First, it claimed property and business income loss from vandalism and theft to the inn's bar, which allegedly occurred in October 2011.

Second, it claimed damages from a hail storm that occurred in May 2012.

Century paid the claims in the combined amount of $777,885.41.

After Shayona submitted additional related claims, Century conducted further investigation and eventually concluded that at least some of the submissions by Shayona had been fraudulent.

Century then filed a complaint for declaratory judgment for a determination of rights and obligations under the policy, including whether Shayona had committed fraud such that the policy was void and Century was due back the money it had paid out.

At trial, the parties disagreed as to what evidentiary standard should govern.

Shayona argued that a clear and convincing standard was appropriate because it viewed Century's claim as a fraud action.

The U.S. District Court for the Western District of Oklahoma disagreed with Shayona, accepted Century's characterization of the action as one for declaratory judgment, and instructed the jury that Century only had to prove breach of the contract by a preponderance of the evidence.

The jury then found that Shayona had indeed submitted false or fraudulent information that voided the policy, and that judgment should be entered against Shayona for $855,057.91. Notably, the jury included in that award $77,172.50 for Century's investigative expenses.

The district court entered judgment on the verdict, and Shayona appealed to the Fifth Circuit. It argued that the district court had erred by instructing the jury that Century only had to prove its case by a preponderance of the evidence. The standard should have been clear and convincing, Shayona argued, because Century's claim was, in fact, a fraud claim: Century had not merely raised fraud as an affirmative defense to deny payment under the contract (in which case Shayona agreed that preponderance of the evidence would be the correct standard), but Century had brought its claim outright to reclaim the money it had paid out under the contract and to recover its investigative expenses.

Thus, Shayona contended, even though Century had strategically characterized its claim as a declaratory judgment action to gain the benefit of the lower standard, in reality the claim was for fraud, and as such it should be treated as a claim for fraud – and this required use of the clear and convincing standard.

The Fifth Circuit's Decision

The circuit court affirmed.

In its decision, it first observed that, in a breach-of-contract insurance action, Oklahoma courts “have long used the preponderance standard.” The same standard applied if an insurer raised breach of a fraud provision as an affirmative defense, the circuit court noted. It then ruled that no different standard should apply to a party asserting the same argument “as a claim instead of as a defense.”

Next, the Fifth Circuit rejected Shayona's argument that the inclusion of investigatory expenses in the jury's award supported viewing the entire claim as one for fraud. The circuit court said that there was “no reason to believe that a higher evidentiary standard should apply” when an insurer brought a declaratory judgment action regarding its rights under the contract because of an insured's fraudulent behavior. The inclusion of other damages resulting from the breach did not change this, and it did not transform a contract action into a tort action, the circuit court stated. Rather, it concluded, damages from breach of contract included those damages that were the “natural and proximate consequence of a breach.”

The case is Century Surety Co. v. Shayona Investment, LLC, No. 15-6083 (10th Cir. Nov. 1, 2016). Attorneys involved include: S.Corey Stone, Pettis & Stone, Shawnee, Oklahoma, for Defendant – Appellant; Phil R. Richards, (Randy Lewin, and Brett E. Gray of Richards & Connor, on the brief), Tulsa, Oklahoma, for Plaintiff – Appellee.