Scottsdale Indemnity Company v. Martinez Inc

Filing 29

MEMORANDUM OPINION Signed by Judge Karon O Bowdre on 1/29/13. (SAC )

FILED
2013 Jan-29 PM 04:21
U.S. DISTRICT COURT
N.D. OF ALABAMA

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
SCOTTSDALE INDEMNITY CO.,
Plaintiff & Counterclaim
Defendant,
v.
MARTINEZ, INC.,
Defendant and Counterclaim
Plaintiff.

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2:12-cv-2146-KOB

MEMORANDUM OPINION
This matter comes before the court on “Scottsdale Indemnity Company’s Second Motion
to Dismiss Martinez’s Amended Counterclaim.” (Doc. 19). Plaintiff Scottsdale argues that the
court should dismiss Defendant Martinez, Inc.’s bad faith counterclaim because Martinez has
failed to plead the claim with the requisite specificity and has failed to state a claim upon which
relief can be granted. Scottsdale argues that its bad faith claim should not be dismissed because it
is not subject to the heightened pleading standard of Rule 9(b) and because it sufficiently
apprises Scottsdale of the claim against it. The court agrees that Rule 9(b) does not apply to bad
faith claims and that Martinez’s amended counterclaim adequately puts Scottsdale on notice of
the counterclaim asserted against it. For these reasons as more fully stated below, the court will
DENY the motion to dismiss.

I.

STATEMENT OF FACTS
This action is a dispute over an unpaid insurance claim. Plaintiff Scottsdale issued to

Defendant Martinez a renewal of Business and Management Indemnity Policy (“The Policy”) on
September 15, 2010; coverage under that policy extended from September 15, 2010 to September
15, 2011. Under the Policy, Scottsdale agreed to pay for “loss or damage to Money, Securities,
and Other Property resulting directly from Theft or Forgery by any identifiable Employee while
acting alone or in collusion with others.” (“Business and Management Indemnity Policy,” Doc.
1-1, at 36). On or about August 15, 2011, Martinez discovered that an employee had stolen
money from Martinez. In compliance with the notice terms of the Policy, Martinez notified
Scottsdale of the loss and abided with all other duties owed to Scottsdale with regard to the
claim.
From February to June 2012, Scottsdale investigated the claim through an independent
accounting firm. During that time, the accounting firm provided reports on the scope and validity
of the loss to Cheryl Lanier, a Scottsdale agent. On June 12, 2012, Scottsdale notified Martinez
of the denial of its claim for loss. Martinez alleges that Scottsdale “sought an opinion upon which
it based its denial as a pretext in order to avoid paying a valid claim” and that Scottsdale’s
purported reasons for denying the claim “were based upon factually incorrect information.” (Doc.
18, at 9, 10).
Scottsdale brought this action against Martinez seeking a declaratory judgment that no
coverage exists for Martinez’s losses under the Policy, and then Martinez filed bad faith and
breach of contract counterclaims against Scottsdale. Scottsdale filed a motion to dismiss
Martinez’s counterclaims, or alternatively, for a more definite statement. (Doc. 16). The court
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denied the motion to dismiss but granted the motion for more definite statement. (Doc. 17).
Martinez filed amended bad faith and breach of contract claims against Scottsdale, alleging that
Scottsdale “intentionally, and without legitimate or arguable reason” denied its claim and
“intentionally failed and refused” to pay the claim. (Doc. 18, at 11). Scottsdale then filed the
instant motion to dismiss Martinez’s bad faith counterclaim. (Doc. 19).
II.

STANDARD OF REVIEW
A Rule 12(b)(6) motion to dismiss attacks the legal sufficiency of the complaint.

Generally, the Federal Rules of Civil Procedure require only that the complaint provide “‘a short
and plain statement of the claim’ that will give the defendant fair notice of what the plaintiff’s
claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957)
(quoting Fed. R. Civ. P. 8(a)). A plaintiff must provide the grounds of his entitlement, but Rule
8 generally does not require “detailed factual allegations.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007) (quoting Conley, 355 U.S. at 47). It does, however, “demand[ ] more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal 556 U.S. 662,
678 (2009). Pleadings that contain nothing more than “a formulaic recitation of the elements of
a cause of action” do not meet Rule 8 standards nor do pleadings suffice that are based merely
upon “labels or conclusions” or “naked assertions” without supporting factual allegations.
Twombly, 550 U.S. at 555, 557.
The Supreme Court explained that “[t]o survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Iqbal, 556 U.S. at 678 (quoting and explaining its decision in Twombly, 550 U.S. at 570).
To be plausible on its face, the claim must contain enough facts that “allow[ ] the court to draw
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the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S.
at 678. Although “[t]he plausibility standard is not akin to a ‘probability requirement,’” the
complaint must demonstrate “more than a sheer possibility that a defendant has acted
unlawfully.” Id. “Where a complaint pleads facts that are merely consistent with a defendant’s
liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.’”
Id. (quoting Twombly, 550 U.S. at 557).
The Supreme Court has recently identified “two working principles” for the district court
to use in applying the facial plausibility standard. The first principle is that, in evaluating
motions to dismiss, the court must assume the veracity of well-pleaded factual allegations;
however, the court does not have to accept as true legal conclusions even when “couched as []
factual allegation[s]” or “threadbare recitals of the elements of a cause of action, supported by
mere conclusory statements.” Iqbal, 556 U.S. at 678.

The second principle is that “only a

complaint that states a plausible claim for relief survives a motion to dismiss.” Id. at 679. Thus,
under prong one, the court determines the factual allegations that are well-pleaded and assumes
their veracity, and then proceeds, under prong two, to determine the claim’s plausibility given the
well-pleaded facts. That task is “context-specific” and, to survive the motion, the allegations
must permit the court based on its “judicial experience and common sense. . . to infer more than
the mere possibility of misconduct.” Id. If the court determines that well-pleaded facts, accepted
as true, do not state a claim that is plausible, the claim must be dismissed. Id.
III.

DISCUSSION
Scottsdale argues that Martinez’s bad faith claim, as a species of fraud, must comport

with the heightened pleading standard for allegations of fraud. When a party alleges fraud or
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mistake, the “party must state with particularity the circumstances constituting fraud or mistake”
but “malice, intent, knowledge, and other conditions of a person’s mind may be alleged
generally.” Fed. R. Civ. Pro. 9(b). Scottsdale does not cite any case stating that bad faith failure
to pay claims are subject to the heightened pleading requirements for claims of fraud. Certainly,
the Alabama Supreme Court has made clear that bad faith claims are a subset of fraud claims, but
no case states that bad faith claims are subject to Rule 9(b)’s requirements.
Martinez points the court to the recent decision of Austin v. Auto Owners Ins. Co., 2012
WL 3101693 (S.D. Ala. 2012). In that case, Judge Steele held that Rule 9(b) had no role in bad
faith claims. Id. at *3, n. 7. This court agrees with Judge Steele’s reasoning that
In an ordinary fraud case, the Rule 9(b) who/ what/when/where specificity is
necessary to apprise the defendant of what it is alleged to have done wrong. Without
knowing the particulars of the fraudulent statement it is accused of making, a
defendant cannot respond properly. Here, however, [the insurer] knows exactly what
[the insured] contends it did wrong, with regard to a specific policy number and
claim, plus [the insured’s] allegations that there was no arguable basis for not paying
the claim and that [the insurer] knew it. Armed with this kind of pleading detail,
defendant is fully equipped to prepare a defense, and cannot plausibly profess to be
in the dark as to [the insured’s] claim. Rule 9(b) has no role here.

Id. Here, Scottsdale, as the insurer in Austin, cannot be “in the dark” as to the facts surrounding
Martinez’s counterclaim because Scottsdale filed the original Complaint in the controversy. This
court will not require Martinez’ bad faith claim to comport with Rule 9(b)’s heightened pleading
requirement. Therefore, the court will analyze whether Martinez’s bad faith claim states a claim
upon which relief can be granted.
Under Alabama law, the insured bringing a claim of bad faith against its insurer must
prove the following elements: “(a) an insurance contract between the parties and a breach thereof

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by the defendant; (b) an intentional refusal to pay the insured's claim; (c) the absence of any
reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason); (d)
the insurer's actual knowledge of the absence of any legitimate or arguable reason; (e) if the
intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must
prove the insurer's intentional failure to determine whether there is a legitimate or arguable
reason to refuse to pay the claim.” Ex parte Alfa Mut. Ins. Co., 799 So. 2d 957, 962 (Ala. 2001).
The Alabama Supreme Court has further elaborated that “In short, plaintiff must go beyond a
mere showing of nonpayment and prove a bad faith nonpayment, a nonpayment without any
reasonable ground for dispute. Or, stated differently the plaintiff must show that the insurance
company had no legal or factual defense to the insurance claim.” Farr v. Gulf Agency, 74 So. 3d
393, 403 (Ala. 2011)(citing Nat. Sec. Fire & Cas. Co. v. Bowen, 417 So. 2d 179, 183 (Ala.
1982)).
In this case, the parties inherently recognize the existence of a valid insurance contract
but argue over whether Scottsdale breached that contract. Martinez pled that it incurred a covered
loss when its employee stole money from the company; that Scottsdale owed it benefits under the
Policy; and that Scottsdale refused to pay the covered claim. Martinez specifically alleges that
Scottsdale “intentionally, and without legitimate or arguable reason” refused to pay and denied
its claim. (Doc. 18, at 11). Martinez’s allegation that Scottsdale’s given reason for denying its
claim was pretext alleges by inference that Scottsdale did not have or know of any legitimate
reason to deny the claim.
This pleading goes well beyond the mere conclusory allegation that Scottsdale simply
denied Martinez’s claim in bad faith. The second amended counterclaim alleges “a valid
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insurance policy, a covered loss, a timely claim, a lack of any reasonable basis for denying the
claim, a lack of reasonable basis for denying the claim, and knowledge of these facts by the
defendant.” Austin, 2012 at *5. These allegations put Scottsdale on notice of the claim against it,
especially in this case where the underlying insurance policy is the subject of the action originally
brought by Scottsdale. Assuming the veracity of the well-pled allegations, Martinez stated a
viable bad faith counterclaim against Scottsdale.
IV.

CONCLUSION
The court refuses to apply Rule 9(b)’s heightened pleading standard to Martinez’s bad

faith counterclaim, and under Rule 8's pleading standards, Martinez states a viable bad faith
claim against Scottsdale. For these reasons, the court will DENY Scottsdale’s motion to dismiss
and will simultaneously enter an order to that effect.
DONE and ORDERED this 29th day of January, 2013.

____________________________________
KARON OWEN BOWDRE
UNITED STATES DISTRICT JUDGE

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