                                                                   FILED
                                                       United States Court of Appeals
                                                               Tenth Circuit

                                                              June 26, 2013
                                    PUBLISH               Elisabeth A. Shumaker
                                                              Clerk of Court
                  UNITED STATES COURT OF APPEALS

                               TENTH CIRCUIT



 AUTOMAX HYUNDAI SOUTH,
 L.L.C., an Oklahoma limited liability
 company,

             Plaintiff-Appellant,
       v.                                            No. 12-6161
 ZURICH AMERICAN INSURANCE
 COMPANY, and UNIVERSAL
 UNDERWRITERS INSURANCE
 COMPANY,

             Defendants-Appellees.


        APPEAL FROM THE UNITED STATES DISTRICT COURT
           FOR THE WESTERN DISTRICT OF OKLAHOMA
                    (D.C. No. 5:11-CV-00165-R)


Randall K. Calvert (Rabindranath Ramana with him on the briefs), Calvert Law
Firm, Oklahoma City, Oklahoma, for Appellant.

Brittan L. Buchanan, Van Osselaer & Buchanan LLP, Austin, Texas (Laura J.
Grabouski, Van Osselaer & Buchanan LLP, Austin, Texas, and Daniel K. Zorn,
Collins, Zorn & Wagner, P.C., Oklahoma City, Oklahoma, with him on the brief),
for Appellees.


Before KELLY, MURPHY, and TYMKOVICH, Circuit Judges.


TYMKOVICH, Circuit Judge.
      Automax Hyundai South, a car dealership in Oklahoma City, Oklahoma,

filed suit against its insurer, Zurich American Insurance Co., for Zurich’s refusal

to defend Automax in a lawsuit. The underlying lawsuit involved two aggrieved

customers who brought claims against Automax relating to a car purchase they

had made. The customers won a sizable judgment in Oklahoma state court. The

district court ruled that Zurich had no duty to defend or indemnify Automax in the

underlying lawsuit, and thus its claims failed.

      We agree with Automax and conclude Zurich had a duty to defend

Automax. Zurich had notice that at least some of the liability asserted against

Automax was potentially covered under its policy, which triggered its duty to

defend. Zurich’s failure to defend Automax also means that Zurich, on the

question of indemnity, bears the burden of allocating between covered and

noncovered claims.

      Exercising our jurisdiction under 28 U.S.C. § 1291, we REVERSE and

REMAND.

                                I. Background

      A. Insurance Policy

      Automax purchased an insurance policy from Universal Underwriters

Insurance Company, whose parent company is Zurich. The policy is specifically

designed for automotive businesses, such as dealerships and repair shops. The

policy provided coverage up to $500,000 for “an OCCURRENCE arising out of

                                         -2-
GARAGE OPERATIONS or AUTO HAZARD.” App. 138. The parties refer to

this as the “occurrence provision.” An “occurrence” is defined as “an accident

. . . which results in [] INJURY . . . neither intended nor expected from the

standpoint of a reasonably prudent person.” Id. at 140. And an “injury” is

defined to include “mental anguish, mental injury, fright, shock, or humiliation.”

Id. at 139.

      The policy also provided coverage up to $25,000 for statutory errors and

omissions (“STATUTE AND TITLE E&O”). “Statute and Title E&O” is defined

to cover suits related to violations of the “odometer law,” “truth-in-lending or

truth-in-leasing law,” “auto damage disclosure law,” “competitive auto parts

law,” and “used car ‘Buyers Guide,’ including federal regulation 455.” Id. at 140.

      The policy has explicit exclusions for injuries “caused by any dishonest,

fraudulent or criminal acts” and for conduct committed with “intent to cause

harm.” Id. at 141.

      B. Moses Lawsuit

      The underlying lawsuit began in August 2007 after Tammy Moses

purchased a car from Automax. Because she could not obtain financing on her

own, she asked her father, David Moses, to cosign the loan for her. But unknown

to both of them, Mr. Moses did not end up a mere cosignatory; he was the sole

legal signatory on the loan. He later claimed the staff at Automax did not allow

him to review the purchase documents despite his requesting to do so.

                                         -3-
      The car she selected, a Hyundai Elantra, was advertised as new. Another

fact then unknown to David and Tammy Moses was that they were not the

Elantra’s first owners. The car had been sold a few months earlier to another

customer, who, after being unable to secure financing, had returned the car to

Automax. Automax had then requested a duplicate certificate of origin from the

manufacturer and marketed the Elantra as new—a practice Automax later claimed

was permitted under Oklahoma regulations.

      Tammy and David learned of this prior ownership around two months after

their purchase when Tammy crashed the car on a road trip to Dallas. She had

driven off the road, she claimed, after the car had veered dramatically. Tammy

later stated that she had noticed the car’s steering wheel begin to shake about one

month before the accident. After the accident, Tammy had the car towed to a

nearby Hyundai dealership, where she learned of the prior sale. She also learned

that the car had extensive damage to the underbody, ostensibly predating the

accident.

      David Moses approached Automax and requested compensation for the

damage to the Elantra, claiming that the damage predated the car’s sale to him.

Later, he sought to rescind the sale entirely, alleging that Automax had not fully

disclosed the financing terms and had defrauded him by not disclosing the prior

damage. Zurich denied coverage of Moses’s claim with Automax. Zurich’s

adjuster explained its decision in a February 2008 letter: “Our investigation into

                                         -4-
the facts and circumstances concerning the above subject claim fails to reveal any

negligence on the part of our insured.” App. 517. Zurich concluded the damage

“occurred after Mr. Moses took possession of the vehicle.” Id.

      David and Tammy Moses then filed suit in state court in Oklahoma County.

Their first petition alleged causes of action for common law fraud, violation of

the Truth-in-Lending Act, and violation of Oklahoma’s consumer protection

statute. The allegations contained in the petition centered on the fact that

Automax had intentionally sold the Elantra as “new” when it was in fact used and

damaged. They filed four more petitions amending the allegations. In the fourth

amended petition, the Moseses included a cause of action for “negligence or

predetory [sic] lending,” claiming that Automax had inflated David Moses’s

income to ensure approval of the loan. Id. at 312. That particular claim

mentioned nothing about Automax’s failure to find the alleged preexisting defect

in the Elantra. Automax contested the Moseses’ claims, maintaining that the

Elantra was not damaged or “used” for purposes of Oklahoma law when it sold

the car to them.

      At the beginning of the lawsuit with the Moseses, Zurich paid for

Automax’s representation under the “Statute and Title E&O” provision of its

policy, which had a maximum coverage of $25,000. Zurich did not cover the

behavior under the occurrence provision, which provided coverage up to

$500,000. Automax’s policy coverage maxed out over ten months before trial,

                                         -5-
and Zurich stopped paying Automax’s counsel. Automax continued with the

same counsel at its own expense.

      Prior to trial, the state court issued a pretrial order listing the various

theories of recovery: (1) fraud/deceit, (2) Oklahoma Consumer Protection Act, (3)

negligence, (4) one provision of the Truth in Lending Act, (5) another provision

of Truth in Lending Act. Id. at 353. At the end of the trial, the jury ended up

receiving instructions on only the following three claims: (1) fraud/deceit, (2)

negligence, (3) Truth in Lending Act. The fraud/deceit claim contained

instructions on multiple theories of liability, including false representation, non-

disclosure, deceit, and constructive fraud. The negligence claims included

instructions on both ordinary negligence (violation of duty of ordinary care) and

negligence per se (violation of specific statutes). The verdict form, however, did

not ask the jury to specify the particular theory under which Automax might be

guilty. For example, the form only asked whether Automax was guilty of

negligence, and not whether the basis for that finding was ordinary negligence or

negligence per se.

      The jury ultimately returned a verdict for the Moseses on all three claims.

The jury also specifically found that Automax had “acted in reckless disregard of

the rights of others” and had “acted intentionally and with malice towards others,”

though there was no indication as to which claims these findings applied. Id. at

405. The jury awarded compensatory damages of $300,000 and punitive damages

                                          -6-
of $100,000. Rather than pursue an appeal, Automax settled the case with the

Moseses for $300,000.

      After the conclusion of the Moses trial, Automax attempted to have Zurich

indemnify it for the cost of the settlement. Zurich refused, contending that the

jury’s intentional conduct finding placed the settlement outside the policy’s

coverage. Automax then filed a lawsuit in federal district court, alleging that

Zurich breached the terms of their insurance contract for refusing to defend and

indemnify Automax in the Moses suit, and, in doing so, breached the covenant of

good faith and fair dealing (also known as a bad faith claim).

      Zurich filed a motion for summary judgment on Automax’s breach of

contract and bad faith claims, while Automax filed a cross motion for partial

summary judgment on those same claims. The district court denied Automax’s

motion and granted Zurich’s. The court reasoned that Zurich had no duty to

defend Automax under its occurrence provision because the only negligence claim

in the Moses lawsuit was based on intentional conduct—falsifying income

information—and all the other claims were also based on intentional conduct.

Moreover, because the jury found that Automax acted intentionally and with

malice, the court concluded that Zurich had no duty to indemnify Automax under

its occurrence provision. These findings, the court noted, also triggered the

policy’s exclusion for acts done with the intent to harm. Given its conclusion that




                                         -7-
Zurich had no duty to defend Automax, the court also ruled that Zurich was

entitled to summary judgment on the bad faith claim.

                                  II. Analysis

      Automax challenges the district court’s summary judgment conclusions that

Zurich (1) had no duty to defend Automax in the Moses lawsuit, (2) had no duty

to indemnify Automax, and (3) did not act in bad faith. “We review a grant of

summary judgment de novo, applying the same standard as the district court.”

Oldenkamp v. United Am. Ins. Co., 619 F.3d 1243, 1246 (10th Cir. 2010).

      A. Duty to Defend

      Automax argues Zurich was obligated to provide a defense in the Moses

lawsuit because the lawsuit presented facts raising the possibility that the

Moseses’ damages resulted from a covered accident. Zurich, by contrast,

contends the lawsuit concerned the intentional sale of a used car as “new,” which

cannot be considered an accident. After examining the terms of the policy and

relevant Oklahoma law, we conclude Zurich had a duty to defend Automax in the

Moses lawsuit under the occurrence provision.

      Oklahoma contract law applies to this diversity action. See Yaffe Cos. v.

Great Am. Ins. Co., 499 F.3d 1182, 1185 (10th Cir. 2007). Under Oklahoma law,

an insurance policy is a contract and is interpreted accordingly. First Bank of

Turley v. Fid. & Deposit Ins. Co. of Md., 928 P.2d 298, 302 (Okla. 1996). Courts

may not rewrite the terms of the insurance policy and must give effect to all of

                                         -8-
the policy’s provisions. Dodson v. St. Paul Ins. Co., 812 P.2d 372, 376 (Okla.

1991). If the terms of an insurance policy are clear and unambiguous, then those

terms will govern. Id. If the terms are ambiguous, however, and are “susceptible

to two constructions,” then the terms will be “interpreted . . . most favorably to

the insured and against the insurance carrier.” Id. at 377. Determining whether

an insurance contract is ambiguous and interpreting the terms of a contract are

tasks for the court. Id. at 376.

      An insurer providing liability coverage usually has two duties: the duty to

defend and the duty to indemnify. Under Oklahoma law, the duty to defend is

distinct from and broader than the duty to indemnify. Turley, 928 P.2d at 303.

“An insurer has a duty to defend an insured whenever it ascertains the presence of

facts that give rise to the potential of liability under the policy.” Id. (emphasis in

original) (citations omitted). “[T]here need not be a probability” that the insured

will be entitled to indemnification. Id. at 303 n.14 (emphasis omitted) (citation

omitted). The focus is on the facts of the incident not merely the allegations in

the complaint. Id. at 303 & nn.13 & 15. While the initial burden to request a

defense is on the insured, once that request is received the insurer bears the

burden of investigating the underlying facts and determining whether they trigger

coverage. Id. at 304. The duty to defend is triggered by the facts reasonably

available at the time the defense is demanded, not by the outcome of the lawsuit.

Id. at 303–05.

                                          -9-
      Automax’s insurance policy with Zurich provides “occurrence” coverage

for “an accident” that results in injuries “neither intended nor expected from the

standpoint of a reasonably prudent person.” App. 140. The Oklahoma Supreme

Court has stated that “the words, ‘accident’ and ‘accidental’ have never acquired

any technical meaning in law, and when used in an insurance contract, they are to

be construed and considered according to common speech and common usage of

people generally.” U.S. Fid. & Guar. Co. v. Briscoe, 239 P.2d 754, 756 (Okla.

1951). Negligent conduct that, although voluntary, produces an unexpected result

will be deemed an “accident.” See Penley v. Gulf Ins. Co., 414 P.2d 305, 309

(Okla. 1966) (“accident” occurred when employee mistakenly filled a motor

grader with gasoline rather than diesel because he lacked “any intent to inflict

injury or damage upon this property”). Applying these principles of Oklahoma

law, we made the related point in an unpublished case that a voluntary action

resulting in foreseeable injury was not an “accident.” See Shelter Mut. Ins. Co. v.

Wheat, 313 F. App’x 76, 81 (10th Cir. 2008) (bullet wound resulting from

ricochet was not “accident” because intentionally firing a gun at close range to

frighten someone could foreseeably cause such an injury).

      Whether Automax’s conduct constitutes an accident requires us to parse the

facts of the Elantra purchase. See Turley, 928 P.2d at 303. The complaint

indicates that Automax could incur liability for three types of behavior: (1) the

sale of the used car as “new,” (2) the sale of the car with undisclosed damage, and

                                        -10-
(3) the terms and manner of the financing. Automax contends the second

scenario, the sale of the car with undisclosed damage, could constitute a covered

accident. That is, the lawsuit contemplates the possibility that Automax did not

know of the damage when it sold the Elantra to the Moseses and violated the

ordinary duty of care by failing to detect the damage. In other words, the original

owner or someone else damaged the car before it was sold again.

      We agree that the failure to detect damage in a car constitutes an “accident”

(and thus an “occurrence”) under the terms of the policy, because a dealership

neither expects nor intends to cause injury to its customers when it sells a car that

it believes is in perfect condition. See Penley, 414 P.2d at 309 (“accident” can

encompass a voluntary act where the injury that resulted was neither intentional

nor likely). Here, the Moseses alleged that the sale resulted in emotional distress,

a covered “injury” under the policy. Thus, the facts of the case clearly suggested

the possibility that the Moseses had suffered an injury resulting from a covered

accident. The only question then is whether Zurich had sufficient notice of this

possibility to trigger its duty to defend.

       From the beginning, Zurich was aware that negligent conduct may have

been part of the lawsuit. Shortly after the Moseses discovered the damage, their

attorney wrote in a letter to Automax demanding recision and claiming the

Elantra’s sale “was predicated on fraud” because Automax “fail[ed] to disclose

prior damage of which [Automax] had knowledge.” App. 516 (emphasis added).

                                             -11-
Automax forwarded the letter to Zurich, which denied the claim, stating, “Our

investigation into the facts and circumstances surrounding [the sale] . . . fails to

reveal any negligence on the part of [Automax].” Id. at 517 (emphasis added).

Zurich claimed that “[o]n September 5, 2007, the vehicle was in for service and

there was no damage to the under carriage at that time.” Id. at 517.

      Zurich’s own response suggests the possibility that the car was damaged at

sale but that Automax was not aware of it. Certainly, a jury when presented with

two conflicting versions of facts—in the plaintiff’s, that damage existed and

Automax knew about it, and in the defense’s, that no damage existed—could find

that the truth was somewhere in between. Indeed, this possibility became a real

defense when, in the pretrial order, the court noted that Automax “denies that the

vehicle had been sold or damaged prior to the sale” to the Moseses, id. at 335,

and that the “claims for undisclosed damage fail per 47 O.S. § 1112.1,” id. at 336.

The reference to section 1112.1 is notable, because that particular statute creates

liability only for failing to disclose “material damage known by the dealer.”

Okla. Stat. Ann. tit. 47, § 1112.1(A)(1)–(2) (emphasis added).

      Other courts similarly conclude that an insurer has a duty to defend even

where the facts alleged intentional conduct because at trial the jury could have

found the defendant guilty merely of negligence or other nonintentional conduct.

See Westport Ins. Corp. v. Napoli, Kaiser & Bern, 746 F. Supp. 2d 502, 508

(S.D.N.Y. 2010) (applying New York law); Gray v. Zurich Ins. Co., 419 P.2d

                                          -12-
168, 177 (Cal. 1966). And those jurisdictions follow a rule similar to

Oklahoma’s, whereby an insurer has a duty to defend if the facts raise the mere

“potential of liability.” Turley, 928 P.2d at 303 (emphasis in original); see

Frontier Insulation Contractors, Inc. v. Merchs. Mut. Ins. Co., 690 N.E.2d 866,

868–69 (N.Y. 1997) (noting that duty to defend is triggered unless “there is no

possible factual or legal basis upon which the insurer may eventually be held

obligated to indemnify the insured”); Horace Mann Ins. Co. v. Barbara B., 846

P.2d 792, 795 (Cal. 1993) (extrinsic facts can “give rise to a duty to defend when

they reveal a possibility that the claim may be covered by the policy”). Given

Oklahoma’s understanding of the duty to defend, we must conclude that the facts

of the case triggered Zurich’s duty to defend Automax under the occurrence

provision. See Turley, 928 P.2d at 302 n.14.

      To avoid this result, Zurich insists that it did not have a duty to defend

because the conduct alleged in the complaint was intentional. First, this argument

fails to acknowledge that the underlying facts, and not the allegations in the

Moseses’ complaint, are dispositive of the duty to defend. Id. at 303. And, as

already noted, the facts indicate that Automax may have been negligent in failing

to discover preexisting damage in the Elantra. Nothing more is required to trigger

the duty to defend.

      Second, this argument fails to realize that multiple types of misconduct—

some covered under the policy, and some not—were part of the Moses lawsuit.

                                         -13-
The general rule is that once an insurer’s duty to defend is triggered, it must

defend all the claims in a lawsuit. D AVID L EITNER ET AL ., L AW & P RAC . OF I NS .

C OVERAGE L ITIG . § 4:21 (2012); see also L EE R. R USS , C OUCH ON I NS . § 200:25

(3d ed. 2012) (“In the majority of jurisdictions, an insurer’s duty to defend

extends to the entire action, which includes covered, potentially covered, and

uncovered allegations within the claim.”). Zurich has offered no authority

demonstrating that Oklahoma deviates from this rule and circumscribes the duty

to defend if the majority of the conduct alleged in the lawsuit would not be

covered under an indemnity provision. Cf. Utica Mut. Ins. Co. v. Voyles, 277 F.

App’x 809, 816 (10th Cir. 2008) (noting that “[a]lthough [an insurer] must defend

[its insureds] in Oklahoma state court against all claims, it need only indemnify

claims falling within the policy’s scope” (emphasis added)).

      Because at least some of Automax’s conduct may have been covered,

Zurich had a duty to defend all the claims. And given Zurich’s breach of that

duty, it must also pay for the entire defense costs. C OUCH ON I NS . § 205:79 (“An

insurer that breaches its duty to defend is presumptively liable for the costs of

defending the entire litigation, even if some claims, standing alone, would not

have given rise to coverage, at least where the costs cannot be allocated between

the covered and noncovered claims.”).




                                          -14-
         B. Duty to Indemnify

         Having concluded that Zurich had a duty to defend Automax in the Moses

lawsuit, we must now decide whether Zurich had a duty to indemnify Automax

for the settlement with the Moseses. We conclude it does, at least for part of the

settlement, and possibly for all of it.

         Zurich argues that it did not have to indemnify Automax for any of the

settlement because all of the conduct in the lawsuit was intentional, and the jury

specifically found that Automax had acted intentionally and with malice. In

particular, Zurich argues that the sole claim that raised the possibility of

coverage—the negligence claim, first included in the fourth amended

complaint—was based on intentional conduct. Automax, by contrast, contends

the jury’s verdict was ambiguous, and that this ambiguity cuts in Automax’s

favor.

         As a practical matter, where an insurer may have to indemnify its insured

for only a portion of the underlying conduct, a special verdict can be helpful or

even essential—that way, the insurer can know the basis of the jury’s verdict and

possible damages award, and apportion its coverage accordingly. Otherwise,

there can be a problem with disentangling the claims that are covered under the

policy from those that are not. Here, for example, the jury’s general verdict

found Automax liable under three different theories of liability—negligence,

fraud/deceit, and truth-in-lending act violations—but neither apportioned the

                                          -15-
$300,000 damages award among the three theories nor specified the precise

conduct to which the finding of intentionality and malice applied.

      As a result, without more we must conclude that it is possible covered

conduct formed part of the basis of the jury’s verdict. Automax correctly points

out that the complaint—with its allegations of intentional conduct—was not the

controlling document at trial. Rather, the pretrial order laid out a general

negligence claim, and the jury was instructed to this effect. (The jury was also

instructed as to negligence per se.) Given these general instructions, the jury may

have returned the negligence verdict based on conduct that was covered under the

policy (i.e., that Automax was negligent in failing to discover damage to the

vehicle before selling it). Indeed, given the jury’s power to affix any, all, or no

damages for each claim, it is even possible that this negligence finding provided

the entire basis for the jury’s damage award. There is simply no way at this point

to determine whether the jury’s finding that Automax had acted intentionally and

with malice applied to all the claims or only some of them. (The same goes for

the punitive damages award.) Thus, it is possible there were both covered and

noncovered claims in the final judgment. The question, then, becomes who bears

the burden for allocating the judgment between the covered and noncovered

claims. 1 A LLAN D. W INDT , I NS . C LAIMS & D ISPUTES § 6:27 (2013) (“Assuming

      1
       Even though Automax ultimately paid a settlement rather than a final
judgment, the principles governing allocation of judgments are equally applicable
                                                                    (continued...)

                                         -16-
that it is proved that a portion of the judgment is covered by the policy and a

portion is not, the next question that arises is which party should have the burden

of allocating the verdict. . . .”).

        We have held that where both covered and noncovered causes of action are

alleged, the insurer—assuming it is in charge of the insured’s defense—must

request a special verdict to disentangle the facts relevant to its indemnification of

the insured. See Magnum Foods, Inc. v. Cont’l Cas. Co., 36 F.3d 1491, 1498

(10th Cir. 1994) (applying Oklahoma law); see also Owners Ins. Co. v. Clayton,

614 S.E.2d 611, 614–15 (S.C. 2005) (insurer who defended insured to general

verdict had to cover entire judgment because at least one claim was covered). In

Magnum Foods, we reasoned that “[i]f the burden of apportioning damages

between covered and non-covered were to rest on the insured, who is not in

control of the defense, the insurer could obtain for itself an escape from

responsibility merely by failing to request a special verdict or special

interrogatories.” 36 F.3d at 1498. Accordingly, “[d]amages [are] presumed to be

covered” unless the insurer can demonstrate an appropriate allocation. Id. at

1499.


        1
       (...continued)
to those governing allocation of settlements. See, e.g., Gay & Taylor, Inc. v. St.
Paul Fire & Marine Ins. Co., 550 F. Supp. 710, 716 (W.D. Okla. 1981) (applying
principles for apportioning judgment to apportioning settlement); see also A LLAN
D. W INDT , I NS . C LAIMS & D ISPUTES § 6:31 (2013) (discussing rules for allocating
judgment in context of allocating settlement).

                                         -17-
      Automax argues Magnum Foods supports its position that Zurich must bear

the burden of allocation for having abandoned it before trial. The difference

though is that Zurich, unlike the insurer in Magnum Foods, was not in charge of

its insured’s defense at trial, because it had ceased representing Automax over ten

months earlier. Nevertheless, most courts to have considered the question have

held that while the insured generally bears the burden of allocating between

covered and noncovered claims, that burden shifts to the insurer when the insurer

had an affirmative duty to defend and fails to fulfill its duty. See, e.g., Liquor

Liab. Joint Underwriting Ass’n of Mass. v. Germitage Ins. Co., 644 N.E.2d 964,

969 (Mass. 1995) (insurer that wrongly refused to defend insured bears “burden

of allocating the judgment in the [underlying] lawsuit between the covered claim

and noncovered claim”); Camden-Clark Mem’l Hosp. Ass’n v. St. Paul Fire &

Marine Ins. Co., 682 S.E.2d 566, 576 (W. Va. 2009) (“[W]e believe that the

insured’s ordinary burden to allocate a verdict between covered and non-covered

claims does not shift to an insurer, unless the insurer has an affirmative duty to

defend the insured under the policy terms.”); see also W INDT , I NS . C LAIMS &

D ISPUTES § 6:27 (When “insurer was obligated to seek an allocated verdict or

advise the insured of the need for one, but failed to fulfill that obligation . . . . the

burden of persuasion should be placed on the insurer.”).

      The logic of Magnum Foods, which applied Oklahoma law, is close to the

holdings of these cases. In Magnum Foods, we held that one of the insurer’s

                                          -18-
duties when it controls the litigation is “not to prejudice the insured’s rights by

failing to request special interrogatories or a special verdict in order to clarify

coverage of damages.” 36 F.3d at 1498. Here, the insurer should also have a

duty to protect the insured’s rights where it is supposed to fund the defense.

Indeed, the Supreme Judicial Court of Massachusetts in Liquor Liability made the

jump from the Magnum Foods situation, where an insurer failed to request a

special verdict (even though the insurer was controlling the litigation), to the one

where the insurer failed to provide a defense at all—in both situations, the insurer

should bear the burden of allocation. 644 N.E.2d at 969. 2

      Placing the burden of allocation on insurers when they have a duty to

defend provides an appropriate incentive for them to fulfill their defense

obligations. If the burden of allocation rested merely on the party who was in

charge of the defense, then insurers would have little to lose on the back end by


      2
         We recognize the potential for a conflict of interest between an insurer
and an insured with respect to a special verdict where both covered and
noncovered claims are at issue. The insurer cannot demand that an insured’s
lawyer (though paid by the insurer) request a special verdict, as the insured
generally controls its own defense. See C OUCH ON I NS . § 205:22 (“An insurer
does not have a right, absent the insured’s consent, to retain control of the defense
of a lawsuit and, at the same time, reserve a right to disclaim liability.”).
Nevertheless, given that the insured generally bears the burden of allocation, the
insurer can prevent that burden from being shifted back to itself by informing the
insured that it would be in the insured’s best interest to request a special verdict.
See Duke v. Hoch, 468 F.2d 973, 979 (5th Cir. 1972) (requiring insurer’s counsel
“to make known to the insured the availability of a special verdict and the
divergence of interest between them and the insurer springing from whether
damages were or were not allocated”).

                                          -19-
refusing to defend on the front end. Assuming the insured was in charge and

managed to obtain a special verdict, the insurers would still be liable for the same

portion of the verdict had they fulfilled their initial obligation to defend. And in

the event the insured neglected to obtain a special verdict, the insurers would

likely be liable for nothing because the insured would be unable to prove

apportionment. Accordingly, we conclude that the Oklahoma Supreme Court

would also place the burden of allocation on the insurer if the insurer wrongly

refuses to defend a claim. Here, that burden lies with Zurich. But, in light of the

general verdict returned by the Moses jury and the impossibility of retrying the

case, Zurich faces an epistemological barrier to determining the jury’s grounds

for judgment.

      As a result of such difficulties, some courts have concluded in similar

situations that an insurer cannot meet its burden of allocating a general verdict,

forcing the insurer to pay the entire judgment. See, e.g., Liquor Liability, 644

N.E.2d at 324 (“[The insurer] cannot satisfy this burden, and any attempt on its

part to do so would be speculative and arbitrary, essentially amounting to an

attempt to determine the particular amount that happened to be in the jurors’

minds as they returned the verdict.” (internal quotation marks omitted; alteration

incorporated)). Others have remanded for evidentiary hearings and recommended

using the trial transcript to make a reasonable allocation. See, e.g., See Duke v.

Hoch, 468 F.2d 973, 984 (5th Cir. 1972); see also TIG Ins. Co. v. Premier Parks,

                                         -20-
Inc., No. Civ.A.02C04126JRS, 2004 WL 728858, at *8 (Del. Super. Ct. Mar. 10,

2004) (“The Court can envision no further competent evidence of the jury’s

intentions beyond the verdict form and the trial transcript.”).

      In this instance, we believe Zurich should have the opportunity to try and

satisfy that burden. In particular, we note that Automax paid a settlement, not a

final judgment. And the settlement amount, $300,000, was lower than the total

damages award of $400,000 ($300,000 in compensatory and $100,000 in

punitive). Thus, the prospect of Automax’s paying punitive damages—which,

Automax concedes, generally cannot be covered under Oklahoma liability

insurance policies, see Magnum Foods, 36 F.3d at 1497—may have factored into

the settlement negotiations. In that case, there may be a reasonable basis for

apportioning the $300,000 settlement. Cf. Gay & Taylor, Inc. v. St. Paul Fire &

Marine Ins. Co., 550 F. Supp. 710, 717 (W.D. Okla. 1981) (apportioning

settlement between actual damages and punitive damages). But if Zurich cannot

satisfy its burden of proof—which it very well may not—it must pay the full

amount of Automax’s $300,000 settlement with the Moseses.

      The prospect of Zurich having to pay all of the Moses settlement may, on

the surface, seem unfair—especially when the jury explicitly found that Automax

had acted intentionally and with malice, and the policy explicitly excludes

coverage for conduct committed “with intent to cause harm.” App. 141. But the

Oklahoma Supreme Court has explained that an insurer who disputes an insured’s

                                         -21-
demand for a defense has three options: “It can (1) seek declaratory relief that

would define the insurer’s rights and obligations; (2) defend the insured under a

reservation of rights, or (3) refuse to take any action at the peril of being later

found in breach of its duty to defend.” Turley, 928 P.2d at 304–05. 3 Zurich

chose option three. And one of the perils of refusing to provide a defense is the

inability to ensure an accurate apportionment of indemnity costs. Had Zurich

chosen option one or two, it likely would be facing a much smaller bill.

      Zurich wagered and lost, but it certainly did not face an unfair choice.




      3
          Declaratory relief is available in either federal court or Oklahoma state
court. In the federal court, the Declaratory Judgment Act provides: “In a case of
actual controversy within its jurisdiction, . . . any court of the United States, upon
the filing of an appropriate pleading, may declare the rights and other legal
relations of any interested party seeking such declaration, whether or not further
relief is or could be sought.” 28 U.S.C. § 2201(a). Invoking this provision,
insurers often seek declaratory judgment in federal court (assuming jurisdiction is
appropriate) on whether they have a duty to defend an insured under the terms of
a liability policy. See, e.g., United Fire & Cas. Co. v. Boulder Plaza Residential,
LLC, 633 F.3d 951 (10th Cir. 2011); Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for
Rehab., 529 F.3d 916 (10th Cir. 2008).
       Oklahoma also permits declaratory judgments in its courts. At the time
Turley was decided, Oklahoma law prohibited declaratory judgments “concerning
obligations alleged to arise under policies of insurance covering liability or
indemnity against liability for such injuries.” Okla. Stat. Ann. tit. 12, § 1651
(West 1995). That language, however, was removed by legislation in 2004,
thereby permitting actions for declaratory judgment on the duty to defend. See
Equity Ins. Co. v. Garrett, 178 P.3d 201, 204 (Okla. Civ. App. 2008); see also
Knight ex rel. Ellis v. Miller, 195 P.3d 372, 375 (Okla. 2008) (agreeing with
Garret court’s analysis).

                                          -22-
      C. Bad Faith Claim

      Finally, Automax argues the district court erred in granting summary

judgment to Zurich on Automax’s bad faith claim. Zurich insists that even if it

breached its duty to defend and indemnify Automax, the bad faith claim must fail

because there was a reasonable dispute over coverage.

      Under Oklahoma law, an insurer has an “implied-in-law duty to act in good

faith and deal fairly with the insured to ensure that the policy benefits are

received.” Gray v. Holman, 909 P.2d 776, 780 n.9 (Okla. 1995) (emphasis

omitted). “Tort liability is allowed in . . . [insurance] contracts, because bad

faith, or, more properly, breach of the implied duty to deal fairly and in good

faith, precipitates the precise economic hardship the contract was intended to

avoid.” Embry v. Innovative Aftermarket Sys. L.P., 247 P.3d 1158, 1160 (Okla.

2010). The duty encompasses not only the prompt payment of money upon proof

of loss but also the good faith defense of the insured. Christian v. Am. Home

Assurance Co., 577 P.2d 899, 904 (Okla. 1977).

      The elements of a bad faith claim against an insurer are: (1) the insured was

entitled to coverage under the policy; (2) the insurer had no reasonable basis for

delaying payment; (3) the insurer did not deal fairly and in good faith with the

insured; and (4) the insurer’s violation of the duty of good faith was the direct

cause of the insured’s injury. Ball v. Wilshire Ins. Co., 221 P.3d 717, 724 (Okla.




                                         -23-
2009). It is the insured’s burden to establish every element of the claim. Garnett

v. Gov’t Emps. Ins. Co., 186 P.3d 935, 944 (Okla. 2008).

        The district court granted Zurich’s motion for summary judgment on the

bad faith claim because it concluded that Automax could not meet the first

element of the claim—that Automax was entitled to coverage. The court also

concluded, apparently along the same lines, that there was at least a legitimate

basis for Zurich’s denying coverage for Automax. It did not reach the other

elements of the claim. Yet the record suggests—though, at the moment, does not

conclusively show—that Zurich may have misunderstood the duty in Oklahoma to

defend an insured if the facts of the lawsuit reveal a mere possibility that a claim

is covered, as well as the duty that, once an insured requests a defense, the insurer

has to inquire into the underlying facts. Turley, 928 P.2d at 303. It is possible

that Zurich did not conduct the requisite investigation before denying Automax’s

claim. Such a scenario would suggest that Zurich did not have a reasonable basis

for delaying payment.

        In sum, because we have concluded Zurich had a duty to defend Automax

under the occurrence provision, and that Zurich may not have had a reasonable

basis for denying coverage, summary judgment for Zurich is inappropriate at this

time.




                                         -24-
                                III. Conclusion

      Because Zurich violated its duty to defend, we REVERSE and REMAND to

the district court for proceedings consistent with this opinion.




                                        -25-
