Court Opinion

ID: 6932387
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:10:23.60249+00
Date Added: 2024-06-11T16:07:15.638579
License: Public Domain

PAUL KELLY, Jr., Circuit Judge,
dissenting.
The court decides that Magnum’s punitive liability is nondelegable, is consequently direct and therefore not recoverable from CNA and that Magnum’s exposure to punitive damages may not be considered as damages flowing from a breach of the duty of good faith. I respectfully dissent.
I. Insurance Coverage of Punitive Damages
Magnum as a corporation is responsible for breach of a nondelegable duty. However, the assumption that such a breach, under any and all circumstances, is evidence of its “own negligence ” and “positive wrongdoing” as required under Dayton Hudson Corp. v. American Mut. Liab. Ins., 621 P.2d 1155. 1160 (Okla.1980), is an erroneous confusion of responsibility with culpability.
A breach of a nondelegable duty sometimes results in vicarious liability because an employer or owner lacked actual knowledge of the wrongdoing — although it could not escape liability for the tortious acts. Even where an employer has actual knowledge of circumstances which could give rise to wrongdoing and is deemed negligent, Oklahoma still would allow insurance coverage of resultant punitive damages, provided the employer’s knowledge resulted in ordinary, rather than gross, negligence. Id. at 1161.
Lack of actual knowledge concerning wrongdoing associated with a nondelegable duty has been held to result in vicarious liability when an independent contractor is at fault. For example, in Willis v. Westin Hotel Co., 884 F.2d 1556 (2d Cir.1989), the Second Circuit stated: “ ‘Although [the owner] had a nondelegable duty to plaintiff to maintain and repair the elevator, unless [the owner] had actual notice of the malfunction, its liability was vicarious only.’ ” Id. at 1561 (quoting Sirigiano v. Otis Elevator Co., 118 A.D.2d 920, 499 N.Y.S.2d 486, 488, appeal denied, 68 N.Y.2d 604, 506 N.Y.S.2d 1027, 497 N.E.2d 707 (1986)). The court explained, “the owner has ‘imput[ed] to [it] the negligence of any delegate insofar as plaintiffs *1511rights to recover [a]re concerned, but only to that extent.’” Id. That is the situation here.
Similarly, in Lessnau v. United States, 979 F.2d 855, 1992 WL 344966 (9th Cir.1992), the Ninth Circuit characterized Restatement (Second) of Torts § 416 (1965) as “vicarious” and distinguished this nondelegable duty from that imposed by § 413 which it characterized as “direct.” Lessnau, 1992 WL 344966, at *2. See also Allen v. Seacoast Products, Inc., 623 F.2d 355, 364 (5th Cir.1980) (vessel owner’s “absolute, continuing and non-delegable duty” to prevent unsea-worthy conditions breached by a delegate imposes vicarious liability). Thus, even though duties are nondelegable, liability for their breach has no automatic characterization as “direct” because liability may arise vicariously.
For a bar to recovery of punitive damages, Oklahoma law requires knowledge “in fact” for a showing of the “employer’s own negligence,” indeed “gross negligence ... the equivalent of positive wrongdoing,” Dayton Hudson, 621 P.2d at 1161, and we cannot now escape this requirement by merely categorizing the duty as “nondelegable.” A separate rule for corporations does not exist. An unequivocal showing of actual corporate knowledge should be the predicate for corporate liability in this case.
No record evidence suggests that any officer or director of Magnum “in fact” had knowledge of Mr. Martina’s questionable activities. Magnum’s president testified that the failure to document instances of sexual harassment is in violation of the written policies of the corporation. Linda Rogers, Martina’s direct supervisor testified that she did not report her knowledge of certain sexual harassment charges made against him. She admitted that she violated corporate policy, thereby giving Martina the appearance of a first offender in his personnel file. Aplt.App. at 354r-355. The jury instructions, however, allowed the jury to find corporate liability based upon her conduct in complete contravention of announced corporate policy.
The Restatement (Second) of Torts (1979) addresses the question of corporate culpability under these circumstances and makes a notable distinction. Section 909(b) allows punitive damages against a principal due to the acts of an agent where “the agent was unfit and the principal or a managerial agent was reckless in employing or retaining him.” While not specifying in the text whether these damages are the result of direct or vicarious liability, a comment recognizes that punitive damages may arise where “there has been no fault on the part of a corporation or other employer, if a person acting in a managerial capacity either does an outrageous act or approves of the act by a subordinate.” Id. § 909, emt. b.
The court emphasizes that under Oklahoma law, masters may be held liable in punitive damages for the torts of their servants under the doctrine of respondeat superior, regardless of whether there is ratification. See Ct.Op. at 1498 n. 5. This means only that for Magnum to be responsible in Oklahoma, it need have no actual knowledge. Undoubtedly, Magnum bears liability. See Allen, 623 F.2d at 364 (holding lack of knowledge is not an excuse for liability, but such liability is vicariously derived). The real question under Oklahoma law, though, is whether Magnum is at fault, and without actual knowledge, the answer must be “no.”
The knowledge instruction given to the jury exacerbates this confusion between liability premised upon fault, as opposed to mere responsibility, because it imputes knowledge, which in itself is fully consistent with fault based upon respondeat superior. See Black’s Law Dictionary, (6th ed. 1990) (“Imputed” defined as “attributed vicariously”). The pertinent instruction stated that “[kjnowledge, or notice possessed by any management personnel of Magnum Foods, Inc., while acting within the scope of his authority, is the knowledge of, or notice to, his principal, Magnum Foods, Inc.” The jury was not required to find that the corporation itself had knowledge. Thus, any employee with the title “manager,” including one without' hiring or firing authority, could withhold her knowledge and render the corporation culpable under a negligent hiring, retention and supervision theory. Cf. In the Matter of P & E Boat Rentals (Fusselman v. Ennia Gen’l Ins. Co., Inc.), 872 F.2d 642, 652-53 (5th Cir.1989) (vacating punitive dam*1512age award for outrageous conduct of company’s foreman where company “policymaking officials” had no knowledge).
Despite this problem, the court concludes that the verdict for punitive damages against Magnum, in light of the other jury instructions, expresses the jury’s determination that Magnum itself was grossly negligent, willful, wanton, fraudulent, oppressive, or malicious. Ct.Op. at 1499-1502. The court thus holds that insurance coverage for punitive damages must fall outside the umbrella of the second public policy exception, which allows recovery of punitive damages from an insurer if the principal’s conduct was ordinary negligence. See Dayton Hudson, 621 P.2d at 1161. The district court’s similar reliance on the phrases “negligence of the Defendant” and “acts ... of Magnum Foods” in the verdict forms is far less compelling in light of the following instruction on who may act on behalf of the corporation:
Linda Rogers, Terry Duckworth, Mark Conover and Bob Bealmer were the employees of the Defendant, Magnum Foods, Inc., in regard to the hiring, retention and supervision of defendant James Martina. Therefore, an act or omission of Linda Rogers, Terry Duckworth, Mark Conover or Bob Bealmer within the scope of their employment at the time was in law the act or omission of the Defendant, Magnum Foods, Inc.
Aplt.App. 298. The court’s response to this patent statement of vicarious liability is that “[i]f these employees’ acts were the acts of the corporation, then the corporation was being found to have acted negligently in violation of its nondelegable duty.” Ct.Op. at 1501 n. 1. While this is a true statement, it begs the real question of whether these employees’ acts are properly considered to be the acts of the corporation. It is well-settled law that corporations act through their directors and officers or through agents to whom their duties are delegated. See Okla. StatAnn. tit. 18, §§ 1027, 1028 (West 1986).
It is undisputed that Linda Rogers had neither hiring nor firing authority; thus, since these duties were not “delegated” to her, her omissions in this regard cannot be deemed the corporation’s. Yet the instructions required the jury to consider Ms. Rogers’ actions those of the corporation. The court’s reliance on references to “Defendant Magnum Foods, Inc.” contained in the instructions, Ct.Op. at 1499-1502, is not persuasive as to culpability when we remember whose actions are deemed corporate actions in the jury instructions.
The court’s resolution requires that a corporation stand directly liable and uninsurable for punitive damages stemming from the torts of negligent hiring, retention, and supervision, regardless of which employees have actual knowledge of the wrongdoer’s behavior and regardless of whether those employees follow a corporation’s rules for documenting such behavior. The Oklahoma Supreme Court declined to make such a per se rule in Dayton Hudson, 621 P.2d at 1161, and I am compelled to agree. Instead, an examination of the record in light of Oklahoma law shows that the jury may very well have based punitive damages on a vicarious liability theory.
II. Denial of Judgment as a Matter of Law on the Bad Faith Claim
I also disagree with the court’s conclusion that the compensatory damages awarded to Magnum under its bad faith claim may not include uncovered punitive damages. Ct.Op. at 1507. Because I do not agree that Magnum’s punitive damages are necessarily uncovered, I, of course, would not have reached this issue. However, given the decision of the court, with respect to the coverage of punitive damages predicated on “direct” liability, the better approach would be to simply not recognize any claim based upon a bad faith refusal to settle where policy limits were not exceeded and the only exposure to the insured was for an uncovered event.
While I agree with the court’s holding that the existence of a punitive damage claim does not relieve the carrier of its obligation to defend the entire case in good faith, Ct.Op. at 1505-06,1 disagree that the reasoning behind Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 613, N.Y.S.2d 352, at 355, 635 N.E.2d 1222, at 1225 (1994) and Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1345-46 (9th Cir.1983), provides sufficient rationale *1513for the denial of recovery of punitive damages as part of a bad faith claim.
The court attempts to distinguish the normal “excess” situation from that present here, Ct.Op. at 1504-05, that being the risk of a punitive award, which may or may not be uncovered under Oklahoma law, as a result of refusing to reasonably evaluate and settle a claim. The record is undisputed that the settlement offers made by the victim were reasonable, did not include any punitive damages, and were well within the policy limits, as well as being significantly less than that awarded by the jury.
This court’s holding that good faith includes “fair consideration given to Magnum’s concerns because of its exposure to the uninsured punitive claim” Ct.Op. at 1506, seems at odds with its prior refusal to include, as compensatory damages, those damages flowing logically and naturally from any bad faith refusal to settle. The court correctly recognizes that the insured cannot “take a gamble that only its insured stands to lose,” Ct.Op. at 1504, but then stacks the deck so that the insured must lose. Under the court’s reasoning, once the insurance company undertakes to defend the entire claim, as occurred in this situation, there are essentially no recoverable damages for bad faith unless the insured actually pays a portion of the compensatory damages in order to avoid going to trial.
I would hold that where the insurer refuses a reasonable offer, well within policy limits, to settle and this refusal subjects the insured to liability outside the policy coverage, the insurer should be responsible for any losses incurred as a result of its bad faith refusal to settle. I would emphasize that such liability could only be found when the settlement amount demanded of the insurer is reasonable, taking into account the injuries, the covered exposure and the ultimate jury verdict on the covered portion of the claims. In Zieman, the Ninth Circuit was dealing with an entirely different situation, apparently framing the question as whether the insurer must settle at any figure within policy limits to avoid subjecting its insured to punitive exposure. 724 F.2d at 1345. The answer is obviously no. I believe the New York Court of Appeals decision in Soto is simply bad law. The court of appeals recognizes that a damage award against an insurer predicated, in part, upon punitive damages incurred as a result of refusal to settle, is really no different in principle from any other damages that might be found to flow naturally and consequentially from a bad faith refusal to settle. Soto, 613 N.Y.S.2d at 354, 635 N.E.2d at 1224. The court, however, simply dismisses consideration of these damages by reason of the State’s apparent unwavering public policy precluding indemnification for punitive damages. Id. Oklahoma does not have such an absolute prohibition as is clearly evidenced by Dayton Hudson.