Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-07-05083/USCOURTS-ca10-07-05083-0/pdf.json

Parties Involved:
Scottsdale Insurance Company
Appellee
Michael S. Tolliver
Appellant
Sandra L. Tolliver
Appellant

Document Text:

* After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination of

this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument. This order and judgment is

not binding precedent, except under the doctrines of law of the case, res judicata,

and collateral estoppel. It may be cited, however, for its persuasive value

consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1. 

FILED

United States Court of Appeals

Tenth Circuit

March 11, 2008

Elisabeth A. Shumaker

Clerk of Court

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

SCOTTSDALE INSURANCE

COMPANY,

Plaintiff-CounterDefendant-Appellee,

v.

MICHAEL S. TOLLIVER;

SANDRA L. TOLLIVER,

Defendants-CounterClaimants-Appellants.

No. 07-5083

(D.C. No. 04-CV-227-CVE-FHM)

(N.D. Okla.)

ORDER AND JUDGMENT*

Before TACHA, EBEL, and MURPHY, Circuit Judges.

Michael S. and Sandra L. Tolliver appeal from a judgment following a jury

verdict in favor of Scottsdale Insurance Company on its claim for cancellation of

an insurance policy and against the Tollivers on their claim for breach of contract. 

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The Tollivers also appeal the district court’s grant of summary judgment in favor

of Scottsdale on their bad faith claim. We affirm in part, reverse in part, and

remand for a new trial.

Factual and Procedural Background

Scottsdale issued a dwelling policy (Policy) to the Tollivers on

September 24, 2002, to insure a residential rental property they owned in Tulsa,

Oklahoma (Property). The application for insurance requested disclosure of

“ANY LOSSES, WHETHER OR NOT PAID BY INSURANCE, DURING THE

LAST 3 YEARS, AT THIS OR AT ANY OTHER LOCATION.” Aplt. App., Vol.

I at 107. The application disclosed one $5,000 hail damage claim in 2001. 

Mrs. Tolliver signed the application, attesting that the information she provided

was “true, complete and correct to the best of [her] knowledge and belief.” Id. A

fire occurred at the Property on March 29, 2003, and the Tollivers submitted a

claim for the loss to Scottsdale. Scottsdale denied the claim based on

misrepresentations in the application, after determining that the Tollivers had

over $200,000 in previous claims in the past three years that were not disclosed in

the application, including two total-loss fire claims and a substantial theft claim.

Scottsdale filed a declaratory judgment action against the Tollivers, seeking

to avoid payment of their claim and asking for rescission of the Policy. 

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1 Okla. Stat. tit. 36, § 3609 provides, in relevant part:

A. All statements and descriptions in any application for an

insurance policy or in negotiations therefor, by or in behalf of the

insured, shall be deemed to be representations and not warranties.

Misrepresentations, omissions, concealment of facts, and incorrect

statements shall not prevent a recovery under the policy unless:

1. Fraudulent; or

2. Material either to the acceptance of the risk, or to the hazard

assumed by the insurer; or

3. The insurer in good faith would either not have issued the policy,

or would not have issued a policy in as large an amount, or would not

have provided coverage with respect to the hazard resulting in the

loss, if the true facts had been made known to the insurer as required

either by the application for the policy or otherwise.

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Scottsdale asserted its claims under Okla. Stat. tit. 36, § 3609.1

 The Tollivers

filed counterclaims for breach of contract and bad faith. Scottsdale moved for

summary judgment on all claims, but the district court granted summary judgment

only on the Tollivers’ bad faith claim.

Prior to trial, the parties disagreed regarding the proof required under

§ 3609 to prevent a recovery under a policy. Consequently, the district court

certified a question to the Oklahoma Supreme Court, asking whether Oklahoma

law requires a finding that the insured intended to deceive before a

misrepresentation, an omission, or an incorrect statement in an application can

avoid the policy under § 3609. The Oklahoma Supreme Court declined to answer

the certified question, holding that controlling precedent required a finding of

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intent to deceive under § 3609. Scottsdale Ins. Co. v. Tolliver, 127 P.3d 611,

614-15 (Okla. 2005). The Oklahoma Supreme Court also stated that the question

of the insured’s intent to deceive under § 3609 is for the jury where the evidence

is conflicting. Id. at 614. The district court subsequently held sua sponte that

Scottsdale’s claim was a legal claim for cancellation of the policy, rather than an

equitable claim for rescission. The case was therefore tried to a jury.

At the close of Scottsdale’s case, and again after both parties rested, the

Tollivers moved for judgment as a matter of law on two grounds: (1) that the

evidence of intent to deceive was insufficient to satisfy a clear and convincing

standard of proof; and (2) that the evidence failed to show that Scottsdale had

returned to the Tollivers the premium they paid under the Policy. At each stage,

the district court denied the motion on the first ground and took the second

ground under advisement. Over the Tollivers’ objection, the court ultimately

instructed the jury that Scottsdale’s burden of proof on its cancellation claim,

including on the issue of intent to deceive, was “BY A PREPONDERANCE OR

THE GREATER WEIGHT OF THE EVIDENCE.” Aplt. App., Vol. I at 388. 

After the jury returned a verdict for Scottsdale, the district court issued a written

order denying the Tollivers’ motion for judgment as a matter of law based on

Scottsdale’s failure to return the premium. The court then entered judgment in

favor of Scottsdale and the Tollivers appealed.

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Discussion

The Tollivers raise four issues on appeal, which we will address in turn.

1. Cancellation Versus Rescission

The Tollivers first argue that, by re-labeling Scottsdale’s claim as seeking

“cancellation” rather than “rescission,” Scottsdale could obtain only prospective

relief, namely cancellation of the policy as of the date of the judgment. They

contend, therefore, that it was error for the district court to enter judgment against

them on their breach of contract claim, which was based upon a loss that

pre-dated the judgment. Consequently, they ask this court for judgment in their

favor on their breach of contract claim. For this proposition the Tollivers rely on

various treatises and one Oklahoma Supreme Court case delineating the

distinction between claims for rescission and cancellation. See F. & M. Drilling

Co. v. M. & T. Oil Co., 137 P.2d 575, 577 (Okla. 1943) (“‘[C]ancellation’ . . .

means to abrogate so much of [a contract] as remains unperformed . . . and [is]

different from ‘rescission,’ which means to restore the parties to their former

position.”).

The Tollivers contend that this is a legal issue that we review de novo. But

we decline to consider it because the Tollivers did not raise the issue in the

district court. See Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th Cir.

1992). Neither party objected when the court determined that Scottsdale’s claim

was legal rather than equitable and thereafter referred to the remedy as

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cancellation rather than rescission. In making that ruling, the district court was

focused on whether to seat only an advisory jury or allow the jury to decide

Scottsdale’s claim. But it is clear that, regardless of how Scottsdale’s claim

under § 3609 was labeled, the court and the parties intended that a finding in

favor of Scottsdale would preclude a finding in favor of the Tollivers on their

breach of contract claim. Scottsdale’s action would otherwise be nonsensical, as

its purpose in bringing the claim was to avoid paying the Tollivers for their

March 29, 2003, fire loss at the Property.

The Tollivers acquiesced in Scottsdale’s theory of avoiding the Policy by

failing to object to the applicable jury instruction and verdict forms. See Quigley

v. Rosenthal, 327 F.3d 1044, 1063 (10th Cir. 2003) (holding appeal argument

waived where defendant “acquiesced in the plaintiffs’ conspiracy theory and the

district court’s conspiracy instructions”). The instructions directed the jury that

“IF AND ONLY IF YOU FIND FOR [THE TOLLIVERS] ON [SCOTTSDALE’S]

CLAIM FOR CANCELLATION, YOU MUST ALSO COMPLETE A VERDICT

FORM ON [THE TOLLIVERS’] COUNTERCLAIM FOR BREACH OF

CONTRACT.” Aplt. App., Vol. I at 409. In reviewing the appropriateness of this

instruction with both parties’ counsel, the district court asked Scottsdale’s

counsel, “You would agree that . . . if the jury finds for [Scottsdale] on the

cancellation claim, there is no breach-of-contract claim to get to?” Id., Vol. II at

761. Scottsdale’s counsel replied, “I agree, Your Honor.” Id. The Tollivers

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raised no objection and the jury was instructed accordingly. Under these

circumstances, we have no hesitation in holding that the Tollivers forfeited their

argument that the judgment for cancellation terminated the Policy only

prospectively.

2. Return of the Premium

The Tollivers next argue that the district court erred in denying their

motion for judgment as a matter of law because Scottsdale presented no evidence

that it returned the premium to them, as required by Oklahoma law. We review

the denial of a motion for judgment as a matter of law de novo. See Phillips v.

Hillcrest Med. Ctr., 244 F.3d 790, 796 (10th Cir. 2001). “[A] trial judge may

grant a motion for judgment as a matter of law if, after a party has been fully

heard on an issue, there is no legally sufficient evidentiary basis for a reasonable

jury to find for the party on that issue.” Id.; see also Fed. R. Civ. P. 50(a)(1). 

Likewise, our review of the district court’s interpretation of Oklahoma law is de

novo. Cooper v. Cent. & Sw. Servs., 271 F.3d 1247, 1251 (10th Cir. 2001). We

must “ascertain and apply Oklahoma law with the objective that the result

obtained in federal court should be the result that would be reached in an

Oklahoma court. In so doing, we must apply the most recent statement of state

law by the state’s highest court.” Id. (citation and quotations omitted).

In support of their argument that Scottsdale was required to present

evidence that it returned the premium, the Tollivers rely on Great American

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Reserve Insurance Co. of Dallas v. Strain, in which an insurer defended a claim

under a life insurance policy, asserting that the policy was void. See 377 P.2d

583, 586-87 (Okla. 1962). The jury returned a verdict for the insured and the

insurer appealed. Id. at 586. The Oklahoma Supreme Court affirmed the

judgment in favor of the insured on the basis that the insurer failed to plead or

prove return or tender of the premium, citing Okla. Stat. tit. 15, § 235. Strain,

377 P.2d at 587-88. Section 235 provides, in relevant part:

Rescission, when not effected by consent, can be accomplished

only by the use, on the part of the party rescinding, of reasonable

diligence to comply with the following rules: 

. . . .

2. He must restore to the other party everything of value

which he has received from him under the contract; or must offer to

restore the same, upon condition that such party shall do likewise,

unless the latter is unable, or positively refuses to do so.

§ 235(2).

The court explained in Strain that “[t]he purpose of requiring a party

rescinding a contract to restore to the other party everything of value he has

received under it is to make it unnecessary for the party to whom restoration

should be made to bring an action to obtain such restoration.” 377 P.2d at 588

(quotation omitted). The court held further that the insurer has the duty to plead

and prove tender, although the failure to plead could be cured by proof at trial. 

Id. Finally, the court concluded that failure of a party seeking to avoid a contract

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to comply with § 235 is “fatal to his cause of action or defense.” Id. The

Tollivers argue that, under the reasoning in Strain, the refund principle is likewise

applicable to Scottsdale’s claim for cancellation of the Policy under § 3609.

In denying the Tollivers’ motion, the district court acknowledged that the

rule requiring return or tender of the premium applies in equitable claims for

rescission. But the court held that it was inapplicable in a legal claim for

cancellation under § 3609, noting that the Oklahoma Supreme Court has not

applied the refund principle in this context. Scottsdale argues on appeal that the

district court’s conclusion was correct, contending that § 3609 should not be

rewritten to include a refund/tender requirement.

We conclude that the district court erred in holding that the refund principle

is inapplicable to legal claims under § 3609. While the Oklahoma Supreme Court

has not specifically applied it in this context, and § 3609 itself does not specify

that refund or tender is necessary to avoid a policy under that section, the court

held in Strain that § 235 controls “with equal force and effect, whether the action

or defense be at law or in equity,” stating that “[o]ne will not be permitted to

repudiate his contract and retain the benefits which he has derived from it.” 

377 P.2d at 588. Therefore, we conclude that the Oklahoma Supreme Court

would apply the refund principle to claims under § 3609. Thus, the district court

erred in denying the Tollivers’ motion for judgment as a matter of law, unless

some exception to the rule applies in this case.

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Scottsdale argues that two exceptions to the rule are applicable here. First,

it contends that tender of the premium was unnecessary because it is clear that

any offer of a refund in exchange for cancellation of the Policy would have been

refused by the Tollivers. Section 235 “dispenses with the necessity of making the

offer if the non-rescinding party positively refuses to return everything of value

received by him.” Jones v. Goldberger, 323 P.2d 344, 349 (Okla. 1958). The

Oklahoma Supreme Court stated further that “[w]hen, in an action at law, a tender

is necessary to the establishment of any right, it is waived or becomes

unnecessary when it is reasonably certain that the offer, if made, would be

refused.” Id. In National Foundation Life Insurance Co. v. Loftis, the court held

that tender prior to the time of trial was not necessary under the rule laid down in

Jones “that restoration or an offer of restoration has no application where it is

certain that the defendant would not have accepted the tender, had it been made.” 

425 P.2d 946, 950 (Okla. 1966).

Mrs. Tolliver testified at the trial that she would not have accepted

Scottsdale’s offer to return the premium, had such an offer been made. But the

Tollivers argue that this evidence, which was not admitted in Scottsdale’s case in

chief, came too late to satisfy Scottsdale’s duty to comply with § 235. Scottsdale

argues, however, that the Tollivers’ tenacious prosecution of their counterclaim,

in which they asserted that Scottsdale was contractually obligated to pay their fire

loss claim, was sufficient proof that any tender of the premium would have been

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rejected. We agree. In Loftis, the court considered the defendant’s response to

the plaintiff’s attempts to rescind an insurance policy and obtain a refund of the

premium she had paid, and concluded that “even if the offer had been made by the

plaintiff to return the policies to the defendant, and . . . even if the defendant had

accepted the policies, it would not have returned to the plaintiff the money she

had paid.” 425 P.2d at 950. We believe it is equally clear here that, even if

Scottsdale had returned the premium to the Tollivers, they would not have agreed

to cancellation of the Policy. Thus, tender of the premium was unnecessary.

Scottsdale also argues that it was not required to complete a refund of the

premium to the Tollivers before entry of judgment because the district court could

have entered a judgment of cancellation conditioned on Scottsdale returning the

premium. The Oklahoma Supreme Court approved of such a conditional

judgment in Sneed v. Oklahoma ex rel. Department of Transportation, 683 P.2d

525, 528-29 (Okla. 1983). On appeal, the Tollivers do not contend that a

conditional judgment would be insufficient to satisfy Scottsdale’s duty to return

the premium. Rather, they argue that Scottsdale did not raise this issue in the

district court, and the district court did not enter such a judgment. But in

response to the Tollivers’ motion, Scottsdale argued that a return of the premium

was premature until the jury decided that Scottsdale was entitled to cancellation

of the Policy, in which case Scottsdale would refund the premium. And, citing

Sneed, the district court concluded that it could enter a conditional judgment,

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2 The Tollivers did not request that the district court instruct the jury on

return of the premium as an element of Scottsdale’s cancellation claim. On

appeal, they argue that the court’s failure to give that instruction was plainly

(continued...)

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before it held that such a judgment was unnecessary because the refund principle

was inapplicable to claims under § 3609. A conditional judgment would appear

to satisfy the purpose of the refund principle “to make it unnecessary for the party

to whom restoration should be made to bring an action to obtain such restoration.” 

Strain, 377 P.2d at 588 (quotation omitted).

Accordingly, we hold that the district court did not err in denying the

Tollivers’ motion for judgment as a matter of law, because the evidence showed

that tender of the premium would have been refused, and the court could have

effected the refund by entering a judgment of cancellation conditioned upon

Scottsdale returning the premium to the Tollivers.

3. Jury Instructions

The Tollivers next contend that the district court made two errors in

instructing the jury on Scottsdale’s cancellation claim, requiring reversal of the

judgment in favor of Scottsdale and remand for a new trial. They argue that the

district court erred in instructing the jury on Scottsdale’s burden of proof on the

issue of intent to deceive under § 3609, and in failing to instruct the jury that

evidence of a return of the premium was a necessary element of Scottsdale’s

claim.2

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2

(...continued)

erroneous. See Ecclesiastes 9:10-11-12, Inc. v. LMC Holding Co., 497 F.3d 1135,

1142 (10th Cir. 2007). In light of our holding, infra, that the district court erred

in instructing the jury on the burden of proof, we do not address this issue, as the

district court will need to determine the appropriate instruction to be given on

retrial.

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We review de novo whether, as a whole, the district court’s jury

instructions correctly stated the governing law and provided the jury

with an ample understanding of the issues and applicable standards. 

Even if the district court erred, we will affirm as long as the error is

harmless in the context of the trial as a whole.

World Wide Ass’n of Specialty Programs v. Pure, Inc., 450 F.3d 1132, 1139

(10th Cir. 2006) (reviewing claimed error in jury instructions on burden of proof)

(citation and quotation omitted). Again, we review de novo the district court’s

interpretation of Oklahoma law. Cooper, 271 F.3d at 1251.

The Tollivers argue that Scottsdale was required to prove their intent to

deceive by clear and convincing evidence and that the district court erred in

instructing the jury that Scottsdale’s burden of proof was a preponderance or the

greater weight of the evidence. They rely on New York Life Insurance Co. v.

Kaplan, in which an insurance company sought to cancel a life insurance policy

because of false representations in the application for insurance. 163 P.2d 1009,

1011 (Okla. 1945). Based upon policy language that provided, “All statements

made by the insured shall, in the absence of fraud, be deemed representations and

not warranties,” id. (quotation omitted), the court held that in order to cancel the

policy, the insurer was required to show that the statements were “wilfully false,

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fraudulent and misleading and made in bad faith,” id. The court stated further

that wilfulness “must be established by clear, cogent and convincing proof.” Id.

at 1012.

The Tollivers contend that Kaplan is controlling on the appropriate burden

of proof for intent to deceive under § 3609 because, under Oklahoma law, statutes

must be interpreted consistent with the common law. See Okla. Stat. tit. 12, § 2

(“The common law, as modified by constitutional and statutory law, judicial

decisions and the condition and wants of the people, shall remain in force in aid

of the general statutes of Oklahoma[.]”); Silver v. Slusher, 770 P.2d 878, 884

(Okla. 1988) (“The common law supplements our statutes. It remains in full force

unless it is clearly and expressly modified or abrogated by our constitution or by

statute.”); Lierly v. Tidewater Petroleum Corp., 139 P.3d 897, 905 n.8 (Okla.

2006) (“The statutes and the common law are to be read together as one

harmonious whole.”). The Tollivers contend further that application of a clear

and convincing standard of proof to the issue of their intent to deceive under

§ 3609 is also consistent with the burden of proof applicable to fraud claims

under Oklahoma law. In Funnell v. Jones, the Oklahoma Supreme Court stated,

“It is a settled rule in Oklahoma that fraud is never presumed and where a written

agreement is attacked on the ground of fraud, that agreement will be upheld

unless the allegations of fraud are established by clear and convincing evidence.” 

737 P.2d 105, 108 (Okla. 1985).

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Scottsdale argues that the district court correctly concluded that the

insurer’s burden of proof on the issue of intent to deceive under § 3609 is a

preponderance or the greater weight of the evidence. As Scottsdale notes, this is

“the usual standard in a civil case” in Oklahoma. Timmons v. Royal Globe Ins.

Co., 653 P.2d 907, 913 (Okla. 1982) (holding Oklahoma Supreme Court did not

clearly delineate digression from usual standard of proof in bad faith insurance

claims). Noting that § 3609 itself is silent regarding the applicable burden of

proof, Scottsdale argues that the Oklahoma legislature could have expressly

included a clear and convincing standard of proof in § 3609, but apparently chose

not to. The parties do not cite, nor have we found, any Oklahoma Supreme

Court case setting forth the burden of proof applicable to the issue of intent to

deceive under § 3609. While the Oklahoma Supreme Court has stated, with

respect to that section, that “an insurer relying on the defense of

misrepresentations by the insured in his application bears the burden of pleading

and proving the facts necessary to sustain the defense,” Tolliver, 127 P.3d at 614,

it has never held that the applicable standard of proof on that issue is clear and

convincing evidence. But Kaplan has not been reversed, withdrawn, or modified,

and we agree with the Tollivers that Kaplan is controlling, unless it is

distinguishable from this case.

First, Oklahoma law is clear that statutes, including § 3609, must be

construed consistent with the common law. In Harkrider v. Posey, the Oklahoma

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3 The Oklahoma Supreme Court has equated this standard of proof with the

more commonly used terminology “clear and convincing evidence.” See Lester v.

Sparks, 583 P.2d 1097, 1101 (Okla. 1978) (applying heightened standard of proof

(continued...)

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Supreme Court stated, “Nothing in the statutory text of § 3609 nor in our extant

jurisprudence prevents us from interpreting § 3609 in conformity with the general

common law of contracts which recognizes the distinction between contracts that

are void and those that are merely voidable.” 24 P.3d 821, 826 (Okla. 2000). In

Massachusetts Mutual Life Insurance Co. v. Allen, the court interpreted § 3609 to

require proof of intent to deceive based on common law definitions of

“misrepresentation” and “concealment.” See 416 P.2d 935, 940 (Okla. 1965). 

Nothing in § 3609 is plainly inconsistent with a clear and convincing standard of

proof, as applied in Kaplan. We discern no reason why the Oklahoma Supreme

Court would deviate from its practice of interpreting § 3609 consistent with the

common law on the issue presented here: the standard of proof applicable to the

insured’s intent to deceive.

We also conclude that Kaplan is not distinguishable from this case. Kaplan

held that, in order to cancel a policy, an insurer must show that statements in the

application were “wilfully false, fraudulent and misleading and made in bad

faith.” 163 P.2d at 1011. Moreover, “[w]ilfulness, that is, design to perpetrate a

fraud, by a false representation . . . must be established by clear, cogent, and

convincing proof.” Id. at 1012.3

 We see no basis to distinguish the wilful falsity

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3

(...continued)

to alleged fraud in insurance claim). The Kaplan court went on to say that

[p]roof that establishes the falsity of a material statement and

knowledge of its falsity, supported by inference, by the one who

made the statement standing alone, clearly and convincingly

establishes the intent or design of the perpetrator and would be

sufficient in the absence of proof reasonably tending to show the

absence of wilfulness to support a judgment of cancellation. Such

inference as may arise from such a state of facts is not conclusive but

may be rebutted.

163 P.2d at 1012.

4 Although the Kaplan court did not cite it, at the time that the policy was

issued in that case, an Oklahoma statute provided that “the statements made in the

application shall, in the absence of fraud, be deemed representations and not

warranties: Provided, however, that the company shall not be debarred from

proving as a defense to [a] claim that said statements are wilfully false, fraudulent

or misleading.” Okla. Stat., Ch. 51, Art. 1, § 10519 (1931).

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requirement, as applied in Kaplan, from the intent to deceive requirement under

§ 3609. Indeed, the Oklahoma Supreme Court has expressly equated the two

standards. N.Y. Life Ins. Co. v. Carroll, 7 P.2d 440, 443-44 (Okla. 1932)

(“Statements to be willfully false, fraudulent, or misleading must be made with

actual intent to mislead or deceive another.” (quotation omitted)).

The district court reasoned that Kaplan is distinguishable from this case

because it involved a claim under the policy language, while Scottsdale’s claim is

statutory. This is a distinction without a difference. In applying the rule that

wilful falsity is a necessary element of the insurer’s claim, Kaplan did not

distinguish between statutory4

 and policy-language claims. See 163 P.2d at 1011

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(citing N.Y. Life Ins. Co. v. Stagg, 219 P. 362, 364 (Okla. 1923) (policy-language

claim); N.Y. Life Ins. Co. v. Strong, 65 P.2d 194, 196 (Okla. 1937) (statutory

claim)). Likewise, we see no basis to make such a distinction with respect to

Kaplan and this case.

Our holding is bolstered by Oklahoma’s application of a clear and

convincing standard of proof to fraud claims. In Johnson v. Board of Governors

of Registered Dentists, the Oklahoma Supreme Court explained that

[t]he clear-and-convincing standard is employed in civil cases

involving allegations of fraud or some other quasi-criminal

wrongdoing by the defendant. The interest at stake in those cases is

deemed to be more substantial than mere loss of money and some

jurisdictions reduce the risk to the defendant of having his reputation

tarnished erroneously by increasing the plaintiff’s burden of proof.

913 P.2d 1339, 1345 (Okla. 1996) (quotation omitted). Scottsdale argues that

fraud claims are distinguishable because they raise the specter of punitive

damages, whereas here the Tollivers face only cancellation of the policy (albeit

based upon a potentially reputation-tarnishing claim of intent to deceive). But

Oklahoma applies a clear and convincing standard of proof in actions seeking to

avoid a contract based on fraudulent inducement, a claim that is akin to

Scottsdale’s cancellation claim. See Funnell, 737 P.2d at 108 (stating clear and

convincing evidence was necessary in claim to set aside settlement agreement).

Finally, Scottsdale makes several policy arguments why the Oklahoma

Supreme Court should not adopt a heightened burden of proof under § 3609. It

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contends that a clear and convincing standard is unnecessary to protect the

interests of the insured because an insurer already has to meet the difficult burden

under § 3609 of proving that the insured intended to deceive. It also asserts that

other jurisdictions that have considered the question of the appropriate burden of

proof, in similar, although not identical, circumstances, have rejected the clear

and convincing standard. But our duty is to apply the applicable decisions of the

Oklahoma Supreme Court. Cooper, 271 F.3d at 1251. Having determined that

Kaplan is controlling, Scottsdale’s policy arguments to the contrary are

unavailing.

We hold that the district court erred in failing to instruct the jury that

Scottsdale was required to prove by clear and convincing evidence the element of

intent to deceive under § 3609. We could still affirm the judgment if this error

was “harmless in the context of the trial as a whole.” World Wide Ass’n, 450 F.3d

at 1139. “The error is harmless when the erroneous instruction could not have

changed the result of the case.” Id. (quotation omitted). We conclude that the

district court’s erroneous instruction on the burden on proof was not harmless. 

There was conflicting evidence regarding whether the Tollivers disclosed their

previous claims to their insurance agent, and regarding who was responsible for

the omission of that information from the insurance application. Applying the

preponderance or greater weight of the evidence standard, the jury found in favor

of Scottsdale on this conflicting evidence, but we cannot conclude as a matter of

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5 In fact, the district court denied Scottsdale’s motion for directed verdict on

its cancellation claim after the close of the evidence, applying a clear and

convincing standard of proof to the issue of intent to deceive. At that time, the

district court had not yet determined that the standard was instead a

preponderance or the greater weight of the evidence. In denying Scottsdale’s

motion, the court observed that the evidence was not so overwhelming that a

reasonable person would be unable to find a lack of intent to deceive.

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law that the jury would have found for Scottsdale even under the higher standard

of proof.5

 Therefore, we reverse and remand for a new trial.

4. Bad Faith

The Tollivers’ final argument on appeal challenges the district court’s grant

of summary judgment in favor of Scottsdale on their bad faith claim. They argue

that there were conflicting facts regarding whether there was a legitimate

coverage dispute at the time Scottsdale denied their claim, and whether

Scottsdale’s investigation prior to denying the claim was reasonable. We review

the district court’s grant of summary judgment de novo. Oulds v. Prinicipal Mut.

Life Ins. Co., 6 F.3d 1431, 1436 (10th Cir. 1993). Summary judgment “should be

rendered if the pleadings, the discovery and disclosure materials on file, and any

affidavits show that there is no genuine issue as to any material fact and that the

movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).

Under Oklahoma law, “an insurer has an implied duty to deal fairly and act

in good faith with its insured and [a] violation of this duty gives rise to an action

in tort for which consequential and, in a proper case, punitive, damages may be

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sought.” Christian v. Am. Home Assurance Co., 577 P.2d 899, 904 (Okla. 1977). 

However, the fact that an insurer chooses to litigate a claim, but ultimately does

not prevail, is not in itself sufficient to establish a breach of the insurer’s duty

and liability in tort. Id. at 904-05. Instead, there must be “a clear showing that

the insurer unreasonably, and in bad faith, withholds payment of the claim of its

insured.” Id. at 905. “Thus, in order to establish such a 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.” Oulds, 6 F.3d at 1436. In deciding a motion for summary judgment on a

bad faith claim

the trial court must first determine, under the facts of the particular

case and as a matter of law, whether [the] insurer’s conduct may be

reasonably perceived as tortious. Until the facts, when construed

most favorably against the insurer, have established what might

reasonably be perceived as tortious conduct on the part of the

insurer, the legal gate to submission of the issue to the jury remains

closed. To hold otherwise would subject insurance companies to the

risk of punitive damages whenever litigation arises from insurance

claims.

Id. at 1436-37 (citations and quotation omitted). The key question here is

whether there was a legitimate dispute as to coverage when Scottsdale denied the

Tollivers’ claim. See id. at 1436.

The Tollivers first contend that Scottsdale could not have had a reasonable

good faith belief that they intended to deceive because, at the time it denied the

claim, it was not aware of the requirement to prove intent to deceive under

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§ 3609, as evidenced by its later position in the litigation disputing that

requirement. They emphasize that the insurer’s good faith must be judged at the

time the claim was denied. See Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1109

(Okla. 1991) (“The knowledge and belief of the insurer during the time period the

claim is being reviewed is the focus of a bad-faith claim.”). But their argument

ignores Scottsdale’s stated basis for denying the claim. See id. at 1114 (holding

information is relevant if insurer relied upon it in refusing payment). In its letter

to the Tollivers, Scottsdale relied upon Policy provisions concerning concealment

of fraud, which addressed the effect on the Tollivers’ coverage under the Policy

of intentional concealment or misrepresentation of material facts, fraudulent

conduct, or false statements. See Aplt. App., Vol. I at 208-10. That Scottsdale

apparently later elected to pursue its claim for avoidance of the policy under

§ 3609, and disputed the proof required under that section, is not relevant to its

stated basis for refusing payment: the Tollivers’ omission of information from

their application with intent to deceive, in violation of the Policy terms.

The Tollivers next contend that, at the time Scottsdale denied their claim, it

had no legitimate basis to refuse payment because it had no evidence upon which

it could reasonably conclude that they intended to deceive when they omitted

information about their previous claims from the application for insurance. 

Scottsdale counters that it reasonably disputed the Tollivers’ claim after

discovering over $200,000 in previous losses, including two total-loss fire claims

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6 The Tollivers argue that the district court ignored their expert evidence, but

their expert provided no opinion on the reasonableness of Scottsdale’s inference

of an intent to deceive based upon the nature and extent of the undisclosed losses.

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and a substantial theft loss, that were not disclosed in their application. 

Scottsdale observed that the application requested disclosure of all claims during

the preceding three years, and in signing it, Mrs. Tolliver attested that the

information she provided was “true, complete and correct to the best of [her]

knowledge and belief.” Id. at 107. Yet she disclosed only a less-significant

$5,000 hail damage claim. Scottsdale contends that the omission of such

substantial losses from the application provided reasonable grounds for it to resist

the Tollivers’ claim. We agree. Knowledge and intention in this context may not

be susceptible to direct proof and may instead be inferred from the circumstances. 

See Carroll, 7 P.2d at 443. Thus, in order to avoid summary judgment, the

Tollivers were required to present evidence that Scottsdale’s inference was

unreasonable. They presented no such evidence.6

Finally, the Tollivers assert that the district court erred in granting

summary judgment because there was evidence that Scottsdale’s investigation of

their claim was unreasonable. They rely on their expert’s opinion that “[a] simple

investigation process of interviewing the agent, the insured, and the underwriter

would have quickly shown the claim handlers that there was no intent on the part

of the insureds to deceive Scottsdale.” Aplt. App., Vol. I at 213-14. Under

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Oklahoma law, “[w]hether an insurer’s actions reasonably give rise to an

inference of bad faith must be determined in light of all facts known or knowable

concerning the claim.” Oulds, 6 F.3d at 1439 (emphasis added, quotation

omitted). Although “[t]he investigation of a claim may in some circumstances

permit one to reasonably conclude that the insurer has acted in bad faith,” id. at

1442, the insured must show that the insurer overlooked material facts or that a

more thorough investigation would have resolved the coverage dispute in favor of

the insured, see id.

The Tollivers’ expert stated that a more thorough investigation would have

revealed that previous losses had been disclosed in a prior insurance application

that the Tollivers submitted to a different insurance company, and that the

omission of that same disclosure from their Scottsdale application was simply the

result of a clerical error by the Tollivers’ agent. But the prior application

referenced by the expert stated only, “[Insured] has had some claims on Rental

Prop[erty] that were not personal.” Aplt. App., Vol. I at 147. Thus, further

investigation of that prior application by Scottsdale would not have revealed a

disclosure of the specific claims at issue.

Moreover, the Tollivers’ expert failed to address that further investigation

would have revealed only that Mrs. Tolliver and her insurance agent had

conflicting stories regarding what previous losses she had disclosed to him.

See Oulds, 6 F.3d at 1441 n.4 (noting further investigation would not have

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resolved whether insured or agent was telling the truth). If the agent’s story was

truthful, Scottsdale almost certainly had a valid defense to the Tollivers’ claim. 

See id. at 1439. There is no basis to conclude that Scottsdale actually knew, or

should have known by conducting a more thorough investigation, that the

Tollivers’ application for insurance did not contain intentional misrepresentations. 

Thus, in this case there is no “evidence permitt[ing] a conclusion that a

reasonable insurer, had it been in possession of the facts that a proper

investigation would have revealed, would not have denied coverage.” Id. at 1442.

At the time Scottsdale denied the Tollivers’ claim, facts were in dispute as

to whether or not they were entitled to coverage under the Policy, and a

reasonable jury could have found in favor of Scottsdale based on all facts

Scottsdale knew or should have known. This is “strong evidence that a dispute is

‘legitimate.’” Id. “It cannot be said as it was in Christian that it was apparent

that [Scottsdale] never had a valid defense to [the Tollivers’] claim.” Id. at 1440

(quotation omitted). Thus, Scottsdale had the right to deny their claim and to

have the legitimate dispute determined in a judicial forum. Under Oklahoma law,

there is no disputed material fact issue concerning Scottsdale’s bad faith and the

district court did not err in granting summary judgment. See id. at 1445. We

therefore affirm the district court’s grant of summary judgment in favor of

Scottsdale on the Tollivers’ bad faith claim.

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Conclusion

The district court’s judgment in favor of Scottsdale Insurance Company on

its claim for cancellation, and against Michael S. Tolliver and Sandra L. Tolliver

on their counterclaim for breach of contract, is REVERSED and REMANDED for

a new trial in accord with this order and judgment. The district court’s grant of

summary judgment in favor of Scottsdale on the Tollivers’ bad faith claim is

AFFIRMED.

Entered for the Court

Deanell Reece Tacha

Circuit Judge

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