Georgia-Pacific Consumer Products LP et al v. Zurich American Insurance Co. et al
ORDER denying 102 Motion to Dismiss. Signed by Chief Judge William H. Steele on 4/21/2016. (tgw)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
PRODUCTS LP, etc., et al.,
ZURICH AMERICAN INSURANCE
COMPANY, etc., et al.,
) CIVIL ACTION 15-0342-WS-B
This matter is before the Court on the motion of defendant Aspen Specialty
Insurance Company (“Aspen”) to dismiss, brought pursuant to Rule 12(b)(6).
(Doc. 102). The parties have filed briefs in support of their respective positions,
(Docs. 103, 124, 128), and the motion is ripe for resolution. After careful
consideration, the Court concludes that the motion is due to be denied.
According to the third amended complaint, (Doc. 182) (“the complaint”),1
the entity plaintiff (“GP”) operates a paper mill facility in Choctaw County. One
defendant (“S&S”) contracted with GP to perform work at the facility, in the
course of which an employee of S&S was killed. S&S had agreed to obtain
The motion to dismiss is directed toward the second amended complaint. (Doc.
85). Following the completion of briefing, the plaintiffs filed a motion for leave to file a
third amended complaint. (Doc. 155). After all defendants declined the opportunity to
object, the Court granted the motion. (Doc. 181). The third amended complaint is thus
now the operative pleading. E.g., Krinsk v. SunTrust Banks, Inc., 654 F.3d 1194, 1202
(11th Cir. 2011) (“[U]nder the Federal Rules of Civil Procedure, an amended complaint
supersedes the initial complaint and becomes the operative pleading in the case ….”)
(internal quotes omitted). However, because the third amended complaint makes no
changes material to Aspen’s motion to dismiss, (Doc. 155), its motion can be decided
insurance in favor of GP and its officers and agents (including the individual
plaintiff). Aspen issued an excess/umbrella policy but refused to investigate the
matter or provide coverage and refused to participate in the ultimate settlement of
the underlying lawsuit.
The third amended complaint asserts claims against Aspen for: breach of
contract (Count One); negligence (Count Two); bad faith (Count Three); abnormal
bad faith (Count Four); and declaratory relief (Count Nine). Aspen’s motion
targets only the bad faith claims.
Aspen argues that the bad faith counts fail to satisfy the pleading
requirements of Rule 8(a) and that, in any event, it owed the plaintiffs no duty at
the time it denied their claim.
To survive dismissal under Rule 12(b)(6), a complaint must first satisfy the
pleading requirements of Rule 8(a)(2). Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555 (2007). “A pleading that states a claim for relief must contain … a short
and plain statement of the claim showing that the pleader is entitled to relief ….”
Fed. R. Civ. P. 8(a)(2). Rule 8 establishes a regime of “notice pleading.”
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 513-14 (2002). It does not,
however, eliminate all pleading requirements.
First, the complaint must address all the elements that must be shown in
order to support recovery under one or more causes of action. “At a minimum,
notice pleading requires that a complaint contain inferential allegations from
which we can identify each of the material elements necessary to sustain a
recovery under some viable legal theory.” Wilchombe v. TeeVee Toons, Inc., 555
F.3d 949, 960 (11th Cir. 2009) (emphasis and internal quotes omitted).
Pleading elements is necessary, but it is not enough to satisfy Rule 8(a)(2).
The rule “requires more than labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do” to satisfy that rule. Twombly, 550
U.S. at 555. There must in addition be a pleading of facts. Though they need not
be detailed, “[f]actual allegations must be enough to raise a right to relief above
the speculative level ....” Id. That is, the complaint must allege “enough facts to
state a claim for relief that is plausible on its face.” Id. at 570. “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard … asks for
more than a sheer possibility that the defendant has acted unlawfully,” and
“[w]here 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. (internal quotes omitted). A complaint lacking
“sufficient factual matter, accepted as true, to state a claim to relief that is
plausible on its face” will not “survive a motion to dismiss.” Id. But so long as
the plausibility standard is met, the complaint “may proceed even if it strikes a
savvy judge that actual proof of those facts is improbable, and that a recovery is
very remote and unlikely.” Twombly, 550 U.S. at 556 (internal quotes omitted).
These are the pleading requirements of Rule 8(a)(2), and failure to meet
them exposes a complaint to dismissal under Rule 12(b)(6) for failure to state a
claim on which relief can be granted. But the complaint is so exposed only if the
defendant moves for dismissal under that rule, invokes the plausibility standard,
and makes a satisfactory showing that, in certain, specified respects, for certain,
specified reasons, the complaint falls short of that standard.2 “Vague, generalized
This necessarily follows from the principle that the movant bears the burden of
showing that dismissal for failure to state a claim is warranted. E.g., Beck v. Deloitte &
Touche, 144 F.3d 732, 735-36 (11th Cir. 1998); Continental Motors, Inc. v. Jewell
Aircraft, Inc., 882 F. Supp. 2d 1296, 1314 n.26 (S.D. Ala. 2012).
assertions that a claim is somehow implausible, without a clear, supported
explanation of just what is implausible and why, places no burden on the Court to
supply the deficiency or on the plaintiff to respond.” FNB Bank v. Park National
Corp., 2013 WL 1748796 at *2 (S.D. Ala. 2013).
The parties agree as to the elements of a normal bad faith claim under
Alabama law: (1) a breach of an insurance contract; (2) the intentional refusal to
pay a claim; (3) the absence of an arguable reason for the refusal; and (4) the
insurer’s knowledge of the absence of an arguable reason for the refusal. They
also agree that a claim of abnormal bad faith includes a fifth element: the
intentional failure to determine whether there is an arguable basis for the refusal.
(Doc. 103 at 5; Doc. 124 at 5).3 Aspen argues that the plaintiff has not adequately
pleaded the fourth and fifth elements. (Doc. 103 at 6, 7, 14).
Aspen does not dispute that the complaint adequately pleads the third
element – that Aspen lacked an arguable reason for refusing to pay.4 The only
Both sides rely on State Farm Fire and Casualty Co. v. Brechbill, 144 So. 3d
248, 258 (Ala. 2013), for this rendition.
In its reply brief, Aspen changes tack, ignoring completely the fourth and fifth
elements and arguing for the first time that the second amended complaint on its face
negates the third element. (Doc. 128 at 6-8). This argument comes too late to be
considered. Gross-Jones v. Mercy Medical, 874 F. Supp. 2d 1319, 1330 n.8 (S.D. Ala.
2012) (“District courts, including this one, ordinarily do not consider arguments raised
for the first time on reply.”) (citing cases and explaining rationale).
Even had this challenge been timely presented, it could not prevail. Aspen’s
position is that the complaint, by listing reasons Aspen gave for denying coverage,
“demonstrates that Aspen had arguable reasons for denial of coverage.” (Doc. 128 at 67). The complaint, however, does not reflect that the reasons Aspen gave for denying
coverage were arguable, only that they were given. Far from suggesting that Aspen’s
reasons were arguable, the complaint characterizes them as “erroneous,” based on
“mischaracteri[zation],” “[in]applicable” provisions and a practice of “ignoring”
governing facts and law, and, ultimately, with “no basis, factual or legal.” (Doc. 182 at
16-17, 19). To the uncertain extent Aspen suggests that the complaint must “rebut”
Aspen’s articulated reasons and “sho[w]” they are inarguable, (Doc. 128 at 2, 8), it
demands far too much of the plausibility standard. Cf. Austin v. Auto Owners Insurance
Co., 2012 WL 3101693 at *5 n.8 (S.D. Ala. 2012) (“Nothing in the Twombly/Iqbal line
of precedents would require a plaintiff to … transform her complaint into a summary
question is whether it adequately pleads that Aspen knew it lacked an arguable
reason. The complaint expressly so alleges: “Aspen … refused to provide
Plaintiffs with coverage (indemnity) and/or mediate, settle and pay the claims …
and did so … with knowledge that there was no basis, factual or legal, to refuse to
pay said claim/settlement ….” (Doc. 182 at 19).
The quoted language, protests Aspen, is a “conclusory assertion devoid of
factual enhancement and a mere recitation of some of the elements of a claim for
bad faith” and thus a legally insufficient allegation. (Doc. 103 at 13 (internal
quotes omitted)). It is not, however, the only relevant allegation since, as noted,
Aspen does not challenge the adequacy of the complaint’s allegation that Aspen
lacked an arguable reason for refusing to pay. All that is required is a plausible
allegation of knowledge, and it would appear facially plausible (though not
necessarily correct in every case) that an insurer lacking any arguable basis for
denying coverage would be aware it lacked an arguable basis. Certainly Aspen
offers the Court no reason to believe otherwise.
Turning to the fifth element, an abnormal claim of bad faith can be based
on an “intentional or reckless failure to investigate a claim.” Singleton v. State
Farm Fire & Casualty Co., 928 So. 2d 280, 283 (Ala. 2005). The complaint
alleges that Aspen failed to investigate the underlying incident, the underlying
lawsuit, and the plaintiffs’ status as additional insureds. (Doc. 182 at 13, 20).
Aspen characterizes this, in familiar language, as a conclusory assertion devoid of
factual enhancement and a mere recitation of elements of the claim. (Doc. 103 at
7-8, 13). Assuming without deciding that a bad faith complaint must allege
subsidiary facts supporting an allegation of a “failure to investigate” in order to
satisfy Rule 8(a)(2), the complaint does so.
judgment-style memorandum of law setting forth the entirety of her coverage argument,
extensive analysis and application of the relevant policy provisions, and so forth.”).
The complaint alleges that, at a July 2015 mediation, Aspen “asserted
denials and reservations of coverage, and in doing so admitted that [it] had not
investigated or evaluated the Southerland Lawsuit or Plaintiffs’ demands and
entitlement to coverage.” (Doc. 182 at 14). It is certainly plausible that a
defendant admitting it has not investigated has in fact not investigated. Aspen,
however, labels this allegation “speculation,” (Doc. 103 at 8), apparently on the
theory that the plaintiffs are extrapolating a failure to investigate from a denial of
coverage. That is, Aspen reads “in doing so” as meaning “by doing so.” But “in
doing so” can comfortably be read in the sense of “in the course of doing so,”
which would indicate that Aspen, while denying coverage at the mediation, also
admitted it had performed no investigation. 5 Aspen offers the Court no reason to
select its preferred reading over the equally plausible alternative, and the Court
declines to do so.
Aspen suggests it could not have failed to investigate prior to the July 2015
mediation because this action was filed less than a week prior to the mediation.
(Doc. 103 at 8-9). The Court is unable to make that impressive mental leap; a
denial of coverage without an adequate investigation could occur at any time –
including at the very moment the insurer becomes aware of a claim. Nothing in
the alleged timing negates a failure to investigate.
Aspen next points to a letter it sent the plaintiffs the day before the July
2015 mediation; because the letter sets forth a reason for denying coverage, Aspen
concludes that it must necessarily have conducted a legally sufficient investigation
in order to come up with that reason. (Doc. 103 at 9). As a threshold matter,
Aspen has not shown that the Court may consider the letter – which is neither an
exhibit to the complaint nor referenced therein – on motion to dismiss. Even
could the letter be considered, an insurer obviously could state a reason for
denying a claim without having conducted any investigation to back it up –
Indeed, Aspen elsewhere acknowledges that the complaint alleges that a
“representation was made” that it had not investigated coverage. (Doc. 103 at 14).
indeed, that is the very premise behind the abnormal variety of bad faith. The
letter, in short, does not negate a failure to investigate.
Aspen focuses on “investigation,” but an abnormal case of bad faith “can
[also] consist of … intentional or reckless failure to properly subject a claim to a
cognitive evaluation or review ….” Singleton, 928 So. 2d at 283. Thus, in
abnormal bad faith cases, “[a] defendant’s knowledge or reckless disregard of the
fact that it had no legitimate or reasonable basis for denying a claim may be
inferred and imputed to an insurer when it has shown a reckless indifference to
facts or proof submitted by the insured.” Ex parte Simmons, 791 So. 2d 371, 379
(Ala. 2000) (internal quotes omitted); see also Blackburn v. Fidelity and Deposit
Co., 667 So. 2d 661, 673 (Ala. 1995) (abnormal bad faith claim based on fact that
the defendant “ignored other information as it became available”). Here, the
complaint alleges that Aspen failed to conduct a “cognitive review and
evaluation,” (Doc. 182 at 20), but instead relied only on the pleadings in the
underlying lawsuit, even after it was “provided and apprised of relevant and
dispositive facts and evidence beyond those pleadings.” (Id. at 16). Aspen does
not assert that this allegation is implausible, (Doc. 103 at 11-12), and it plainly is
Aspen argues that, pursuant to the terms of its policy, it had “no duty
whatsoever” to the plaintiffs until the primary insurer (“Zurich”) paid its policy
limits over to the underlying plaintiff.6 That payment occurred on October 18,
2015, and Aspen asserts that all of the complaint’s allegations of bad faith address
its acts and omissions prior to that date. Thus, Aspen concludes, at the relevant
The only duties identified in the portion of the policy on which Aspen relies are
those of investigation, settlement and defense. (Doc. 82-1 at 7). This case does not
concern the duty to defend. (Doc. 182 at 19-20; Doc. 124 at 20).
time it had no duties to the plaintiffs that it could have breached. (Doc. 103 at 1419).
The plaintiffs agree that Zurich’s payment occurred on October 18, but they
disagree that the policy (either as written or in light of public policy) conditions
the activation of Aspen’s duties on Zurich’s actual payment (as opposed to its
agreement to pay, which they say occurred at the July 2015 mediation). They also
disagree as to the scope of the complaint, asserting that it alleges bad faith
continuing at least until the second amended complaint was filed in December
2015. These are interesting questions, but the Court need not resolve them, since
the plaintiffs raise another argument that proves dispositive.
“Every contract contains an implied in law covenant of good faith and fair
dealing; this covenant provides that neither party will interfere with the rights of
the other to receive the benefits of the agreement.” Chavers v. National Security
Fire & Casualty Co., 405 So. 2d 1, 4 (Ala. 1981) (internal quotes omitted).
However, “this requirement of good faith and fair dealing should be characterized
as a duty implied by law.” Id. at 4-5 (emphasis added). Again, “this good faith
duty [is] imposed not by the contract itself, but rather by law ….” Id. at 6
(emphasis added); accord Gulf Atlantic Life Insurance Co. v. Barnes, 405 So. 2d
916, 924 (Ala. 1981) (“Bad faith is the intentional failure by an insurer to perform
the duty implied by law of good faith [and] fair dealing.”) (emphasis added). A
breach of this duty occurs when the insurer, with no arguable reason and with
knowledge (or culpable ignorance) that it has no arguable reason, intentionally
refuses to pay a claim. State Farm Fire and Casualty Co. v. Brechbill, 144 So. 3d
248, 258 (Ala. 2013).
It may (or may not) be, as Aspen insists, that it was under no contractual
duty to investigate or to settle before Zurich actually paid its policy limits in
October 2015. And it may be assumed that Aspen was under no duty to make a
coverage decision before that point. According to the complaint, however, Aspen
was not content to delay its coverage decision until actual payment was made.
According to the complaint, Aspen affirmatively and definitively denied coverage.
(Doc. 182 at 16). As the plaintiffs note, (Doc. 124 at 18-19), by electing to deny
coverage, Aspen became subject to the duty imposed by law to exercise good faith
in making its coverage decision; that Aspen at that point in time may not have
owed the plaintiffs any duty to investigate or settle imposed by contract is
irrelevant. None of the authorities cited in Aspen’s principal brief appear to
support a contrary result, and in any event none of them were decided under
In its reply brief, Aspen offers no response to the plaintiffs’ position.
Instead, it again pivots to a brand-new argument wholly absent from its principal
brief: that it “could not have engaged in bad faith because it was defending the
complaint for declaratory judgment when it denied coverage.” (Doc. 128 at 9).
As previously noted, Aspen cannot obtain relief on the basis of an argument,
previously available to it, not raised in its principal brief but only in reply. For
that reason alone its argument is unavailing.
But the argument would fail even had it been timely presented. Aspen’s
authorities (none applying Alabama law) stand only for the proposition that an
insurer’s actions in defending a lawsuit brought by its insured generally cannot be
used to establish the insurer’s bad faith, on the theory that any probative value of
such evidence is outweighed by the risk of unfair prejudice. That is, Aspen’s
cases only limit what evidence can be used to show that a denial was made in bad
faith; they do not state or remotely suggest that a denial made during litigation
cannot, for that reason, form the basis of a bad faith claim.
Moreover, the evidentiary exclusion extends only to an insurer’s “litigation
conduct,”7 that is, its “‘litigation tactics and strategy in defending a claim.’”8
Knotts v. Zurich Insurance Co., 197 S.W.3d 512, 523 (Ky. 2006); Sims v.
Travelers Insurance Co., 16 P.3d 468, 471 (Okla. App. 2000).
Aspen has not asserted (and would have a difficult time establishing) that its
denial of coverage – which was made during, but not as part of, this litigation –
constituted “litigation conduct” within the contemplation of its own authorities.
And even could it do so, the evidentiary rule is not absolute but subject to
exceptions,9 one of which presumably would cover such a bald attempt to
immunize a denial of coverage from bad faith review.
In a related vein, Aspen creatively proposes that, by filing an answer
asserting that it investigated the plaintiffs’ claim and had arguable reasons for
denying coverage, it has insulated its denial from any bad faith claim, on the
theory that its lawyers’ Rule 11 certification must be held to be dispositive of the
question. (Doc. 128 at 10-11). The argument, first raised in reply, comes too late
to be considered, but it is in any event plainly meritless.
For the reasons set forth above, Aspen’s motion to dismiss is denied.
DONE and ORDERED this 21st day of April, 2016.
s/ WILLIAM H. STEELE
CHIEF UNITED STATES DISTRICT JUDGE
Timberlake Construction Co. v. United States Fidelity and Guaranty Co., 71
F.3d 335, 340 (10th Cir. 1995) (quoting Palmer ex rel. Diacon v. Farmers Insurance
Exchange, 861 P.2d 895, 915 (Mont. 1993)).
Timberlake, 71 F.3d at 341; Knotts, 197 S.W.3d at 523; Palmer, 861 P.2d at
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