Crandall v. Hartford Casualty Insurance Company et al

Filing 75

MEMORANDUM DECISION AND ORDER denying 44 Motion for Hearing. Signed by Judge Ronald E Bush. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (krb)

UNITED STATES DISTRICT COURT
DISTRICT OF IDAHO

DANIEL W. CRANDALL,

Case No.: CV 10-00127-REB

Plaintiff,

MEMORANDUM DECISION AND
ORDER RE:

vs.
HARTFORD CASUALTY INSURANCE
COMPANY, and HARTFORD STEAM BOILER
INSPECTION & INSURANCE COMPANY,

PLAINTIFF’S § 6-1604 MOTION FOR
HEARING ON PUNITIVE DAMAGES
(Docket No. 44)

Defendants.

Currently pending before the Court is Plaintiff’s § 6-1604 Motion for Hearing on
Punitive Damages (Docket No. 44). Having carefully reviewed the record, participated in oral
argument, and otherwise being fully advised, the Court enters the following Memorandum
Decision and Order:
BACKGROUND
Plaintiff brings this lawsuit as the “legal assignee of claims” for CatRisk.us, LLC
(“CatRisk”), an Idaho limited liability company providing electronic medical billing services to
small physician practices in several states. CatRisk performed these services entirely over the
internet, using computer network technologies to communicate with its medical, insurance, and
governmental clients/subscribers. To insure the risk of a computer system failure, CatRisk
purchased a “Special Multi-Flex Spectrum Policy” (the “Policy”) from Defendant Hartford
Casualty Insurance Company (“Hartford Casualty”), effective on May 1, 2008.

MEMORANDUM DECISION AND ORDER - 1

Plaintiff alleges that, on May 21, 2009, CatRisk suffered a sudden and catastrophic
mechanical breakdown, resulting in the total loss of computer functions. Functionality was
restored eight days later and CatRisk was able to resume business operations. Plaintiff reported
the incident to CatRisk’s insurer, Hartford Casualty, and, on June 3, 2009, Hartford Casualty
denied Plaintiff’s claim.
Arguing now that Hartford Casualty investigation into the May 21, 2009 incident was
both delayed and incomplete, Plaintiff seeks to amend his complaint to assert a claim for
punitive damages against Hartford Casualty.1
DISCUSSION
A.

Amending a Complaint to Add a Claim for Punitive Damages
“A prayer for punitive damages is not a stand-alone cause of action, but flows from an

underlying cause of action, such as a breach of contract or a tort, when the conduct of a party
meets the threshold level of being oppressive and outrageous.” See Boise Tower Associates LLC
v. Washington Capital Joint Master Trust, 2006 WL 1749656 at *12 (D. Idaho 2006). Conduct
justifying punitive damages requires “an intersection of two factors: a bad act and a bad state of
mind.” See Linscott v. Rainier Nat. Life Ins. Co., 606 P.2d 958, 962 (Idaho 1980). The
defendant must (1) act in a manner that was an extreme deviation from reasonable standards of
conduct with an understanding of – or disregard for – its likely consequences, and must (2) act
with an extremely harmful state of mind, described variously as with malice, oppression, fraud,
gross negligence, wantonness, deliberately, or willfully. See Myers v. Workmen’s Auto Ins. Co.,

1

Defendant Hartford Steam Boiler Inspection & Insurance Company has already been
dismissed from this action; therefore, Plaintiff’s request to add a claim for punitive damages
applies to Hartford Casualty only.
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95 P.3d 977, 983 (Idaho 2004). For plaintiffs to be entitled to amend their complaint to add a
claim for punitive damages, they need to show “a reasonable likelihood of proving facts at trial
sufficient to support an award of punitive damages.” See I.C. § 6-1604(2).
B.

Analysis
Plaintiff’s argument in favor of adding a claim for punitive damages against Hartford

Casualty relates, generally, to the manner in which Hartford Casualty responded to Plaintiff’s
loss claim. Specifically, Plaintiff argues that Hartford Casualty (1) did not investigate Plaintiff’s
claim with reasonable diligence, and (2) did not conduct a thorough, impartial investigation into
the May 21, 2009 incident before denying Plaintiff’s claim. These arguments, while persuasive
to an extent, do not rise to the level needed in order to add a claim for punitive damages under
Idaho law.
1.

No Reasonable Likelihood of Showing of Hartford Casualty’s “Extremely
Harmful State of Mind”

Plaintiff has not demonstrated a reasonable likelihood that he could make a showing at
trial – through clear and convincing evidence – that Hartford Casualty engaged in the requisite
bad act, indicative of an extremely harmful state of mind (beyond, allegedly, denying Plaintiff’s
claim in bad faith), needed to sustain a claim for punitive damages.
The record demonstrates amply that Plaintiff is beyond frustrated, believing that his
claim was handled poorly from the outset and that its ultimate denial was manifestly improper.
However, this alone cannot justify a claim for punitive damages; otherwise, punitive damages
claims would “piggy-back” without more upon each and every bad faith claim. However, more
is needed. To that end, Plaintiff, through his expert William A. Walker, contends that a punitive
damages claim is warranted here given Hartford Casualty’s delinquent and incomplete
MEMORANDUM DECISION AND ORDER - 3

investigation. The Court has scrutinized and considered Mr. Walker’s opinion and the related
argument of Plaintiff, but ultimately is not persuaded.
First, while it is true that some level of familiarity in computer equipment breakdown
should be expected to exist by way of claim investigations into such matters, the undersigned
cannot agree with Plaintiff to the extent he argues that the absence of a computer forensics
expert, available on a moment’s notice on the front end of any investigation, constitutes a bad act
for the purposes of a punitive damages analysis. Simply put, there is no evidence in the record
supporting such a conclusion. While Plaintiff may argue that this reality constitutes a breach of
an understood duty owed to him by virtue of his insurance policy, the record does not support it
rising to the level of an extreme deviation from reasonable standards of conduct, combined with
an extremely harmful state of mind.
Second, given the nature of the alleged mechanical breakdown, it is sensible that
technical support from third-parties might be necessary when investigating the claim. Assistance
in these areas logically expands the time-line for any claim investigation and, correspondingly,
for addressing and fixing the underlying problem. Here, notwithstanding Plaintiff’s generalized
claims to the contrary, his own expert, Mr. Walker, testified that Hartford Casualty could not
have done anything different in terms of getting CatRisk’s medical billing services up and
running more quickly:
Q:

Are you aware of anything that Hartford could have done that would have
allowed that system to be returned to full functionality any sooner than that
7 or 8 days?

A:

What they could have done is gone out and studied the problem and advised
the insured at the time whether there was coverage, or in this case, there
wasn’t coverage.

MEMORANDUM DECISION AND ORDER - 4

Q:

I’m not talking about coverage right now. I’m talking about getting the thing
back running. Is there anything you’re aware of, that Hartford could have
done, that would have gotten that system functional within a shorter period
of time than the 7 or 8 days it took?

A:

I’m not aware of anything.

See Walker Depo. at 39:24-40:12, attached as Ex. B to McGee Aff. (Docket No. 49, Att. 1).
Again, while Plaintiff can argue that certain delays existed with respect to the way
Hartford Casualty investigated the at-issue incident and resolved the coverage dispute, those
arguments go to the substance of Plaintiff’s bad faith claim, particularly when understanding that
any alleged delays did not prevent CatRisk from resuming business.2 Therefore, based upon the
existing record, Hartford Casualty’s alleged delays in this respect does not constitute an extreme
deviation from reasonable standards of conduct.
Third, although it is possible to argue that a more technical investigation into the cause
and nature of the loss should/could have been undertaken, there is no evidence suggesting that
Hartford Casualty’s alleged failure to exclude all possible causes of the breakdown warrants a
claim for punitive damages. Indeed, regardless of whether LWG Consulting’s opinions were
well-founded or not from a forensic engineering viewpoint, the record reflects that LWG
Consulting concluded in no uncertain terms that “[t]he cause of the bad sectors is related to
normal wear and tear” – a cause Hartford Casualty determined to be outside the policy coverage.
See 7/7/09 Rpt., attached as Ex. D to McGee Aff. (Docket No. 49, Att. 1). Even if such

2

Moreover, it appears as though at least some delay into the investigation of the cause of
the breakdown (and, therefore, coverage determination) is attributable to CatRisk and or its
agents/representatives when understanding that the wrong hard drive components were initially
sent to LWG Consulting for analysis. See Crandall Depo. at 112:17-113:1, attached as Ex. A to
McGee Aff. (Docket No. 49, Att. 1).
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decisions are debatable, as Plaintiff contends, there is nothing obvious nor inescapably
compelling in what Plaintiff has submitted for the Court to conclude that he is reasonably likely
to prove that Hartford Casualty had no justification to rely upon LWG Consulting’s findings
when rendering its coverage opinion. More particularly in regard to certain of Plaintiff’s
argument, he points to no authority obligating Hartford Casualty to pursue additional testing – in
this case, destructive testing using an atomic microscope – to confirm or disprove LWG
Consulting’s report.
Plaintiff’s argument is further weakened by full details of his most heavily-emphasized
argument – that Hartford Casualty did not do enough to pinpoint the reason for the computer
failure, and that micron level microscopic testing should have been performed. However, not
only does an issue exist as to whether Plaintiff even authorized LWG Consulting to perform
destructive testing, at Plaintiff’s direction, a different laboratory (Kroll Ontrack) did perform
subsequent destructive testing – albeit, using an electron microscope – and that such testing
showed no particle evidence indicating a head crash. See 11/05/09 Rpt., attached as Ex. D to
McGee Aff. (Docket No. 49, Att. 1). Thus, even though Hartford Casualty theoretically could
have done more investigation, its alleged failure to do so goes to Plaintiff’s bad faith claim, and
is not a proper basis to add a claim for punitive damages.
2.

Insufficient Showing of Hartford Casualty’s “Bad Motive”

Aside from arguing generally that Hartford Casualty is motivated to save money by not
paying out legitimate claims, Plaintiff offers no evidence of Hartford Casualty’s specific ill
intent in handling Plaintiff’s claim. The Court is mindful that (1) some of Hartford Casualty’s
conduct in the alacrity, or as Plaintiff would contend the lack thereof, in which it responded to

MEMORANDUM DECISION AND ORDER - 6

the initial claim, and (2) some facts suggesting the adjustment of the claim was passed back and
forth between Hartford Casualty and its re-insurer, Hartford Steam Boiler Inspection &
Insurance Company, could be argued to represent a cavalier approach to the claim on the part of
Hartford Casualty. However, on the record and argument put forward by Plaintiff in support of
his Motion, those matters do not rise to the level of oppressive or outrageous. Therefore,
Plaintiff has not demonstrated a reasonable likelihood of making a showing at trial – through
clear and convincing evidence – that Hartford Casualty engaged in the requisite bad motive
(beyond, allegedly, denying Plaintiff’s claim in bad faith) needed to sustain a claim for punitive
damages.
3.

Beyond Denying Plaintiff’s Claim, Hartford Casualty’s Conduct Did Not Cause
Harm to Plaintiff

“Idaho courts are generally reluctant to allow punitive damages in breach of contract
cases, adhering to the principle that such damages ‘should be awarded cautiously and within
narrow limits.’” Weekes v. Ohio Nat. Life Assur. Corp., 2011 WL 6140967, * 6 (D. Idaho 2011)
(quoting Cuddy Mountain Concrete Inc. v. Citadel Constr. Inc., 824 P.2d 151, 159 (Idaho
1992)). “To determine if a contractual breach is compelling enough to allow punitive damages,
courts ask if the breaching party acted in bad faith or was oppressive, unreasonable, or
irrational.” Id. (citing Cuddy Mountain Concrete, 824 P.2d at 160). The Idaho Supreme Court
summarized these general concerns as follows:
The award of punitive damages in the context of a contractual relationship seems to
be based on conduct which is unreasonable and irrational in the business context.
The acts show a lack of professional regard for the consequences of the breach of the
contractual agreement. If a party breaches its duty to act in good faith, it may be
liable for . . . punitive damages.
Id. (quoting Cuddy Mountain Concrete, 824 P.2d at 160).
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In addition to these general concerns, the Idaho Supreme Court in Cuddy described
particular types of evidence that could justify a claim for punitive damages, has laid out specific
factors that play a determinative role in deciding whether there is sufficient evidence to support a
punitive damages award: among them, “whether the unreasonable conduct actually caused harm
to the plaintiff.” Id. (citing Cuddy Mountain Concrete, 824 P.2d at 160-61). Here, it cannot be
said that Hartford Casualty’s allegedly unreasonable conduct actually caused harm to Plaintiff,
above and beyond the harm imposed by Hartford Casualty’s denial of the claim itself. As
pointed out earlier, Mr. Walker testified that Hartford Casualty could not have done anything
different to get CatRisk’s medical billing services up and running more quickly than was done
by Plaintiff on his own. See supra at p. 4. With this in mind, based upon the existing record,
Hartford Casualty’s conduct did not cause the sort of harm justifying the additional of a punitive
damages claim.
ORDER
Based upon the foregoing, IT IS HEREBY ORDERED that Plaintiff’s request to add a
claim for punitive damages, as sought in his Motion for Hearing on Punitive Damages (Docket
No. 44), is DENIED.
DATED: March 12, 2012

Honorable Ronald E. Bush
U. S. Magistrate Judge

MEMORANDUM DECISION AND ORDER - 8