A. No. 

Q. You agree that it's not bad faith for an insurance company to take its 

customer's word? 

A. I agree. [

16] 

Against this background, David Timberlake had told Fidelity two days after the fire that he 

believed the locks were changed and in any event, the Timberlake employees could gain access 

only with the assistance of Wal-Mart employees. Timberlake stated: 

A: [I]t's·my understanding that Wal-Mart changed the-- we furnished temporary 

cylinders and tumblers on all the locks and the doors with construction keys and 

we turned these over to them. Then they rekey them and put new tumblers in 

and have the permanent keys so that construction personnel won't end up with the 

keys to the store. It is my understanding that this was accomplished on or prior 

to Monday and that they had the keys on Monday, possession day, when they 

were to start installing their fixtures and equipment. 

* * * 

Q: If they changed the locks on the doors and you did not have a set, then you 

did not have access to the building, is that correct, unless you met with a WalMart representative who let you in? 

A: They would be working, that's correct. They would be in the building at all times 

and after that day would set hours on the building, when the building was open, and, if 

we needed any different times, they would make that arrangement. 

Murray's investigative interview of Timberlake also produced the following information: 

Q:. To the best of your knowledge, your policy says that -- your contract says 

that Wal-Mart takes over when there's substantial completion. Do you think 

16 Fidelity's investigator's manual directs its investigators to contact the insured in cases 

of fire with over $25,000 of damage. That was immediately done here. 

17 

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there was substantial completion except for some parking lot work and hooking 

up equipment? 

A: Yes. Substantial completion by the AI definition is that point at which the 

building is substantially completed to be used for its intended purpose. In 

consideration of that, most of the building was substantially complete. We were 

still laying carpet. We had some paint touch-up that we were doing and they 

were laying some asphalt in the parking lot and we were obviously -- part of our 

obligation was some gas lines serving the units on the roof and that was being 

performed. So, it was substantial enough for them to go ahead and start to bring 

fixtures and things in. They would like to have seen it a little further along on 

that day, but I would say it was substantially complete. 

Clearly, Fidelity conducted an investigation that gave it an ample basis from which to 

take a reasonable position that Wal-Mart had taken occupancy and control of the premises and 

that Timberlake's coverage under Fidelity's builders' risk policy had accordingly terminated. 

Consequently, given all the information Fidelity's investigation did uncover, as well as the fact 

that further investigation would have produced nothing of consequence, we are compelled to 

conclude that any alleged 11 failure 11 to further investigate cannot, in this case, support 

Timberlake's bad faith claim. 

Finally, Timberlake contends that notwithstanding it got paid all its reconstruction costs 

under the Fidelity/INA non-waiver agreement-- and it would have received no more had Fidelity 

been the sole payor -- that the non-waiver agreement itself is evidence of bad faith. 17 

Timberlake argues that Fidelity entered into the agreement to share the rebuilding costs with 

INA for the sole purpose of avoiding paying the full amount under the builders' risk policy. 

Timberlake has no evidence to support this other than the agreement itself. We find 

Timberlake's assertion to be without merit. First and foremost, Fidelity's entry into the 

17 Timberlake's Answer Brief at P. 24, listing further evidence of bad faith, reads: 

11 [Fidelity] failed to send a reservation of rights letter regarding coverage to TCI, 

contrary to [its] policy [as set forth in its manual containing investigative 

guidelines.] 11 

But Timberlake's Answer Brief omits the alternative set forth in the manual immediately 

following the above language of a 11Non-Waiver 11 which Fidelity executed with INA, Timberlake 

being its third-party beneficiary. 

18 

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... 

agreement never shielded it from possible liability for the full amount. As its name indicates, 

the non-waiver agreement preserved the right of each insurer to sue the other to recover any and 

all monies paid. Thus, Fidelity entered into the agreement knowing that it might eventually be 

liable for the full amount of the rebuilding costs. In addition, common sense dictates that entry 

into the non-waiver agreement cannot be construed as bad faith where Fidelity started 

immediately advancing to Timberlake payments totaling $1,147,000.00 in lieu of exercising its 

option to go to court and seek a declaratory judgment of no coverage. And, as noted earlier, 

even Hammond, Timberlake's expert, acknowledged that these payments were evidence of ~ood 

faith. Thus, no reasonable jury could conclude that it was an act of bad faith by Fidelity when 

it entered into the non-waiver agreement. 

In sum, on the record as we find it should have existed at the close of Timberlake's case, 

and viewing it in the light most favorable to Timberlake and drawing all inferences in 

Timberlake's favor, we conclude that there would have been insufficient evidence of bad faith 

to have permitted the jury to consider the issue. 18 Accordingly, the district court would have 

been required to grant Fidelity's Rule 50 motion. Thompson, 875 F. 2d at 1462. We reverse 

and remand to the district court with "the direction that the complaint be dismissed in all respects, 

and judgment be entered in favor of Fidelity. 

18 Given this, obviously the punitive damage claim fails as well. 

19 

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