Employers Mutual Casualty Company v. SG&D Ventures, LLC

Filing 16

MEMORANDUM OPINION signed by Senior Judge Charles R. Simpson, III on 7/18/2017, re Plaintiff's 10 MOTION to Bifurcate And Hold Discovery of Bad Faith Issues in Abeyance. cc: Counsel (RLK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
EMPLOYERS MUTUAL CASUALTY
COMPANY

PLAINTIFF
CIVIL ACTION NO. 3:17-CV-00105-CRS-DW

v.
SG&D VENTURES, LLC

DEFENDANT
Memorandum Opinion

I.

Introduction
This matter is before the Court on the motion of Plaintiff Employers Mutual Casualty

Company (“Employers Mutual”) to bifurcate trial under Federal Rule of Civil Procedure 42 and
to hold the discovery of bad faith issues in abeyance, ECF No. 10. Defendant SG&D Ventures,
LLC (SG&D) responded, ECF No. 12. Employers Mutual replied, ECF No. 15. The Court will
grant Employers Mutual’s motion to bifurcate trial and to hold the discovery of bad faith issues
in abeyance pending the resolution of the underlying declaratory judgment claim and contract
counterclaims.
II.

Background
A.

Allegations in the Complaint

SG&D maintained an insurance policy issued by Employers Mutual (“the policy”).
Policy 1, ECF No. 1-3. According to the complaint, SG&D submitted a notice of an insurance
claim to Employers Mutual under the policy for property damage suffered by eight SG&D
properties in Louisville, Kentucky. Compl. ¶ 4, ECF No. 1. The notice of claim asserted that a
hail storm had damaged the properties’ roofs, gutters, and HVAC systems. Id. ¶ 5. The date of
loss was April 28, 2012, four and one-half years before the notice of claim was sent to
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Employers Mutual. Id. ¶ 6. SG&D requested that Employers Mutual pay $290,865.23 to repair
the damage to the properties. Id. ¶ 7.
On October 11, 2016, Employers Mutual and SG&D agreed that Employer Mutual’s
investigating the claim would not waive or invalidate the terms or conditions of any insurance
policy or the rights of the parties. Id. ¶ 8. That same day, Employers Mutual’s agent, Julia
Tilford, reviewed the properties. Id. ¶ 9.
On December 21, 2016, SG&D’s representative, Sean Garber, testified under oath about
the insurance claim. Id. ¶ 10. He also produced the deed to the properties that showed that SG&D
had acquired the properties between 2008 and 2010. Id. Garber affirmed that the properties’
roofs began leaking in 2012, after the hail storm, and continued to leak through 2016. Id. ¶ 11.
He attested that the leaks further damaged the properties’ ceiling tiles, light fixtures, and sheet
rock. Id. Garber also explained that SG&D employees and several independent contractors had
tried unsuccessfully to repair the leaks in the roofs. Id. ¶ 12. While testifying, Garber recalled the
hail storm that had occurred on April 28, 2012. Id. ¶ 13. His company, which occupies most of
the properties, bought scrap metal that had been damaged in the hail storm and sold auto parts to
companies repairing cars damaged in the hail storm. Id.
Soon thereafter, Employers Mutual filed suit in this Court. Employers Mutual alleges that
SG&D’s claim for the damage to the properties caused by the hail storm is time barred under the
terms of the policy (Count I). Id. ¶¶ 22–24. Employers Mutual further maintains that SG&D’s
failure to promptly provide notice of the insurance claim and to take reasonable steps to protect
the properties from further damage bars any current claim by SG&D for the damage to the
properties caused by the hailstorm (Count II). Id. ¶¶ 25–27. Employers Mutual also contends that
the policy contains an exception for damage caused by:

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“[W]ear and tear, rust or other corrosion, decay, deterioration, hidden or latent
defect or any quality in property that causes it to damage or destroy itself;
continuous or repeated seepage or leakage of water, or the presence or
condensation of humidity, moisture or vapor, that occurs over a period of 14 days
or more; and neglect of an insured to use all reasonable means to save and
preserve property from further damage at and after the time of loss.”
Id. ¶¶ 28–30. And because of this exception, Employers Mutual asserts that SG&D’s claim for
the damage to the properties is excluded from coverage under the policy (Count III). Id.
Employers Mutual also contends that “to the extent that any of the Properties are covered by
other insurance, and SG&D is determined to have an enforceable claim,” the policy is required to
pay only the excess of the amount that the other insurance claims will cover (Count IV). Id. ¶¶
31–33. Finally, Employers Mutual reserves the right to deny any claims for any other reason or
to assert any other conditions of the policy as a defense (Count V). Id. ¶¶ 34–35. Employers
Mutual seeks an entry of declaratory judgment determining its duties to extend coverage to
SG&D for any damages that are sought or that may be sought under the policy and for an award
of costs. Id. at 8.
B.

SG&D’s Counterclaims

In response, SG&D filed an answer and counterclaims against Employers Mutual.
Answer & Countercl. 1, ECF No. 5. Regarding its counterclaims, SG&D asserts that Employers
Mutual breached the policy by failing to fully and promptly pay the amounts owed to it as a
result of the loss, as required by the policy (Count I). Id. ¶¶ 22–26. SG&D also maintains that
Employers Mutual’s “refusal to pay the amounts contractually owed to [it] is arbitrary and
capricious and constitutes bad faith” (Count II). Id. ¶¶ 27–31. Additionally, SG&D alleges that
Employers Mutual violated the Unfair Claims Settlement Act, KRS § 304.12-230 (Count III), id.
¶¶ 32–33, and violated KRS § 304.12-235 by failing to make a good faith attempt to settle its
claims (Count IV), id. ¶¶ 34–36. SG&D further maintains that Employers Mutual violated the
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Kentucky Consumer Protection Act, KRS § 367.110, et seq. by engaging in “unfair, false,
misleading and/or deceptive practices” regarding its claim (Count V). Id. ¶¶ 37–43. SG&D seeks
an injunction requiring Employers Mutual to pay its claim under the policy, compensatory
damages, punitive damages, and attorney fees and costs. Id. at 13–14.
III.

Discussion
Employers Mutual now moves to bifurcate the bad faith claim from the declaratory

judgment claim and contract counterclaims under Federal Rule of Civil Procedure 42 and to hold
discovery of bad faith issues in abeyance pending the resolution of the other claims. Mot.
Bifurcate 1, ECF No. 10.
A.

Employers Mutual’s Motion to Bifurcate the Bad Faith Claim

Employers Mutual argues that the Court should bifurcate the bad faith claim from the
declaratory judgment claim and contract counterclaims to preclude jury confusion and prejudice.
Mem. Supp. Mot. Bifurcate 4–6, ECF No. 10-1. SG&D maintains in opposition that bifurcation
should be denied because the bad faith claim and other claims are “inextricably intertwined”
such that bifurcation is not appropriate under Rule 42. Resp. Opp. Mot. Bifurcate 3–6, ECF No.
12.
Rule 42 provides that “[f]or convenience, to avoid prejudice, or to expedite and
economize, the court may order a separate trial of one or more separate issues, claims,
crossclaims, counterclaims, or third-party claims.” The party seeking bifurcation bears the
burden of showing the issues should be separated. Weathers v. Healthcare Servs. Grp., No. 3:13CV-01196-TBR-LLK, 2014 U.S. Dist. LEXIS 93069, at *2 (W.D. Ky. July 9, 2014).
Whether to try issues or claims separately is ultimately discretionary with the court. Smith
v. Allstate Ins. Co., 403 F.3d 401, 407 (6th Cir. 2005). The court’s decision is made on a case-by-

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case basis. See In re Bendectin Litig., 857 F.2d 290, 307 (6th Cir. 1988). The court should
consider several facts, including “the potential prejudice to the parties, the possible confusion of
the jurors, and the resulting convenience and economy.” Wilson v. Morgan, 477 F.3d 326, 339
(6th Cir. 2007) (internal citations omitted).
Claims for coverage under an insurance agreement and claims of bad faith on behalf of
the insurer are often bifurcated because “if the plaintiff cannot prevail on the coverage issue, the
claim for bad faith necessarily fails.” Brantley v. Safeco Ins. Co. of Am., No. 1:11-CV-00054-R,
2011 U.S. Dist. LEXIS 138111, at *4 (W.D. Ky. Dec. 1, 2011); see also Smith v. Allstate Ins.
Co., 403 F.3d 401, 407 (6th Cir. 2005) (“Because the merits of the bad faith claim depended on
whether the limitations provision was valid, it was reasonable for the court to resolve the validity
question before allowing the bad faith claim to proceed.”).
Here, SG&D must be entitled to recovery under the policy to prevail on its claim of bad
faith. Thus, bifurcation of the bad faith claim from the declaratory judgment claim and contract
counterclaims will avoid the expense and time of litigating issues that may never arise.
Bifurcation will also assist the jury in focusing on a single issue at a time. Moreover, bifurcation
will not prejudice the parties because SG&D will have an opportunity to pursue its bad faith
claim if it is legally entitled to do so and because Employers Mutual will be able to avoid any
unnecessary and premature litigation on the issue of bad faith. Accordingly, the Court will grant
Employers Mutual’s motion to bifurcate the bad faith claim from the declaratory judgment claim
and contract counterclaims.
B.

Employers Mutual’s Motion to Hold Discovery of Bad Faith Issues in Abeyance

Employers Mutual additionally requests that the Court hold discovery of bad faith issues
in abeyance pending the resolution of the declaratory judgment claim and contract

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counterclaims. Mem. Supp. Mot. Bifurcate 6–8, ECF No. 10-1. Employers Mutual argues that
holding discovery will promote judicial economy and will prevent the disclosure of information
protected by the attorney-client privilege. Id. SG&D contends, however, that allowing discovery
on the bad faith issue to proceed would better promote judicial economy and that the Federal
Rules of Civil Procedure provide a solution for the inadvertent disclosure of privileged
information. Resp. Opp. Mot. Bifurcate 5–6, ECF No. 12.
Given that SG&D may not proceed on its bad faith claim until it can establish a breach of
contract claim, judicial economy and the parties’ interests are best served by holding discovery
on bad faith issues in abeyance. See Brantley, 2011 U.S. Dist. LEXIS at *7–8 (“Defendants may
be prejudiced if [joint discovery] occurs before it is clear whether the plaintiff can even proceed
with a bad faith claim by establishing a breach of contract.”) (citing Wolf v. Geico Ins. Co., 682
F. Supp. 2d 197, 199 (D.R.I. 2010)). And while Rule 26(b)(5)(B) provides a solution for the
inadvertent disclosure of privileged information, the Court prefers to avoid needless discovery
disputes. Thus, the Court will grant Employers Mutual’s motion to hold discovery of bad faith
issues in abeyance pending the resolution of the declaratory judgment claim and contract
counterclaims.

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IV.

Conclusion
The Court will grant Employers Mutual’s motion to bifurcate trial and to hold the

discovery of bad faith issues in abeyance. The Court will bifurcate trial on the bad faith claim
from the declaratory judgment claim and contract counterclaims. The Court will hold the
discovery of the bad faith issues in abeyance pending the resolution of the underlying declaratory
judgment claim and contract counterclaims. An order will be entered in accordance with this
memorandum opinion.

July 18, 2017

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