Opinion ID: 164354
Heading Depth: 2
Heading Rank: 1

Heading: Insureds' Attorney Fees and Expenses in Declaratory Judgment Actions

Text: 36 We first consider whether the Agreement requires ERC to reimburse MCCC for MCCC's payment of its insureds' attorney fees and expenses in the declaratory judgment actions. The resolution of this issue turns on whether the Agreement includes such payments within the definition of loss. Each party contends that the Agreement is unambiguous. Rejecting their views, we hold that the language of the Agreement is, as a matter of law, ambiguous on this point. The pertinent part of the Agreement's definition of loss is as follows: The word loss shall mean only such amounts: 37 .... 38 paid by [MCCC] for punitive, exemplary, or compensatory damages awarded to the insured and arising out of the conduct of [MCCC] in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy.... 39 Article VIII, ¶¶ (c)(1), (c)(2), App. 600. As do the parties, we focus on the phrase compensatory damages awarded to the insured. The Agreement does not define compensatory damages. MCCC urges that the insureds' attorney fees and expenses in the declaratory judgment actions constitute compensatory damages. ERC contends that the attorney fees and expenses are not compensatory damages, but rather litigation costs for which it need not reimburse MCCC. 40 Before analyzing the phrase, we consider an argument by ERC that appears to make the intent of the parties irrelevant. ERC asserts that although Oklahoma law governs the interpretation of the Agreement, the Full Faith and Credit Clause of the United States Constitution requires that Texas law govern whether the attorney fees and expenses are loss or litigation costs. Because the amounts at stake were awarded in Texas courts, it argues, the Texas courts' characterization of these amounts—as compensatory damages, costs, or otherwise —is entitled to full faith and credit in other States. Thus, ERC concludes, we are bound by Texas law declaring that the judgments awarded by the Texas courts were litigation costs rather than compensatory damages. 41 We disagree. The parties to the Agreement could define compensatory damages as they saw fit, without regard to the characterization by the State in which judgment had been entered. The Full Faith and Credit Clause is simply irrelevant to the issue before us. The Full Faith and Credit Clause states: Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof. U.S. Const. Art. IV § 1. Although federal judicial proceedings are not expressly included within the Clause, the Clause ... and its implementing statute, 28 U.S.C. § 1738, as well as interstitial federal common law, dictate that courts in the United States, both state and federal, must recognize and give effect to valid judgments rendered by other courts in the United States, including state and federal courts. 18 Moore's Federal Practice § 130.01 (Matthew Bender 3d ed.). 42 In other words, roughly speaking, a judgment must be given the same legal effect in every court within this country. If, for example, a Texas court had interpreted the meaning of compensatory damages in the Agreement between ERC and MCCC, that interpretation would have the same preclusive effect in Oklahoma, or federal, litigation that it would have in litigation in a Texas state court. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 222, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (The full-faith-and-credit statute requires that federal courts give the same preclusive effect to a State's judicial proceedings as would the courts of the State rendering the judgment.... (emphasis omitted)). Here, however, no Texas judgment has interpreted the term compensatory damages in the Agreement, so no Texas judgment is binding with respect to the meaning of that term. Of course, the Agreement could have provided that the term should be construed in accordance with the law of the State where the underlying judgment was entered. But ERC does not argue for such a construction. The full-faith-and-credit requirement does not restrict the parties' right to define contractual terms as they wish. At oral argument ERC properly conceded that if Texas law conflicted with an explicit definition in the Agreement, the Agreement would control. In short, ERC's reliance on the Full Faith and Credit Clause is misplaced. 43 The district court ruled that compensatory damages unambiguously includes attorney fees. After noting that attorney fees are sometimes awarded as costs and sometimes as compensatory or punitive damages, it said that the label is unimportant. Citing our decision in Prudential Insurance Company of America v. Carlson, 126 F.2d 607, 611 (10th Cir.1942), which held that an award of attorney fees is a substantive right for purposes of choice-of-law analysis, the court reasoned that such an award is intended to compensate the prevailing party, and thus is compensatory damages within the definition of the term in Webster's Third New International Dictionary 463 (1986) (compensatory damages are damages awarded to make good or compensate for an injury sustained). The court concluded, [T]he plain and ordinary meaning of the term `compensatory damages' includes attorneys' fees and costs. App. 2452. 44 In support of the district court's ruling, MCCC cites a legal dictionary that states: Compensatory damages are such as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the wrong or injury. Damages awarded to a person as compensation, indemnity, or restitution for harm sustained by him. Black's Law Dictionary 390 (6th ed.1990). MCCC argues that an award of the insured's declaratory judgment expenses is intended to make the insured whole for all the expenses it has incurred in enforcing the insurer's duty to defend and indemnify it with respect to the underlying claim. Thus, MCCC concludes, the insured's declaratory judgment expenses constitute compensatory damages, which compensate for an improper denial of coverage. 45 To challenge the district court's ruling, ERC also relies on a dictionary, the same one that the district court quoted. ERC argues that attorney fees are clearly included within the definition of costs: 46 4. Costs pl: expenses incurred in litigation: as a: those payable to the attorney or counsel by his client esp. when fixed by law b: those given by the law or the court to the prevailing against the losing party in equity and frequently by statute-called also bill of costs. 47 Webster's, supra, at 515. Consequently, ERC asserts, attorney fees are litigation costs, not compensatory damages. 48 We do not see the issue as so clear-cut as the parties seem to. The difficulty here is that payment of attorney fees undoubtedly compensates the prevailing party for losses ultimately caused by the opposing party's wrongdoing, but such fees can also be considered as simply the cost of recovering compensatory damages—a cost which is not itself considered to be part of compensatory damages and is therefore not recoverable. After all, the American Rule (which is followed in Oklahoma, see Kay v. Venezuelan Sun Oil Co., 806 P.2d 648, 650 (Okla.1991)) ordinarily bars the recovery of attorney fees by the prevailing party in litigation, on the theory that such fees are a cost of recovering damages, not damages in themselves. See, e.g., St. Peter's Church v. Beach, 26 Conn. 355, 1857 WL 960, at  (Conn.1857) (Now the expenses of litigation are never damages sued for in any case when the action is brought for the wrong itself, not even if the tort be wanton or malicious. They are not the natural and proximate consequence of the wrongful act, which is the universal rule, but are remote, future and contingent. (internal quotation marks omitted)). 49 Both of these strains of thought—that attorney fees are compensatory damages or are only unrecoverable costs of litigation to recover compensatory damages— are reflected in Oklahoma statutes and judicial opinions. Some Oklahoma authority leads to the conclusion that attorney fees are compensatory damages. See, e.g., Floyd v. Anderson, 36 Okla. 308, 128 P. 249, 250 (Okla.1912) ([w]e think ... that all actual damages, compensatory in their nature, such as ... costs and expenses, including ... a reasonable attorney's fee....). On the other hand, McAlester Urban Renewal Authority v. Hamilton, 521 P.2d 823, 826 (Okla.1974), held that interest on costs, including attorney fees, was not recoverable, whereas interest on damages was. See also 59 Okla. Stat. § 858-604(A) (For purposes of this subsection, attorney fees and costs shall not be considered as or included in actual or compensatory damages.). There appears to be no all-encompassing Oklahoma rule that attorney fees are or are not compensatory damages. 50 Thus, we cannot hold the term compensatory damages in the Agreement to be unambiguous with respect to whether it includes or excludes attorney fees. The term is reasonably susceptible to more than one meaning. 51 To break the standoff between the alternative plausible interpretations of compensatory damages, MCCC argues that ambiguous contract language must be construed against its drafter. This rule of interpretation, often referred to as  contra proferentem,  is particularly suitable for standard insurance contracts where the insured does not have an opportunity to negotiate or bargain. The rule is less appropriate in reinsurance agreements, however, because the parties typically have comparable bargaining power in negotiating the terms of their contracts. For this reason some courts have declined to apply the rule to reinsurance contracts. See, e.g., Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1064-65 (2d Cir. 1993). 52 In any event, Oklahoma appears to have codified the rule. An Oklahoma statute states: In cases of uncertainty not removed by the preceding rules [15 Okla. Stat. §§ 151-69], the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist. The promisor is presumed to be such party.... 15 Okla. Stat. § 170. Yet the statute itself, as well as courts construing the statute, state that this rule is to be applied only when the ambiguity has not been removed by the preceding [statutory] rules. Id.; see, e.g., Cities Service Oil Co. v. Geolograph Co., 208 Okla. 179, 254 P.2d 775, 782 (1953). Among the preceding rules is 15 Okla. Stat. § 163, which states that [a] contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates. Accordingly, a court should not resort to the doctrine of contra proferentem until the parties have an opportunity to present the circumstances surrounding the execution of the contract and other relevant evidence, such as custom in the industry. See Restatement (Second) of Contracts § 202 (setting forth types of evidence appropriate to consider in construing contracts). That opportunity should be afforded the parties here. 53 We therefore remand this issue to the district court for further proceedings regarding the meaning of compensatory damages in the Agreement. 54