Automax Hyundai South, L.L.C. v. Zurich American Insurance
2013 U.S. App. LEXIS 13076
10th Cir.2013Background
- Automax Hyundai South sold a Hyundai Elantra advertised as "new" to Tammy and David Moses; after an accident, the Moseses learned the car had prior ownership and underbody damage.
- The Moseses sued Automax in Oklahoma state court alleging fraud/deceit, violations of Truth in Lending and Oklahoma Consumer Protection Act, and negligence (including negligence per se); the jury returned a general verdict for the Moseses and awarded $300,000 compensatory and $100,000 punitive damages; Automax settled for $300,000.
- Automax had an insurance policy (Zurich/Universal Underwriters) providing: up to $500,000 for "occurrence" (an "accident") arising from garage operations and up to $25,000 for specified statute-and-title E&O claims; exclusions applied to dishonest/fraudulent/criminal acts and intent to harm.
- Zurich initially paid defense under the $25,000 statute-and-title E&O portion, then stopped defending/indemnifying after exhausting that limit and asserted the claims arose from intentional conduct (falling within exclusions). Automax continued defense at its own expense and later sued Zurich for breach of contract and bad faith.
- The district court granted summary judgment for Zurich, finding no duty to defend/indemnify because the underlying claims were intentional; the Tenth Circuit reversed, holding Zurich had a duty to defend and must bear the burden of allocation for indemnity unless it can prove an appropriate apportionment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Zurich had a duty to defend Automax in the Moses suit | Facts showed a possibility of covered "occurrence" (failure to detect preexisting damage = accident); duty triggered by potential coverage | Claims and trial findings showed intentional misconduct, so no "accident" and no duty to defend | Duty to defend triggered: insurer had notice of facts creating potential coverage and must defend all claims once duty attaches |
| Whether Zurich must indemnify Automax for the $300,000 settlement | Settlement may rest partly on covered negligence; verdict was general and ambiguous, so indemnity at least in part | Jury found intentional conduct and malice; policy exclusion for intentional harm bars indemnity | Indemnity may be owed for some or all of the settlement; because verdict was general, Zurich bears burden to allocate between covered and uncovered portions and, if it cannot, must pay the full settlement |
| Who bears burden to allocate covered vs. noncovered liability after a general verdict/settlement | Zurich breached its duty to defend and thus should bear allocation burden for the judgment/settlement | The insured ordinarily bears allocation burden; insurer only bears it when it controlled the defense | Court places allocation burden on Zurich because it wrongfully refused to defend; if Zurich cannot apportion, it must pay entire settlement |
| Whether Automax can maintain a bad faith claim against Zurich | Zurich lacked a reasonable basis to deny defense and may not have adequately investigated; bad faith claim survives summary judgment | There was a legitimate coverage dispute, so denial was reasonable and not bad faith | Bad faith summary judgment improper; triable issues remain whether Zurich had a reasonable basis to deny coverage and whether it acted in bad faith |
Key Cases Cited
- Oldenkamp v. United Am. Ins. Co., 619 F.3d 1243 (10th Cir. 2010) (standard of review for summary judgment and general insurance-law principles)
- First Bank of Turley v. Fidelity & Deposit Ins. Co. of Md., 928 P.2d 298 (Okla. 1996) (Oklahoma rule: duty to defend is broader than duty to indemnify; duty triggered by potential coverage)
- Penley v. Gulf Ins. Co., 414 P.2d 305 (Okla. 1966) (voluntary conduct producing an unexpected result can be an "accident")
- Magnum Foods, Inc. v. Continental Cas. Co., 36 F.3d 1491 (10th Cir. 1994) (insurer controlling defense must seek special verdicts or bear risk of general verdict; damages presumed covered absent insurer allocation)
- Gray v. Holman, 909 P.2d 776 (Okla. 1995) (insurer’s implied duty of good faith and fair dealing and insurer tort liability for bad faith)